Transaction Systems Architects, Inc. 1999 Annual Report What do you value? W H AT D O Y O U VA L U E ? Depending on the time and place, we all value different things—be it the proper tool, correct change or a special roll of paper. In today's e-payments world, financial institutions, retailers and other industries value the solutions Transaction Systems Architects, Inc. provides to smoothly move money and information every minute of every day. At TSA, we value the customers, employees and growing e-payment markets that have helped us become a leading provider of e-payment solutions. FINANCIAL HIGHLIGHTS 1 In Thousands, Except Per Share Amounts . . . . . . . . . . Year Ended September 30 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Net Income Per Share2 . . . . . . . . . . . . . . . . . . . . . . Diluted Net Income Per Share2 . . . . . . . . . . . . . . . . . . . . . Earnings Before Interest, Taxes, Depreciation 1999 1998 1997 $ 354,794 $ 299,249 $ 244,149 40,027 25,278 0.85 0.82 51,488 31,432 1.04 1.01 70,260 44,613 1.41 1.38 and Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,800 62,700 49,600 As of September 30 Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Backlog $ 88,962 329,525 991 225,169 203,800 $ 86,994 226,307 2,002 145,877 185,200 $ 62,914 176,891 2,379 109,346 141,400 SUPPLEMENTAL INFORMATION 1,3 In Thousands, Except Per Share Amounts . . . . . . . . . . Year Ended September 30 1999 1998 1997 % Change 1998-1999 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro Forma Operating Income . . . . . . . . . . . . . . . . . . . . . . Pro Forma Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . Pro Forma Basic Net Income Per Share . . . . . . . . . . . . . . . Pro Forma Diluted Net Income Per Share . . . . . . . . . . . . . . $ 354,794 70,260 45,012 1.42 1.39 $ 299,249 51,488 33,776 1.11 1.08 $ 244,149 40,828 26,079 0.87 0.84 19 36 33 28 29 1 Adjusted for the acquisition of Media Integration BV (MINT), accounted for as a pooling of interests. 2 Prior to their acquisitions, Regency Voice Systems, Inc. (RVS) and IntraNet were taxed primarily as a partnership and a Subchapter S corporation, respectively. In addition, prior to its acquisition, MINT’s earnings were not subject to income taxes. The unaudited pro forma net income and pro forma basic and diluted net income per share reflects a pro forma tax provision for income taxes on results of operations of RVS, IntraNet and MINT for the periods prior to their acquisition. 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 $10.8 million, $3.3 million and $851,000 in 1995, 1996 and 1997, respectively. In addition, the 1998 and 1999 pro forma results exclude $2.5 million and $653,000, respectively 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 I N $ M I L L I O N S 354.8 299.2 244.1 183.2 121.4 P R O F O R M A O P E R AT I N G I N C O M E I N $ M I L L I O N S 3 E N D I N G B A C K L O G I N $ M I L L I O N S 70.3 51.5 40.8 26.6 16.3 203.8 185.2 141.4 105 82.1 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 1995 1996 1997 1998 1999 What do you value? 1 F R O M T H E D E S K O F B I L L F I S H E R. volumes, rising volumes enhance our business model. Our efforts to expand TSA’s footprint in international markets during the past fiscal year increased the number of countries in which we have customers by nine, bringing our total to 79. Our solutions attracted 241 new customers, including Deutsche Bank, currently the largest bank in the world by assets. Revenue for our 1999 fiscal year increased 19 percent to a record $354.8 million, including $125.5 million in recurring revenue from monthly license fees, maintenance fees and facility management. We posted record operating income of $70.3 million and a record backlog of contracted but not yet recognized business of $203.8 million. TSA acquired SDM International, Inc. and Insession, Inc. to expand our solution and platform set. We introduced a new line of Internet-based e-commerce solutions. Not bad for a year that some thought signaled the end of the world. As the fog of Y2K clouded the marketplace, we continued to focus on what we do best, provide solutions that help the world move money and information. Now as our customers concentrate on enhancing their systems, TSA is positioned to help. We’re working with customers to make our products and services — our Transaction SmoothwareTM —the industry standard. To us, Transaction Smoothware is more than a trademark. It is the way we work, our commitment to meet customers’ needs on time, on budget, with no surprises. We believe Transaction Smoothware will become the dominant infrastructure behind e-payments around the world. TSA’s aggressive investment in the Internet is providing the technology our customers need to support the next generation of payments. What do we value? At TSA we value the trust our customers have placed in our ability to provide proven solutions. We value our employees who help keep us in the “right place at the right time.” We value the growing e-payments market that complements our volume-sensitive pricing. And ultimately, we value the continued support and interest of our shareholders. If I might interject a personal note, I value the experiences—both good and sometimes difficult—I’ve had while serving as TSA’s chairman, president and CEO. It has been quite a ride. I also value my family. In order to spend more time with them, this annual report marks my last as president and CEO. While I remain as chairman of the board, I’ve turned over day-to-day duties to Dave Russell, a man whose leadership and talent I respect. Dave most recently served as chief operating officer and executive vice president of TSA, and president of our ACI Worldwide distribution channel. He brings more than 11 years of company experience to his new position as president and CEO, and I know he will do a great job. Thanks again for your continued support and interest in TSA. William E. Fisher Chairman Transaction Systems Architects, Inc. Fellow Shareholders: No, that is not me on the cover of this year’s annual report. My photo is on the left. (I’m the tall guy with the full head of hair.) But the follicle-challenged gentleman gracing our cover raises an interesting point. Depending on our situation (and hairline) we all value different things at different times. As we begin our 25th year in business, we felt it appropriate to reflect on the things we value, and as we always do, to have a little fun. At TSA we value the expertise and good fortune that’s helped us become a leading provider of enterprise e-payment solutions. The explosion of Internet banking and e-commerce, the proliferation of debit cards, and the continued growth of e-payments are fueling a need for reliable, always available processing systems — just the products we’ve been providing for 25 years. More than 2,300 financial institutions, retailers, processors and telcos around the world use our solutions to smoothly and efficiently move money and information. In the past year TSA customers processed an estimated 18 billion electronic transactions, a small percentage of the world’s total volume when you factor in cash and checks, but a portion that is growing faster than paper-based transactions. The younger generation’s acceptance of technology is helping promote this shift from paper to pulse. Rising electronic transaction volumes coupled with the need for around-the-clock services, will make our products even more attractive. Since we base our pricing on transaction What do you value? 3 Driving the business. W E P R O V I D E T H E P R O P E R T O O L S T O D O T H E J O B. Using the proper tool always makes the job easier. That’s why TSA provides a wide range of enterprise e-payment solutions. We’ve organized our solutions along four lines of business — consumer banking, corporate banking, retail solutions and system solutions— to ensure they fit our customers’ business needs. CONSUMER BANKING Solutions in the TSA Consumer Banking toolchest perform the heavy lifting needed to keep ATM and Point of Sale (POS) networks operating around the clock. This line of business includes cutting edge products that make it possible for consumers to conduct banking and pay bills via the Internet; products that process retail transactions initiated by consumers shopping on the Internet, products that manage the transfer of value and information on smart cards; and neural-network based products that help financial institutions control debit and credit card fraud, and money laundering. CORPORATE BANKING TSA’s Corporate Banking line includes solutions that enable financial institutions to automatically deposit payroll checks and process other automated clearing house (ACH) based payments; and to process high-value (wire) payments. These products move money between businesses and financial institutions in multiple countries and in multiple currencies while meeting business, banking and governmental guidelines. We also provide web-enabling interfaces so financial institutions can offer their corporate customers browser-based access to account information. RETAIL SOLUTIONS Large and small retailers around the globe use TSA solutions to process debit and credit card transactions, route Electronic Benefit Transfer (EBT) transactions, authorize checks, and manage frequent shopper programs. We’ve extended this line of business to the web with products that enable business-to-consumer Internet commerce. Our solutions give retailers the ability to set up shop on the Internet and provide a secure shop-and-buy experience. R E V E N U E B Y L I N E O F B U S I N E S S Internet retailers can use our products to process Secure Socket Layer (SSL) and Secure Electronic Transaction (SET) based transactions, issue secure server-based wallets, and control fraud. SYSTEM SOLUTIONS TSA System Solutions are used by a cross-section of industries from telcos to aerospace manufacturers to monitor mission- critical systems, establish communications links between high-volume systems, and handle intersystem messaging. Like our other lines of business, Internet technologies play a role in our System Solutions portfolio. Our monitoring tools are web-enabled to offer browser-based access to system information, and our intersystem messaging software offers the ability to assign Internet addresses to specific systems for browser-based access. TSA’s aggressive investment in web-based technology, coupled with extensive market research, ensures we have the tools our customers need to participate in the world’s new Internet economy. C O N S U M E R B A N K I N G 73 % R E TA I L S O L U T I O N S 6 % C O R P O R AT E B A N K I N G 8 % S Y S T E M S O L U T I O N S 13 % What do you value? 7 88% of total revenue is derived from e-payments. Connecting with our customers. P L U G G I N G I N T O C U S T O M E R S’ N E E D S. TSA stays plugged into customer needs and requirements through ACI Worldwide, our exclusive international distribution and support operation. With a network of offices and development centers around the globe, ACI Worldwide provides a full complement of services including system installation, 24-hour hotline, custom software development and on-site technical services. ACI Worldwide supplies software and services via three distribution and support channels, an Americas channel headquartered in Omaha, Nebraska; a Europe/Middle East/Africa channel headquartered in Watford, England; and an Asia/Pacific channel headquartered in Singapore. The channels maintain more than 20 offices in principal cities throughout the world. To expand our reach into regions in which we do not yet have a presence, we’ve forged partnerships with distributors and sales agents. infrastructure our customers need to remain competitive. As a result of TSA’s international diversity, 53 percent of our revenue comes from outside the US. Our global footprint ensures we are not dependent on a single customer. TSA customers represent all segments of the financial, retail and networking industries and include 111 of the world’s top 500 banks and 22 of the top 100 retailers in the US. We also provide solutions to meet the needs of community banks and small businesses. Large or small, our customer-centric approach of personal contact, user group seminars and market research enables us to help industries adopt business models that handle new and emerging e-payments. From traditional ATM and POS networks to web-enabled ATMs, multi- application smart cards and debit on the Internet, we provide the As new technologies gain acceptance and more players enter the e-payments marketplace, the need for proven solutions that move money and information smoothly, efficiently and securely will grow. No matter the e-payments player — brick-and-mortar financial institution or retailer, e-tailer, portal provider, or Internet Service Provider (ISP) — new technology business models require solutions that route e-payments for authorization and payment. TSA is positioned to meet the need. TSA’s ability to help customers adopt the necessary infrastructure to plug into the latest e-payments technology, our ever-growing portfolio of products and our worldwide reach keep us connected to the needs of customers and the marketplace. R E V E N U E B Y C H A N N E L N U M B E R O F C U S T O M E R S U N I T E D S TAT E S 4 7 % A S I A PA C I F I C 9 % A M E R I C A S - I N T E R N AT I O N A L 12 % 2,314 2,073 1,644 E U R O P E / M I D D L E E A S T / A F R I C A 3 2 % 433 565 1995 1996 1997 1998 1999 What do you value? 11 Igniting a revolution. T S A P R O V I D E S T H E S PA R K T H AT H E L P S C H A N G E T H E WAY T H E W O R L D W O R K S. New e-payment technologies are setting the world on fire and TSA is helping customers adopt them without getting burned. We’re leveraging our knowledge of e-payments to offer customers the knowledge and expertise needed to adopt new technologies that build on and enhance existing e-payment infrastructures. For example, today smart cards do more than exchange value. Smart cards are used to provide an extra level of security, maintain cardholder information for health care applications, or provide access to computer workstations and applications. TSA helps customers meet these varied requirements with solutions that manage the lifecycle of a smart card, from issuance to expiration. Our solutions manage multiple applications on a single smart card and can extend smart card programs to the Internet. And, our server-based solutions integrate with existing processing systems to help our customers leverage the investment they have in their existing infrastructure. Debit card use is exploding in many parts of the world. In addition to traditional uses at ATMs, debit cards are now used for everyday purchases at grocery stores and gas stations. TSA’s proven, scalable solutions are helping financial institutions and retailers leverage their current processing systems to handle growing debit card volumes while offering additional payment options. We are working with financial institutions and retailers on the next generation of debit cards, including the creation of a debit card that slips into an existing drive on a personal computer to provide a secure Internet shopping option. and other Internet players the ability to provide safe and reliable web-based shopping that utilizes today’s most popular security methods. And, e24 is open to tomorrow’s security technologies. Like other TSA solutions, e24 leverages the existing e-payment processing infrastructure. Banking on the web gives financial institutions the ability to expand their banking services. To help our customers enter the point-and-click banking world, TSA provides i24 Internet Banking software. Financial institutions around the world use i24 Smoothware to offer consumers the ability to pay bills, transfer money between accounts and track account activity from the convenience of a PC plugged into the Internet. Commercial opportunities presented by the Internet are fueling the spread of TSA’s e24 Commerce Solutions around the globe. e24 Smoothware gives financial institutions, retailers Just as we helped spark the initial e-payments revolution, TSA continues to look for new and innovative processing options that help our customers continue to change the way the world works. W O R L D W I D E I N T E R N E T U S E R S I N M I L L I O N S 717 319 151 210 SOURCE: Computer Industry Almanac Inc. and Nua Internet Surveys *1999, 2000 and 2005 are projections. 1998 1999* 2000* 2005* What do you value? 15 Making change. T O C O I N A P H R A S E , T S A H E L P S T H E W O R L D M O V E M O N E Y. At TSA we like to say we provide the solutions that help the world smoothly move money and information. While providing money-moving solutions, we continue to invest in new solutions and work to provide long-term value to our shareholders. TSA revenues for the fiscal year 1999 were a record $354.8 million, an increase of 19 percent over fiscal year 1998. Cash flow from operating activities totaled $40.3 million, up from $35.8 million last year. The combined cash and cash equivalents balance, as of September 30, 1999 was $70.5 million. We base TSA’s financial model on volume-sensitive pricing, recurring license fees and maintaining a healthy backlog of contracted, but not yet recognized revenue. This allows us to grow with the e-payments marketplace. During fiscal year 1999, we achieved $125.5 million in recurring revenue — 35 percent of our total revenue. Our recurring revenue is comprised of $54.5 million in monthly license fees, $63.9 million in maintenance fees and $7.1 million in facilities management fees. This growth helped us achieve operating income of $70.3 million, up from $51.5 million in 1998. Our operating margin in the fourth quarter of the fiscal year 1999 reached 21.3 percent as compared with 17.7 percent for the fourth quarter fiscal year 1998. Our recurring revenue pricing model helped us maintain a rolling 12-month backlog that grew 10 percent in fiscal 1999 reaching $203.8 as of September 30. The recurring revenue portion of our backlog that TSA contemplates recognition in fiscal year 2000 reached $138.7 million. In spite of the tough market presented by Y2K, TSA achieved quality growth and consistent earnings throughout fiscal year 1999. Based on our international presence, customers’ focus on new e-payment business models and the growing e-payments market, our long-term outlook is optimistic. F I N A N C I A L M O D E L R E V E N U E B R E A K D O W N S O F T WA R E L I C E N S E F E E S 5 9 % H A R D WA R E 1% M A I N T E N A N C E F E E S 18 % S E R V I C E S 22% 35% is Recurring Revenue consisting of monthly license fees, maintenance fees and facilities management. What do you value? 19 Rolling out value. T S A P R O V I D E S P R O D U C T, P E R F O R M A N C E A N D VA L U E. At TSA, we value the opportunity to help our customers change the way the world works, shops and lives. From creation of the first e-payments network to today’s e-commerce explosion, TSA provides the Transaction Smoothware financial institutions, retailers and others rely on to perform flawlessly, every minute of every day. TSA products perform the heavy lifting required to keep payments moving— smoothly and dependably. Our portfolio extends from ATM processing products to solutions that enable secure point-and-click shopping on the Internet. We provide solutions and expertise in areas such as multi-function smart cards; secure, Internet-based debit cards; and Internet shopping and banking. Our solutions are designed to help our customers adopt new technologies with limited impact on existing systems. We reach our customers in 79 countries through ACI Worldwide, our global support and distribution network. With a network of offices and people around the globe, ACI Worldwide keeps us plugged into customer wants and needs. ACI Worldwide also gives us the ability to meet customers’ needs on time, on budget with no surprises. Our customer relationships don’t end with meeting today’s requirements. We’re investing in research and development to lead the market and ensure we are prepared to help our customers adopt tomorrow’s technologies. TSA’s financial model enables us to take advantage of the generational shift from paper to pulse with volume-sensitive pricing, recurring revenue, and a backlog of contracted, but not yet recognized revenue. Together, these qualities comprise a company that is a world leader in the enterprise e-payment solutions marketplace. The things we value — customer trust, employee expertise, a growing e-payments marketplace and stockholder support— are key components of our ongoing success, and qualities that will enable TSA to deliver on-going value in the technology marketplace. N U M B E R O F S O F T WA R E P R O D U C T S 71 80 61 32 35 1995 1996 1997 1998 1999 What do you value? 23 B O A R D O F D I R E C T O R S E X E C U T I V E O F F I C E R S WILLIAM E. FISHER Chairman of the Board WILLIAM E. FISHER EDWARD H. MANGOLD JON D. PARR Chairman of the Board Senior Vice President - Vice President - Transaction Systems Architects, Inc. Americas Region EMEA Region DAVID C. RUSSELL DAVID C. RUSSELL Chief Executive Officer and JEFFREY S. HALE STEPHEN M. BAILEY Chief Executive Officer and President President Senior Vice President - Vice President - Transaction Systems Architects, Inc. Business Development Corporate Banking PROMOD HAQUE Vice President Norwest Venture Capital Management, Inc. General Partner Norwest Venture Partners GREGORY J. DUMAN Chief Financial Officer MARK R. VIPOND MARLIN R. HOWLEY and Treasurer Senior Vice President - Vice President - Consumer Banking Retail Solutions DAVID P. STOKES General Counsel and Secretary DONALD G. MCLARTY ANTHONY J. PARKINSON DWIGHT G. HANSON Asia/Pacific Region Enterprise Solutions Group Vice President - Vice President - CHARLES E. NOELL, III Chief Accounting Officer STEPHEN J. ROYER Vice President - System Solutions Managing Partner JMI Equity Fund, L.P. JIM D. KEVER President and Co-Chief Executive Officer ENVOY Corporation LARRY G. FENDLEY Senior Vice President of Operations eOnline, inc.com F-1 GENERAL The Company’s products are organized into four lines-of-business groups as follows. • CONSUMER BANKING – Products in this group represent the Company’s largest product line and include its most mature and well-established applications. These applications include the Company’s BASE24, TRANS24, OCM24, Integrated Voice Response (IVR), Smart Card and Internet Banking (i24) product lines. Financial institutions and third-party processors use these products to route and process transactions for Automated Teller Machine (ATM) networks; process transactions from retailers using traditional Point of Sale (POS) devices and the Internet; handle Internet and phone banking transactions; control fraud and money laundering and issue and manage multi-functional applications on smart cards. Products in the Consumer Banking group represent approximately 73% of the Company’s fiscal 1999 revenue. • CORPORATE BANKING – The Company’s Corporate Banking products include its CO-ach, Money Transfer System (MTS) and MoneyNet products. The CO-ach product is used by financial institutions to automatically deposit paychecks and process other automated clearing house (ACH) transactions. Financial institutions use the MTS and MoneyNet products to automate the process by which institutions transfer high-value payments. Products in the Corporate Banking group represent approximately 8% of the Company’s fiscal 1999 revenue. • RETAIL SOLUTIONS – Retail Solutions products include BASE24-POS and WINPAY24 which are used by some of the world’s largest retailers to route transactions from their ATM and POS networks; process Electronic Benefit Transfer (EBT) transactions, authorize checks, establish frequent shopper programs and control fraud. In addition, Retail Solutions products include e24 which allows retailers to process e-commerce payment transactions. Products in the Retail Solutions group represent approximately 6% of the Company’s fiscal 1999 revenue. • SYSTEM SOLUTIONS – Products in this group are used by a cross-section of customers in many industries to monitor mission critical systems, establish communication links between high-volume systems and handle intersystem messaging primarily through the use of the Company’s ICE, NET24, Enguard and Extractor/Replicator products. Products in the System Solutions group represent approximately 13% of the Company’s fiscal 1999 revenue. Products developed by the four lines-of-business groups are marketed and supported through the Company’s wholly-owned subsidiary, ACI Worldwide Inc (ACI). ACI sells and supports the products and services through three distribution networks: the Americas, Europe/Middle East/Africa (EMEA) and Asia/Pacific. Each distribution network primarily uses its own sales force and supplements this with reseller and/or distributor networks. FIVE-YEAR SELECTED FINANCIAL DATA In Thousands, Except Share Data Year ended September 30 1999 1998 1997 1996 1995 Income Statement Data Revenues ............................................. $ 354,794 70,260 Operating income.................................. Net income 1 ........................................ 44,613 Basic net income per share 1 ................. 1.41 Diluted net income per share 1............... 1.38 Balance Sheet Data Working capital..................................... $ 88,962 329,525 Total assets .......................................... Long-term obligations............................ 991 225,169 Stockholders’ equity.............................. $ 299,249 51,488 31,432 1.04 1.01 $ 86,994 226,307 2,002 145,877 $ 244,149 40,027 25,278 0.85 0.82 $ 62,914 176,891 2,379 109,346 $ 183,236 23,268 14,286 0.50 0.48 $ 121,403 9,853 4,060 0.16 0.16 $ 43,268 134,988 1,687 80,298 $ 38,153 103,586 357 60,402 1 Prior to their acquisitions, RVS and IntraNet were taxed primarily as a partnership and a Subchapter S corporation, respectively. In addition, prior to its acquisition, MINT’s earnings were not subject to income taxes. The unaudited pro forma net income reflects a pro forma tax provision for income taxes on the results of operations of RVS, IntraNet and MINT for the periods prior to their acquisition. F-2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company develops, markets, installs and supports a broad line of software products and services primarily focused on facilitating electronic payments and electronic commerce. The Company’s products are organized into four lines of business groups – Consumer Banking, Corporate Banking, Retail Solutions and System Solutions. Products developed by the four lines-of-business groups are marketed and supported through the Company’s wholly-owned subsidiary, ACI Worldwide Inc (ACI). ACI sells and supports the products and services through three distribution networks: the Americas, Europe/Middle East/Africa (EMEA) and Asia/Pacific. Each distribution network primarily uses its own sales force and supplements this with reseller and/or distributor networks. During fiscal 1999, 1998 and 1997, approximately 53%, 55% and 54%, respectively, of total revenues resulted from international operations. The Company derived approximately 66%, 63% and 64%, respectively, of its revenues for those same periods from licensing its BASE24 family of software products and providing related services and maintenance. Although the Company believes that the majority of its revenues will continue to come from its existing BASE24 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, e-commerce, wire transfer, ACH and IVR. ACQUISITIONS The Company has completed several acquisitions during fiscal 1999, 1998 and 1997. 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 electronic 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 payments. Significant acquisitions in fiscal 1999, 1998 and 1997 include the following: Acquiree Open Systems Solutions, Inc. ............................................................................................................ Regency Voice Systems, Inc. (RVS) .................................................................................................... IntraNet, Inc. (IntraNet).................................................................................................................... Professional Resources, Inc. (PRI) ..................................................................................................... Smart Card Integrators Ltd (SCIL)...................................................................................................... Media Integration BV (MINT)............................................................................................................. U S Processing, Inc.(USPI) ............................................................................................................... Insession, Inc. (Insession)................................................................................................................. SDM International, Inc. (SDM) .......................................................................................................... Date Acquired October 1996 May 1997 August 1998 August 1998 August 1998 November 1998 December 1998 March 1999 July 1999 All of the acquisitions were acquired using the pooling of interests method of accounting except for USPI, Insession, and SDM which were accounted for under the purchase method of accounting. USPI was subsequently sold in September 1999. 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. The acquisitions of USPI and SDM did not contribute significant revenues during fiscal 1999. The Company was previously the exclusive distributor of Insession’s primary product (ICE) and, as a result, that acquisition did not contribute significant additional revenues in fiscal 1999. PRODUCT PRICING AND REVENUE RECOGNITION The Company’s primary software license fees pricing method is transaction sensitive, whereby products are priced based upon the number of transactions processed by the customer (“transaction-based pricing”). Under this method, customers license the products by paying an Initial License Fee (ILF), where the customer pays a significant portion of the total software license fees at the beginning of the software license term, and a Monthly License Fee (MLF), where the customer pays a portion of the software license fees over the software license term. The payment of the ILF and MLF allows the customer to process a contractually predetermined maximum volume of transactions per month for a specified period of time. Once the transaction volume exceeds this maximum volume level, the customer is required to pay an additional license fee which is in the form of a Capacity License Fee (CLF), collected at the beginning of the period the customer contracts for an incremental volume level, and a Capacity Monthly License Fee (CMLF), collected over the software license term. There is a separate license fee for each incremental volume level. In addition to transaction-based pricing, the Company 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 F-3 (“designated equipment group pricing”). Under designated equipment group pricing, the customers pay a license fee (in the form of an ILF and MLF) for each copy of the software the customers have licensed for a specified period of time. Under both the transaction-based pricing method and the designated equipment group pricing method, the Company offers a paid up front (PUF) payment option, whereby the present value of the MLF or CMLF is due at the beginning of the software license term. The standard software license term under either pricing method is typically 60 months, but may extend over a shorter or longer period. Other elements of the software licensing arrangement typically include postcontract customer support (maintenance) and, occasionally, services. Beginning in fiscal 1999, the Company adopted American Institute of Certified Public Accountants Statement of Position 97-2, “Software Revenue Recognition” (SOP 97-2). SOP 97-2 provides guidance on applying generally accepted accounting principles for software revenue recognition transactions. The primary software revenue recognition criteria outlined in SOP 97-2 include: evidence of an arrangement; delivery; fixed or determinable fees; and collectibility. SOP 97-2 specifies that extended payment terms in a software licensing arrangement may indicate that the software license fees are not deemed to be fixed or determinable. In addition, if payment of a significant portion of the software license fees is not due until more than twelve months after delivery, the software license fees should be presumed not to be fixed or determinable, and thus should be recognized as the payments become due. However, SOP 97-2 specifies that if the Company has a standard business practice of using extended payment terms in software licensing arrangements and has a history of successfully collecting the software license fees under the original terms of the software licensing arrangement without making concessions, the Company can overcome the presumption that the software license fees are not fixed or determinable. If the presumption is overcome, the Company should recognize the software license fees when all other SOP 97-2 revenue recognition criteria are met. The Company has concluded that for certain software arrangements entered into after October 1, 1998 with extended guaranteed payment terms, the “fixed or determinable” presumption has been overcome and software license fees should be recognized upon meeting the SOP 97-2 revenue recognition criteria (“guaranteed software license fees”). The present value of the guaranteed software license fees, net of third party royalties, recognized in fiscal 1999 totaled approximately $60.5 million. The discount rates used to determine the present value of the guaranteed software license fees, representing the Company’s incremental borrowing rates, ranged from 9.5% to 10.25%. The portion of the guaranteed software license fees that has been recognized by the Company, but not yet billed, is reflected in accrued receivables in the accompanying consolidated balance sheets. Failing to overcome the “fixed or determinable” presumption would have resulted in the Company recognizing the ILF and CLF components of the software license fees related to these certain software arrangements when the software was delivered (or in the reporting period that the incremental volume level was effective), and the MLF and CMLF components of the software license fees would have been recognized ratably over the software license term as they were billed. Software license fees related to those software arrangements that would have been recognized in fiscal 1999 had the Company not been able to overcome the presumption that the software license fees were not fixed or determinable fees would have been approximately $5.1 million. Software license fees for fiscal 1999, 1998 and 1997 consisted of the following (in thousands): Initial license fees (ILF, CLF, PUF) .................................................... Monthly license fees (MLF, CMLF)..................................................... Guaranteed software license fees ...................................................... $ 95,002 54,500 60,500 $ 123,175 43,700 – $ 98,738 32,400 – 1999 1998 1997 $ 210,002 $ 166,875 $ 131,138 The Company prefers to collect software license fees using the MLF/CMLF payment option rather than the PUF payment option, as the MLF/CMLF payment option generally provides more favorable economic results to the Company. Software license arrangements with the MLF/CMLF payment option typically include guaranteed monthly payments, which enhances the long-term relationship with the customer. As a result, in fiscal 1999 the Company emphasized MLF/CMLF payment options rather than PUF payment options. F-4 RESULTS OF OPERATIONS 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, 1999 1998 1997 (in thousands) Revenues: Amount % of Revenue Amount % of Revenue Amount % of Revenue Software license fees ................... $ 210,002) 63,933) Maintenance fees ........................ 76,857) Services...................................... 4,002) Hardware, net ............................. 59.2% 18.0 21.7 1.1 $ 166,875) 57,077) 70,688) 4,609) 55.8% 19.1 23.6 1.5 $ 131,138) 48,714) 58,234) 6,063) 53.7% 20.0 23.9 2.5 Total revenues ................................ 354,794) 100.0 299,249) 100.0 244,149) 100.0 Expenses: Cost of software license fees......... Cost of maintenance and services ... Research and development........... Selling and marketing .................. General and administrative: General and administrative costs .. Amortization of goodwill and 44,079) 72,096) 34,612) 70,121) 12.4 20.3 9.8 19.8 36,294) 69,886) 26,260) 62,013) 12.1 23.4 8.8 20.7 29,538) 57,821) 20,070) 50,168) 12.1 23.7 8.2 20.5 58,725) 16.6 51,873) 17.3 45,517) 18.6 purchased intangibles.............. 4,901) 1.4 1,435) 0.5 1,008) 0.4 Total expenses ................................ 284,534) 80.2 247,761) 82.8 204,122) 83.6 Operating income ........................... 70,260) 19.8 51,488) 17.2 40,027) 16.4 Other income (expense): Interest income ........................... Interest expense .......................... Transaction related expenses ........ Other.......................................... 2,947) (401) (653) (283) 0.8 (0.1) (0.2) (0.1) 3,204) (242) (2,512) (203) 1.1 (0.1) (0.8) (0.1) 2,291) (178) _) (652) 0.9 (0.1) 0.0 (0.3) Total other...................................... 1,610) 0.5 247) 0.1 1,461) 0.6 Income before income taxes ............ Provision for income taxes ............... 71,870) (27,170) 20.3 (7.7) 51,735) (19,476) 17.3 (6.5) 41,488) (14,325) 17.0 (5.9) Net income .................................... $ 44,700) 12.6% Unaudited pro forma net income 1.... $ 44,613) 12.6% $ $ 32,259) 10.8% 31,432) 10.5% $ $ 27,163) 11.1% 25,278) 10.4% 1 Prior to their acquisitions, RVS and IntraNet were taxed primarily as a partnership and a Subchapter S corporation, respectively. In addition, prior to its acquisition, MINT’s earnings were not subject to income taxes. The unaudited pro forma net income reflects a pro forma tax provision for income taxes on the results of operations of RVS, IntraNet and MINT for the periods prior to their acquisition. F-5 REVENUES Total revenues for fiscal 1999 increased 18.6% or $55.5 million over fiscal 1998. Of this increase, $43.1 million of the growth resulted from a 25.8% increase in software license fees revenue, $6.2 million from an 8.7% increase in services revenue and $6.9 million from a 12.0% increase in maintenance fee revenue. Total revenues for fiscal 1998 increased 22.6% or $55.1 million over fiscal 1997. Of this increase, $35.7 million of the growth resulted from a 27.3% increase in software license fees revenue, $12.5 million from a 21.4% increase in services revenue and $8.4 million from a 17.2% increase in maintenance fee revenue. The growth in software license fees revenue in both fiscal 1999 and 1998 is primarily the result of increased demand, from both existing and new customers, for the Company’s BASE24 ATM and POS products and System Solutions products and services accompanied by the continued growth of the installed base of customers paying monthly license fee (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 $54.5 million, $43.7 million and $32.4 million in fiscal 1999, 1998 and 1997, respectively. The growth in services revenue in both fiscal 1999 and 1998 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 1999 and 1998 is a result of the continued growth of the installed base of the Company’s software products. EXPENSES Total operating expenses for fiscal 1999 increased 14.8% or $36.8 million over fiscal 1998. Total operating expenses for fiscal 1998 increased 21.4% or $43.6 million over fiscal 1997. The primary reason for the overall increase in operating expenses during fiscal 1999 and 1998 is the increase in staff required to support the increased demand for the Company’s products and services. The slowing of expense growth in fiscal 1999 is primarily due to the Company implementing controls over headcount growth. Prior to the implementation of the headcount controls, the Company was experiencing significant headcount growth as it moved to the line-of-business organization structure and added acquired companies. Total staff (including both employees and independent contractors) was 2,194, 2,054 and 1,684 at September 30, 1999, 1998 and 1997, respectively. The Company’s operating margin was 19.8%, 17.2% and 16.4% in fiscal 1999, 1998 and 1997, respectively. These improvements 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 67.3%, 64.5% and 64.2% in fiscal 1999, 1998 and 1997, 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 9.8%, 8.8% and 8.2% in fiscal 1999, 1998 and 1997, respectively. The majority of R&D costs have been charged to expense as incurred with the capitalization of software costs amounting to approximately $3.6 million in fiscal 1999 and $1.0 million in fiscal 1998 and 1997. Selling and marketing costs as a percentage of total revenues were 19.8%, 20.7% and 20.5% in fiscal 1999, 1998 and 1997, respectively. The slight decrease in fiscal 1999 as compared to fiscal 1998 and 1997 is due to the impact of additional MLF revenue and increased leverage from a larger revenue base in relation to the level of selling and marketing costs being incurred. General and administrative (G & A) costs as a percentage of total revenues were 16.6%, 17.3% and 18.5% in fiscal 1999, 1998 and 1997. The decreases are due primarily to increased leverage from the larger revenue base in relation to the level of G & A expenses being incurred. F-6 EBITDA The Company’s earnings before interest, income taxes, depreciation and amortization (EBITDA) was $91.8 million, $62.7 million and $49.6 million for fiscal 1999, 1998 and 1997, 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 in accordance with generally accepted accounting principles. OTHER INCOME AND EXPENSE Other income and expense consists primarily of interest income derived from short-term investments and interest expense on indebtedness. Interest income was higher in fiscal 1998 than in fiscal 1999. This is due primarily to interest earned in fiscal 1998 and early fiscal 1999 on promissory notes and line-of-credit advances provided to Insession and USPI prior to the Company’s acquisition of these companies. 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. In fiscal 1999, the Company incurred $653,000 of these expenses to complete the acquisition of MINT and in fiscal 1998, the Company incurred $2.5 million to complete the acquisition of IntraNet, SCIL and PRI. INCOME TAXES The Company had a pro forma effective tax rate of 38% for fiscal 1999 and 39% for fiscal 1998. As of September 30, 1999, the Company has deferred tax assets of approximately $18.7 million and deferred tax liabilities of $6.2 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 $7.5 million of the deferred tax assets were more likely than not to be realized. Accordingly, the Company has recorded a valuation allowance of $11.2 million as of September 30, 1999. The Company intends to analyze the realizability of the net deferred tax assets at each future reporting period. Such analysis may indicate that the realization of various deferred tax benefits is more likely than not and, therefore, the valuation reserve may be reduced. BACKLOG As of September 30, 1999 and 1998, the Company had non-recurring revenue backlog of $30.9 million and $30.2 million in software license fees and $34.2 million and $35.6 million in services, respectively. The Company includes in its non-recurring revenue backlog all fees specified in contracts which have been executed by the Company to the extent that the Company contemplates recognition of the related revenue within one year. There can be no assurance that the contracts included in non-recurring revenue backlog will actually generate the specified revenues or that the actual revenues will be generated within the one year period. As of September 30, 1999 and 1998, the Company had recurring revenue backlog of $138.7 million and $119.4 million, respectively. The Company defines recurring revenue backlog to be all monthly license fees, maintenance fees and facilities management fees specified in contracts which have been executed by the Company and its customers to the extent that the Company contemplates recognition of the related revenue within one year. There can be no assurance that the contracts included in recurring revenue backlog will actually generate the specified revenues or that the actual revenues will be generated within the one year period. F-7 YEAR 2000 Year 2000 problems may arise in computer equipment and software, as well as embedded electronic systems, because of the way these systems are programmed to interpret certain dates that will occur around the change in century. In the computer industry this is primarily the result of computer programs being designed and developed using or reserving only two digits in date fields (rather than four digits) to identify the year, without considering the ability of the program to properly distinguish the upcoming century change in the Year 2000. In addition, the Year 2000 is a special-case leap year and some programs may drop February 29th from their internal calendars. Certain other dates may present problems because of the way the digits are interpreted. Because the Company’s business is based on the licensing of applications software, the Company’s business would be adversely impacted if its products or its internal systems experience problems associated with the century change. This issue also potentially affects the software programs and systems used by the Company in its operations. PROJECT DEFINITION In 1996 the Company initiated a company wide program to analyze three specific categories of systems: (1) software developed by the Company which is licensed to customers; (2) information technology or “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 reviewing its licensed software consisting of four categories. The categories are (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 phases. The tools were subsequently made available to the Company’s customers at no charge. The Company believes that its remediation efforts with respect to its software products will prove to be successful. The Company’s belief is based on testing by the Company of its software products by using testing tools simulating dates and testing by many of its customers who have in turn completed their own Year 2000 testing. Year 2000 compliant versions of its software products (“Compliant Software”) have been made available by the Company to customers in a timely manner and its communication efforts have been proactive and ongoing. The Company continues to actively monitor the status and progress of customers and distributors and assess the risk associated in those cases where the customer has not taken delivery of the Compliant Software or may have not made satisfactory progress in their own Year 2000 testing. With respect to IT and non-IT systems, the Company is utilizing a methodology similar to that adopted for its software products. 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 the importance of communications regarding and organization of Year 2000 tasks and responsibilities, 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 centrally to upper management. The approach also ensures that customers are kept informed of product and Company activities 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 be upgraded as part of the customers’ own Year 2000 projects. As of November 1999, all of the Company’s licensed software applications are compliant and available to customers. The Company continues to conduct analysis of newly acquired software products with appropriate measurement and documentation in accordance with the Year 2000 methodology in place. F-8 With respect to the IT and non-IT systems, remediation and replacement has been substantially completed in the most critical areas. The internal accounting systems utilized by the Company and its subsidiaries have been replaced where necessary. As new IT and non-IT purchases are made, each is scrutinized and inventoried for Year 2000 compliance. 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 90% 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 has developed contingency plans for support of its customers prior to, during, and following the “Year 2000 weekend”. Such plans incorporate, but are not 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 were completed in September 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 related to non-IT compliance involving embedded systems and consulting services. Costs incurred from the beginning of the project in 1996 through September 1999 have totaled approximately $9.4 million. The Company expects to incur an additional $600,000 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 assumptions 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 developed by other vendors or by customers who have developed their own applications for use with the Company’s products, which may not be Year 2000 compliant. Since the majority of the Company’s customers utilize the Company’s software products for authorization, routing, or processing of financial transactions, the failure of such customers’ systems, which may be particularly susceptible to Year 2000 compliance issues, could impact the transaction volume processed by the customers thereby reducing transaction fees paid by customers with usage based fee contracts. Failures of such systems could also increase the efforts required by the Company to assist customers with resolving problems unrelated to the Company’s licensed products. 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 that 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 that are not prepared for the Year 2000. In each case cited previously, the Company has developed 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 monitor 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 acknowledges the risk associated with suppliers of material services, hardware vendors closely related to the operation of the Company’s licensed products, the Company’s own licensed products and the ability of the Company to support its customers. In addition to distributed support methods, the Company’s contingency plans address alternative services, such as telecommunications. The (i) inability to timely implement contingency plans, if deemed necessary and (ii) the cost to implement such plans, may have a material adverse effect on the Company’s results of operations. F-9 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 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 problems. Certain factors could cause actual results to differ materially from the Company’s expectations, including without limitation (i) the failure of existing or future customers to achieve Year 2000 compliance, (ii) the failure of computer hardware system providers on which the Company and its customers rely or other vendors or service providers of the Company or its customers to timely achieve Year 2000 compliance, (iii) the Company’s products and systems not containing all necessary date code changes, (iv) the failure of the Company’s analysis and testing to detect operational problems in IT and non-IT systems utilized by the Company or in the Company’s products or services, whether such failure results from the technical inadequacy of the Company’s validation and testing efforts, the technological unfeasibility of testing certain non-IT systems, and the unavailability of customers or other third parties to participate in testing, (v) potential litigation arising out of Year 2000 issues, with respect to providers of software and related technical and consulting services such as the Company generally, and particularly in light of the numerous interfaces between the Company’s products and products and systems of third parties which are required to successfully utilize the Company’s products which could involve the Company in expensive, multiple party litigation even though the Company may have no responsibility for the alleged problem, and (vi) the failure to successfully implement the contingency plan or any inadequacy of the contingency plan to the extent Year 2000 compliance is not achieved. During the first quarter of fiscal 2000, the Company’s large bank and merchant customers have, in effect, locked down their systems prior to the Year 2000. This Year 2000 lock-down has had a negative impact on the Company’s revenue and net income for the first quarter of fiscal 2000 due to the less than expected demand by the Company’s customers to upgrade and enhance their current systems. Although it is uncertain whether the Year 2000 lock-down will have a negative impact on the Company’s revenue and net income beyond the first quarter of fiscal 2000, the Company believes demand for system upgrades and enhancements could be slow to return to normal levels if one or more segments of the global marketplace experience Year 2000-related failures. It is clear that as a result of the negative impact on the first quarter of fiscal 2000, the Year 2000 lock-down will have a negative impact on the Company’s revenue and net income for fiscal 2000. The statements in this report regarding future results are preliminary and “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, this report contains other forward-looking statements including statements regarding the Company’s expectations, plans and beliefs. The forwarding-looking statements in this report are subject to a variety of risks and uncertainties. Actual results could differ materially. Factors that could cause actual results to differ include but are not limited to those described above and the following: • That the Company will continue to derive a substantial majority of its total revenue from licensing its BASE24 family of software products and providing services and maintenance related to those products. Any reduction in demand for, or increase in competition with respect to, BASE24 products would have a material adverse effect on TSA’s financial condition and results of operations. • That the Company’s business is concentrated in the banking industry, making it susceptible to a downturn in that industry. • Fluctuations in quarterly operating results may result in volatility in TSA’s stock price. No assurance can be given that operating results will not vary. • TSA’s stock price may be volatile, in part due to external factors such as announcements by 3rd parties or competitors, inherent volatility in the high-technology sector and changing market conditions in the industry. For a detailed discussion of these and other risk factors, interested parties should review the Company’s filings with the Securities and Exchange Commission, including Exhibit 99.01 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 1999. F-10 SELECTED QUARTERLY INFORMATION The following table sets forth certain unaudited financial data for each of the quarters within fiscal 1999, 1998 and 1997. 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. Quarter Ended (in thousands) Revenues: Sep. 30,) June 30,)March 31,) Dec. 31,) Sep. 30,) June 30,)March 31,) Dec. 31,) Sep. 30,) June 30,)March 31,) Dec. 31,) 1999) 1999) 1999) 1998) 1998) 1998) 1998) 1997) 1997) 1997) 1997) 1996) Software license fees ............ $60,114) $53,259) $50,552) $46,077) $45,305) $42,923) $40,082) $38,565) $34,796) $34,340)$33,152)$28,850) Maintenance fees ................. 16,328) 16,042) 15,996) 15,567) 15,078) 14,664) 14,162) 13,173) 12,628) 12,470) 11,861) 11,755) Services............................... 15,395) 18,858) 19,309) 23,295) 20,154) 18,188) 16,405) 15,941) 15,455) 15,211) 13,535) 14,033) Hardware, net ...................... 810) 967) 1,094) 1,131) 883) 1,232) 1,105) 1,389) 1,175) 1,083) 3,213) 592) Total revenues .................... 92,647) 89,126) 86,951) 86,070) 81,420) 77,007) 71,754) 69,068) 64,054) 63,104) 61,761) 55,230) Expenses: Cost of software license fees.. 11,926) 10,381) 9,950) 11,822) 9,776) 9,220) 8,535) 8,763) 7,592) 7,428) 7,284) 7,234) Cost of maintenance and services....................... 16,025) 17,740) 18,038) 20,293) 19,304) 18,126) 16,722) 15,734) 14,941) 14,832) 13,929) 14,119) Research and development.... 9,165) 8,711) 8,538) 8,198) 7,050) 6,797) 6,304) 6,109) 5,269) 5,155) 5,102) 4,544) Selling and marketing ........... 19,300) 17,495) 17,348) 15,978) 16,917) 15,682) 15,010) 14,404) 13,713) 13,062) 12,441) 10,952) General and administrative: General and administrative costs.......... 14,742) 14,639) 14,976) 14,368) 14,045) 13,717) 12,279) 11,832) 11,035) 11,422) 12,930) 10,130) Amortization of goodwill and purchased intangibles....... 1,780) 1,572) 1,104) 445) 359) 347) 414) 315) 344) 210) 237) 217) Total expenses ................... 72,938) 70,538) 69,954) 71,104) 67,451) 63,889) 59,264) 57,157) 52,894) 52,109) 51,923) 47,196) Operating income ..................... 19,709) 18,588) 16,997) 14,966) 13,969) 13,118) 12,490) 11,911) 11,160) 10,995) 9,838) 8,034) Other income (expense): Interest income .................... Interest expense ................... Transaction related expenses . 817) (165) _) 706) (77) _) Other income (expense) ........ (320) (131) 721) (48) _) (29) 703) (111) (653) 197) 894) (98) (2,512) 863) (46) _) 63) (226) 800) (78) _) 40 647) (20) _) (80) 642) (42) _) (76) 621) (55) _) 547) (24) _) 481) (57)) _) (40) (223) (313) Total other ......................... 332) 498) 644) 136) (1,653) 591) 762 547) 524) 526) 300) 111) Income before income taxes ...... 20,041) 19,086) 17,641) 15,102) 12,316) 13,709) 13,252) 12,458) 11,684) 11,521) 10,138) 8,145) Provision for income taxes ......... (7,531) (7,237) (6,757) (5,645) (5,289) (5,040) (4,700) (4,447) (3,786) (3,793) (3,667) (3,079) Net income .............................. $12,510) $11,849) $10,884) $9,457) $7,027) $8,669) $8,552) $8,011) $7,898) $7,728) $6,471) $5,066) Unaudited pro forma net income(1) ........................ $12,510) $11,849) $10,884) $9,370) $6,849) $8,575) $8,290) $7,718) $7,537) $7,206) $5,990) $4,545) Pro forma basic earnings per share ............................. $0.39) $0.37) $0.35) $0.30) $0.22) $0.28) $0.28) $0.26) $0.25) $0.24) $0.20) $0.16) Pro forma diluted earnings per share ............................. $0.38) $0.36) $0.34) $0.30) $0.22) $0.27) $0.27) $0.25) $0.24) $0.23) $0.20) $0.15) 1 Prior to their acquisitions, RVS and IntraNet were taxed primarily as a partnership and a Subchapter S corporation, respectively. In addition, prior to its acquisition, MINT’s earnings were not subject to income taxes. The unaudited pro forma net income and earnings per share reflects a pro forma tax provision for income taxes on the results of operations of RVS, IntraNet and MINT. F-11 LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company’s principal sources of liquidity consisted of $70.5 million of cash and cash equivalents, as compared to $63.6 million at September 30, 1998. The Company’s net cash flows provided by operating activities for fiscal 1999, 1998 and 1997 were $40.3 million, $35.8 million and $34.2 million, respectively. The increase of $4.5 million in fiscal 1999 is principally due to higher net income and an increase in deferred revenue, partly offset by an increase in accrued receivables and a decrease in accrued liabilities. The increase of $1.6 million in fiscal 1998 is principally due to higher net income and increases in accrued liabilities and deferred revenue partly offset by increases in billed receivables. An important contributor to the cash management program is the Company’s factoring of accrued receivables begun in fiscal 1998, whereby interest in its receivables are transferred (on a non-recourse basis) to third party financial institutions in exchange for cash. During fiscal 1999 and 1998, the Company generated operating cash flows from the factoring of accrued receivables of $30.9 million and $9.2 million, respectively. The Company’s net cash flows used in investing activities totaled $20.2 million, $24.9 million and $18.5 million in fiscal 1999, 1998 and 1997, respectively. The decrease in cash used in investing activities in fiscal 1999 as compared to 1998 is due to proceeds of $10.1 million received in the sale of US Processing, Inc. more than offsetting the increase in the amount of cash used for purchases of software, marketable securities and acquisitions. The increase in fiscal 1998 as compared to 1997 is due to an increase in the level of cash used to purchase property and equipment, marketable securities and additions to other investments and notes receivable. In each period, the Company made significant investments in computer equipment and software. The Company expects to continue to invest in these items to support its growth. In fiscal 1999, the Company purchased 1.25 million shares of Digital Courier Technologies, Inc. (DCTI) Common Stock for $6.5 million. The Company also received warrants to purchase 1.0 million shares of DCTI Common Stock for an exercise price of $5.20 per share. In fiscal 1998, the Company purchased 2.5 million shares of Nestor, Inc. (Nestor) Common Stock for $5.0 million. The Company also received warrants to purchase 2.5 million shares of Nestor Common Stock for an exercise price of $3 per share. In fiscal 1999, the Company’s Board of Directors approved the repurchase of up to 2,000,000 shares of Common Stock through February 2000. The purpose of the stock repurchase program is to replace the shares issued in the SDM acquisition completed in July 1999, and to fund a reserve for shares for future employee stock option grants, acquisitions or other corporate purposes. Under this repurchase program, the Company purchased 475,000 shares at an average cost of $29.98 per share for approximately $14.2 million in fiscal 1999 and 500,300 shares at an average cost of $26.67 for approximately $13.3 million during the first quarter of fiscal 2000. The Company used cash flow from operations to fund the Common Stock repurchases. Management believes that the Company’s working capital and cash flow generated from operations are sufficient to meet the Company’s working capital requirements for the foreseeable future. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 denominated 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 natural 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-12 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants ........................................................................................................................ F-12 Consolidated Balance Sheets as of September 30, 1999 and 1998.................................................................................... F-13 Consolidated Statements of Income and Comprehensive Income for each of the three years in the period ended September 30, 1999 ......................................................................................................................... F-14 Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended September 30, 1999.......... F-15 Consolidated Statements of Cash Flows for each of the three years in the period ended September 30, 1999 ....................... F-16 Notes to Consolidated Financial Statements ...................................................................................................................... F-17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Transaction Systems Architects, Inc.: We have audited the accompanying consolidated balance sheets of Transaction Systems Architects, Inc. (a Delaware corporation) and Subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Transaction Systems Architects, Inc. and Subsidiaries as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. As explained in Note 2 to the consolidated financial statements, the Company changed its method of accounting for software license fees revenue upon the adoption of American Institute of Certified Public Accountants Statement of Position 97-2, “Software Revenue Recognition,” effective October 1, 1998. ARTHUR ANDERSEN LLP Omaha, Nebraska, October 28, 1999 CONSOLIDATED BALANCE SHEETS (in thousands except share data) F-13 September 30, ASSETS Current assets: 1999) 1998) Cash and cash equivalents...................................................................................... Marketable securities ............................................................................................. Billed receivables, net of allowances of $7,251 and $5,148, respectively .................. Accrued receivables ............................................................................................... Deferred income taxes............................................................................................ Other .................................................................................................................... $ 70,482) 8,456) 50,619) 41,880) 7,468) 7,215) $ 63,648) 2,188) 58,080) 33,000) 4,921) 3,585) Total current assets............................................................................................. 186,120) 165,422) Property and equipment, net...................................................................................... Software, net ............................................................................................................ Intangible assets, net ................................................................................................ Long-term accrued receivables ................................................................................... Investments and notes receivable ............................................................................... Other ....................................................................................................................... 20,754) 25,835) 61,612) 26,850) 3,569) 4,785) 21,001) 7,172) 9,385) 2,056) 16,754) 4,517) Total assets ........................................................................................................ $ 329,525) $ 226,307) 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 ......................................................................................................... Deferred income taxes ............................................................................................... 501) 8,030) 7,192) 18,287) 8,521) 54,627) 97,158) 991) 6,207) Total liabilities.................................................................................................... 104,356) 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, 1999 and 1998 Redeemable Convertible Class B Common Stock and Warrants, $.05 par value; 5,000,000 shares $ 1,078) 13,720) 8,426) 14,826) 4,784) 35,594) 78,428) 2,002) –) 80,430) authorized; no shares issued and outstanding at September 30, 1999 and 1998 Class A Common Stock, $.005 par value; 50,000,000 shares authorized; 32,580,637 and 29,873,947 shares issued at September 30, 1999 and 1998, respectively........................................................................................................ Class B Common Stock, $.005 par value; 5,000,000 shares authorized; none and 1,171,252 shares issued and outstanding at September 30, 1999 and 1998, respectively........................................................................................................ Additional paid-in capital ....................................................................................... Retained earnings .................................................................................................. Treasury stock, at cost, 475,845 shares and 845 shares at September 30, 1999 and 1998, respectively .............................................................................. Accumulated other comprehensive income............................................................... 163) 150) –)) 161,630) 82,922) (14,250) (5,296) 6) 112,398) 38,222) (12) (4,887) Total stockholders’ equity .................................................................................... 225,169) 145,877) Total liabilities and stockholders’ equity ............................................................... $ 329,525) $ 226,307) The accompanying notes are an integral part of the consolidated financial statements. F-14 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in thousands, except per share amounts) Year Ended September 30, Revenues: 1999) 1998) 1997) Software license fees ......................................................................... Maintenance fees .............................................................................. Services............................................................................................ Hardware, net ................................................................................... $ 210,002) 63,933) 76,857) 4,002) $ 166,875) 57,077) 70,688) 4,609) $ 131,138) 48,714) 58,234) 6,063) Total revenues................................................................................ 354,794) 299,249) 244,149) Expenses: Cost of software license fees............................................................... Cost of maintenance and services ....................................................... Research and development................................................................. Selling and marketing ........................................................................ General and administrative: General and administrative costs ..................................................... Amortization of goodwill and purchased intangibles........................... 44,079) 72,096) 34,612) 70,121) 58,725) 4,901) 36,294) 69,886) 26,260) 62,013) 51,873) 1,435) 29,538) 57,821) 20,070) 50,168) 45,517) 1,008) Total expenses ............................................................................... 284,534) 247,761) 204,122) Operating income.................................................................................. 70,260) 51,488) 40,027) Other income (expense): Interest income ................................................................................. Interest expense ................................................................................ Transaction related expenses .............................................................. Other................................................................................................ 2,947) (401) (653) (283) 3,204) (242) (2,512) (203) Total other ..................................................................................... 1,610) 247) 2,291) (178) –) (652) 1,461) Income before income taxes .................................................................. Provision for income taxes ..................................................................... 71,870) (27,170) 51,735) (19,476) 41,488) (14,325) Net income .......................................................................................... $ 44,700) $ 32,259) $ 27,163) Average shares outstanding: Basic................................................................................................ 31,667) 30,298) 29,829) Diluted ............................................................................................. 32,363) 31,193) 30,707) Unaudited pro forma information (Note 3) Pro forma net income ........................................................................ $ 44,613) $ 31,432) $ 25,278) Pro forma earnings per share data: Basic ............................................................................................ Diluted .......................................................................................... $ $ 1.41) 1.38) $ $ 1.04) 1.01) $ $ 0.85) 0.82) Net income .......................................................................................... $ 44,700) $32,259) $ 27,163) Other comprehensive income: Foreign currency translation adjustments ............................................. Unrealized investment holding loss ..................................................... (178) (231) (1,815) (2,812) (24) –) Comprehensive income.......................................................................... $ 44,291) $ 27,632) $ 27,139) The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, except share amounts) F-15 Class A) Common) Stock) Class B) Common) Stock) Additional) Paid-in) Capital) Retained) Earnings) Accumulated) Other) Treasury) Comprehensive) Income) Stock) Total) Balance, September 30, 1996, as previously reported .................. $ 133) $ 11) $ 96,984) $ (16,540) $ (12) $ (236) $ 80,340) Adjustment for Media Integration BV pooling of interests ................. 4) –) 346) 73) –) –) 423) Balance, September 30, 1996, as restated .................................. 137) 11) 97,330) (16,467) (12) (236) 80,763) 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..................................... Foreign currency 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..................................... Foreign currency translation adjustments ................................ Balance, September 30, 1998 ......... Issuance of Class A Common Stock for purchase of Insession, Inc. ...... Issuance of Class A Common Stock for purchase of SDM International, Inc......................... Sale of Class A Common Stock pursuant to Employee Stock Purchase Plan ............................. Conversion of Class B Common Stock to Class A Common Stock ... Purchase of 475,000 shares of Class A Common Stock ................ Exercise of stock options.................. Tax benefit of stock options exercised Unrealized investment holding loss ... Net income..................................... Foreign currency translation adjustments ................................ 1) –) 5) 1) –) –) –) –) –) 144) 4) 1) –) 1) –) –) –) –) –) 150) 4) 2) –) 6) –) 1) –) –) –) –) Balance, September 30, 1999 ......... $ 163) $ 5) (176) 778) –) 1,268) –) 2,586) 3,132) –) –) –) –) (4,320) –) –) 27,163) –) –) –) –) –) –) –) –) –) –) –) –) –) –) –) –) –) –) –) (170) 778) –) 1,269) (4,320) 2,586) 3,132) 27,163) (24) (24) 105,099) 6,200) (12) (260) 111,177) 17) 663) 1,086) –) 971) 2,099) –) 3,126) –) –) –) –) (900) –) –) 32,259) –) –) –) –) –) –) –) –) –) –) –) –) –) –) –) –) –) (2,812) –) 684) 1,087) 971) 2,100) (900) 3,126) (2,812) 32,259) (1,815) (1,815) 112,398) 38,222) (12) (4,887) 145,877) 28,421) 14,485) 1,339) (6) –) –) –) –) –) –) –) –) –) –) 2,216) 2,771) –) –) –) –) –) –) 44,700) (14,238) –) –) –) –) –) –) –) –) –) –) –) (231) –) 28,425) 14,487) 1,339) –) (14,238) 2,217) 2,771) (231) 44,700) –) –) –) (178) (178) $ 161,630) $ 82,922) $ (14,250) $ (5,296) $ 225,169) –) –) (5) –) –) –) –) –) –) 6) –) –) –) –) –) –) –) –) –) 6) –) –) –) –) –) –) –) –) –) –) The accompanying notes are an integral part of the consolidated financial statements. F-16 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended September 30, 1999) 1998) 1997) Cash flows from operating activities: Net income..................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................................................ Amortization ............................................................................ (Increase) decrease in receivables, net ....................................... (Increase) decrease in other current assets ................................. (Increase) decrease in long-term accrued receivables................... Increase in other assets ............................................................ Increase (decrease) in accounts payable ..................................... Increase (decrease) in accrued employee compensation ............... Increase (decrease) in accrued liabilities .................................... Increase in income tax liabilities................................................ Increase in deferred revenue...................................................... $ 44,700) $ 32,259) $ 27,163) 8,270) 13,206) 892) (2,550) (24,794) (1,261) (2,424) (1,332) (9,616) 3,239) 11,932) 6,449) 5,022) (17,949) (345) 338) (1,696) 2,340) (390) 6,289) 839) 2,644) 5,475) 4,404) (17,238) 1,068) (801) (736) (947) 325) 3,561) 3,432) 8,459) Net cash provided by operating activities................................. 40,262) 35,800) 34,165) Cash flows from investing activities: Purchases of property and equipment ............................................... Purchases of software and distribution rights..................................... Purchase of marketable securities .................................................... Acquisition of businesses, net of cash acquired ................................. Proceeds from sale of business ........................................................ Additions to investments and notes receivable ................................... Proceeds from notes receivable repayments....................................... (7,322) (6,891) (6,500) (8,949) 10,093) (602) –) (8,936) (3,702) (5,000) 417) –) (7,840) 149) (7,702) (7,368) –) (2,612) –) (5,036) 4,180) Net cash used in investing activities ....................................... (20,171) (24,912) (18,538) Cash flows from financing activities: Proceeds from issuance of Class A Common Stock............................. Proceeds from sale and exercise of stock options ............................... Purchase of Class A Common Stock.................................................. Distribution to RVS and Intranet owners............................................ Payments of long-term debt ............................................................. 1,339) 2,216) (14,238) –) (2,792) Net cash provided by (used in) financing activities................... (13,475) Effect of exchange rate fluctuations on cash......................................... 218) Net increase in cash and cash equivalents ........................................... Cash and cash equivalents, beginning of period .................................... 6,834) 63,648) 971) 2,062) –) (900) (1,585) 548) (643) 10,793) 52,855) 779) 5,233) –) (4,320) (1,549) 143) (442) 15,328) 37,527) Cash and cash equivalents, end of period............................................. $ 70,482) $ 63,648) $ 52,855) Supplemental cash flow information: Income taxes paid ........................................................................... Interest paid ................................................................................... $ 24,039) 397) $ $ 19,653) 304) $ $ $ 8,848) 175) The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-17 1. GENERAL Transaction Systems Architects, Inc. (the Company or TSA) was formed on November 2, 1993, for the purpose of acquiring all of the outstanding capital stock of Applied Communications, Inc. (ACI) and Applied Communications Inc Limited (ACIL). 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 Inc.’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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidated Financial Statements The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. 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 The Company’s software license fees pricing method is transaction sensitive, whereby products are priced based upon the number of transactions processed by the customer (“transaction-based pricing”). Under this method, customers license the products by paying an Initial License Fee (ILF), where the customer pays a significant portion of the total software license fees at the beginning of the software license term, and a Monthly License Fee (MLF), where the customer pays a portion of the software license fees over the software license term. The payment of the ILF and MLF allows the customer to process a contractually predetermined maximum volume of transactions per month for a specified period of time. Once the transaction volume exceeds this maximum volume level, the customer is required to pay an additional license fee which is in the form of a Capacity License Fee (CLF), collected at the beginning of the period the customer contracts for an incremental volume level, and a Capacity Monthly License Fee (CMLF), collected over the software license term. There is a separate license fee for each incremental volume level. In addition to transaction-based pricing, the Company 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 (“designated equipment group pricing”). Under designated equipment group pricing, the customers pay a license fee (in the form of an ILF and MLF) for each copy of the software the customers have licensed for a specified period of time. Under both the transaction-based pricing method and the designated equipment group pricing method, the Company offers a paid up front (PUF) payment option, whereby the present value of the MLF or CMLF is due at the beginning of the software license term. The standard software license term under either pricing method is typically 60 months, but may extend over a shorter or longer period. Other elements of the software licensing arrangement typically include postcontract customer support (maintenance) and, occasionally, services. Beginning in fiscal 1999, the Company adopted American Institute of Certified Public Accountants Statement of Position 97-2, “Software Revenue Recognition” (SOP 97-2). SOP 97-2 provides guidance on applying generally accepted accounting principles for software revenue recognition transactions. The primary software revenue recognition criteria outlined in SOP 97-2 include: evidence of an arrangement; delivery; fixed or determinable fees; and collectibility. F-18 SOP 97-2 specifies that extended payment terms in a software licensing arrangement may indicate that the software license fees are not deemed to be fixed or determinable. In addition, if payment of a significant portion of the software license fees is not due until more than twelve months after delivery, the software license fees should be presumed not to be fixed or determinable, and thus should be recognized as the payments become due. However, SOP 97-2 specifies that if the Company has a standard business practice of using extended payment terms in software licensing arrangements and has a history of successfully collecting the software license fees under the original terms of the software licensing arrangement without making concessions, the Company can overcome the presumption that the software license fees are not fixed or determinable. If the presumption is overcome, the Company should recognize the software license fees when all other SOP 97-2 revenue recognition criteria are met. The Company has concluded that for certain software arrangements entered into after October 1, 1998 with extended guaranteed payment terms, the “fixed or determinable” presumption has been overcome and software license fees should be recognized upon meeting the SOP 97-2 revenue recognition criteria (“guaranteed software license fees”). The present value of the guaranteed software license fees, net of third party royalties, recognized in fiscal 1999 totaled approximately $60.5 million. The discount rates used to determine the present value of the guaranteed software license fees, representing the Company’s incremental borrowing rates, ranged from 9.5% to 10.25%. The portion of the guaranteed software license fees that has been recognized by the Company, but not yet billed, is reflected in accrued receivables in the accompanying consolidated balance sheets. Failing to overcome the “fixed or determinable” presumption would have resulted in the Company recognizing the ILF and CLF components of the software license fees related to these certain software arrangements when the software was delivered (or in the reporting period that the incremental volume level was effective), and the MLF and CMLF components of the software license fees would have been recognized ratably over the software license term as they were billed. Software license fees revenue related to those software arrangements that would have been recognized in fiscal 1999 had the Company not been able to overcome the presumption that the software license fees were not fixed or determinable fees would have been approximately $5.1 million. The maintenance element of the software arrangements with extended guaranteed payment terms where the Company has determined that the software license fees are fixed or determinable have been segregated from the software license fees and are being recognized over the term of the maintenance agreement. Maintenance fees are recognized ratably over the period maintenance is provided. Services revenues are recognized as the services are performed. Software license fees for fiscal 1999, 1998 and 1997 consisted of the following (in thousands): 1999 1998 1997 Initial license fees (ILF, CLF, PUF).......................................................... Monthly license fees (MLF, CMLF) .......................................................... Guaranteed software license fees ............................................................ $ 95,002 54,500 60,500 $ 123,175 43,700 – $ 98,738 32,400 – $ 210,002 $ 166,875 $ 131,138 Factoring of Accrued Receivables In fiscal 1998, the Company initiated a program to sell the rights to future payment streams under selected software arrangements with extended guaranteed payment terms to financing institutions on a non-recourse basis. Upon determination that 1) the Company had satisfied all of the software revenue recognition criteria and 2) the Company had surrendered control over the future payment stream to the financing institutions in accordance with Statement of Financial Accounting Standard (SFAS) No. 125, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, the Company recognized software license fees equal to the net proceeds from these arrangements. The software license fees recognized as the result of this program in fiscal 1998 totaled approximately $9.2 million. During fiscal 1999, the Company sold the rights to future payment streams under selected software arrangements with extended guaranteed payment terms and received cash of approximately $30.9 million, resulting in an equivalent reduction in accrued receivables. F-19 Deferred Revenue In certain instances, the Company collects cash from customers, or financing institutions under receivable factoring arrangements, prior to the delivery of the software product or performance of contracted maintenance or services. 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 economic life of the product. Currently, estimated economic lives of three years are used on the calculation of amortization of these capitalized costs. Due to competitive pressures, it may be possible the anticipated gross revenue or remaining estimated economic life of the software products will be reduced significantly. As a result, the carrying amount of the software product may be reduced accordingly. Software development costs capitalized in fiscal 1999, 1998 and 1997 totaled $3.6 million, $900,000 and $1.6 million, respectively. Amortization of internally developed software in fiscal 1999, 1998 and 1997 totaled $1.6 million, $1.5 million and $900,000, respectively. 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 ten years. As of September 30, 1999 and 1998, accumulated amortization of the intangible assets was $10.8 million and $3.6 million, respectively. Translation of Foreign Currencies The Company’s non-U.S. subsidiaries use as their functional currency the local currency of the countries in which they operate. Their assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average rates of exchange prevailing during the period. Translation gains and losses, net of tax if any, are reflected in the consolidated financial statements as a component of accumulated other comprehensive income. Transaction gains and losses related 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 financial services, retailers, processors and networks 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. Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances 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 SFAS No. 123 “Accounting for Stock-Based Compensation.” See Note 10 for the required disclosures under SFAS No. 123. F-20 3. ACQUISITIONS 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. 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 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 were restated in fiscal 1997 to include the results of RVS for all periods presented. 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 companies 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 transactions, 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 amortized over ten years. In fiscal 1998, the Company’s financial statements were restated for IntraNet, Inc. (IntraNet) for all periods presented. The results of operations prior to the acquisitions of the remaining companies were not material. During fiscal 1999, the Company acquired all of the outstanding securities of Media Integration BV (MINT), which is located in the Netherlands. MINT’s products are used to issue and manage multi-funtional applications on smart cards. Shareholders of MINT received 740,000 shares of Class A Common Stock. The stock exchange was accounted for as a pooling of interests. The Company’s financial statements have been restated for MINT for all periods presented. Also during fiscal 1999, the Company acquired all of the outstanding securities of Insession, Inc., SDM International, Inc. (SDM), US Processing, Inc. (USPI) and the remaining 49% of its South African distributor (Applied Communications (Propriety) Limited) in separate transactions. These companies are principally engaged in the development and sale of electronic payments software products, services or transaction processing. All transactions were accounted for under the purchase method of accounting. The aggregate purchase price for all these transactions was 1,205,000 shares of Class A Common Stock, with a fair market value at the time of the purchases of approximately $43 million, $19.6 million in cash and the forgiveness of $5.6 million of debt owed to TSA. The excess purchase price over the estimated fair value of the net tangible assets acquired amounted to $84.5 million, of which $66.3 million was allocated to goodwill which is being amortized over ten years and $18.2 was allocated to software which is being amortized over three years. On September 30, 1999, the Company sold USPI for $10.1 million in cash which approximated its carrying value. No pro forma financial statements for the periods prior to the acquisitions have been provided due to the amounts being immaterial. F-21 Combined and separate results of the Company and MINT during the periods preceding the merger are listed below (in thousands). Three Months ended) December 31,) 1998) Year ended September 30,) 1997) 1998) Total revenues: Company ........................................................................................ MINT ............................................................................................. (unaudited)) $ 84,844) 1,226) $ 289,761) 9,488) $ 238,533) 5,616) $ 86,070) $ 299,249) $ 244,149) Net income: Company ........................................................................................ MINT ............................................................................................. $ 9,227) 230) $ 31,759) 500) $ 25,755) 1,408) $ 9,457) $ 32,259) $ 27,163) Prior to their acquisitions, RVS and IntraNet were taxed primarily as a partnership and a Subchapter S corporation, respectively. In addition, prior to its acquisition, MINT’s earnings were not subject to income taxes. The unaudited pro forma net income and earnings per share in the accompaning consolidated statements of income reflects a pro forma tax provision for income taxes on the results of operations of RVS, IntraNet and MINT for the periods prior to their acquisition, as listed below (in thousands): Unaudited pro forma information: Net income – historical.................................................................... RVS tax adjustment – pro forma ....................................................... IntraNet tax adjustment – pro forma ................................................. MINT tax adjustment – pro forma ..................................................... $9,457) –) –) (87) $32,259) –) (633) (194) $27,163) (507) (843) (535) Net income – pro forma ................................................................... $9,370) $31,432) $25,278) 4. MARKETABLE SECURITIES 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. In June 1999, the Company entered into a transaction with Digital Courier Technologies, Inc. (DCTI), whereby the Company acquired 1.25 million shares of DCTI’s Common Stock for $6.5 million. In addition, the Company received warrants to purchase an additional 1.0 million shares at an exercise price of $5.20 per share. DCTI supplies financial institutions, businesses and major web portals with e-commerce, payments processing and content delivery software. The Company has accounted for the investment in Nestor and DCTI Common Stock in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. The investments in marketable securities have 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 reflected in the consolidated financial statements as a component of accumulated other comprehensive income. Gains and losses are determined by specific identification. F-22 5. COMPREHENSIVE INCOME In fiscal 1999, the Company adopted SFAS No. 130, “Reporting Comprehensive Income”, which establishes standards for reporting and display of comprehensive income and its components in a financial statement for the period in which they are recognized. The Company’s components of accumulated other comprehensive income were as follows (in thousands): Foreign) Currency) Translation) Adjustments) Unrealized) Investment) Accumulated) Other) Holding) Comprehensive) Income) Loss) Balance, September 30, 1996 ................................................................ Fiscal 1997 activity................................................................................ $ (236) (24) $ –) –) $ (236) (24) Balance, September 30, 1997 ................................................................ Fiscal 1998 activity................................................................................ Balance, September 30, 1998 ................................................................ Fiscal 1999 activity................................................................................ (260) (1,815) (2,075) (178) –) (2,812) (2,812) (231) (260) (4,627) (4,887) (409) Balance, September 30, 1999 ................................................................ $ (2,253) $ (3,043) $ (5,296) Since the Company has established an asset valuation allowance against its net deferred tax assets, the components of accumulated other comprehensive income have not been tax affected. 6. EARNINGS PER SHARE Basic earnings per share is calculated using the weighted average number of shares outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options using the “treasury stock” method. The following table sets forth the computation of basic and diluted earnings per share: (in thousands, except per share data) 1999) 1998) 1997) Net income............................................................................................ $ 44,700) $ 32,259) $ 27,163) Unaudited net income – pro forma........................................................... $ 44,613) $ 31,432) $ 25,278) Weighted average shares outstanding ....................................................... Dilutive effect of stock options ................................................................ 31,667) 696) 30,298) 895) 29,829) 878) Diluted shares outstanding ...................................................................... 32,363) 31,193) 30,707) Basic earnings per share – pro forma ....................................................... Diluted earnings per share – pro forma..................................................... $ $ 1.41) 1.38) $ $ 1.04) $ 0.85) 1.01) $ 0.82) For fiscal years 1999, 1998 and 1997, weighted average shares from stock options of 96,025, 25,833 and 17,872, respectively have been excluded from the computation of diluted earnings per share because the exercise price of the stock options were greater than the average market price of the common shares. F-23 7. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): September 30, 1999) 1998) Computer equipment..................................................................................................... Office furniture and fixtures........................................................................................... Leasehold improvements ............................................................................................... Vehicles ....................................................................................................................... $ 38,321) 8,439) 6,058) 639) $ 32,496) 7,196) 4,050) 779) Less accumulated depreciation and amortization ............................................................. 53,457) (32,703) 44,521) (23,520) Property and equipment, net.......................................................................................... $ 20,754) $ 21,001) 8. SOFTWARE Software consists of the following (in thousands): September 30, 1999) 1998) Internally developed software ......................................................................................... Purchased software ....................................................................................................... $ 10,905) 39,663) $ 7,328) 16,960) Less accumulated amortization ...................................................................................... 50,568) (24,733) 24,288) (17,116) Software, net ................................................................................................................ $ 25,835) $ 7,172) 9. COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases office space and equipment under operating leases which run through February 2011. Aggregate minimum lease payments under these agreements for the years ending September 30 are as follows (in thousands): 2000....................................................................................................................................................... 2001....................................................................................................................................................... 2002....................................................................................................................................................... 2003....................................................................................................................................................... 2004....................................................................................................................................................... Thereafter ................................................................................................................................................ $ 9,029) 7,977) 6,336) 5,604) 4,641) 13,638) Total ........................................................................................................................................................ $ 47,225) Total rent expense for the fiscal years ended September 30, 1999, 1998 and 1997 was, $12,556,000, $9,738,000 and $8,739,000, respectively. F-24 Legal Proceedings On June 14, 1999, HNC Software Inc. filed a complaint against the Company and its wholly-owned subsidiary, ACI Worldwide, Inc. in the United States District Court for the Southern District of California, San Diego Division. The complaint alleges, among other things, patent infringement, unfair competition, false advertising, and trade libel relating to ACI Worldwide’s distribution of PRISM, a fraud detection software product. ACI distributes PRISM pursuant to a license agreement with Nestor, Inc., a company in which TSA is a minority stockholder. The complaint seeks injunctive relief and unspecified damages including treble damages, costs, attorneys’ fees and various other forms of relief. On November 25, 1998, Nestor had itself filed a complaint in the United States District Court for the District of Rhode Island against HNC Software alleging, among other things, infringement of a patent relating to PRISM and antitrust violations. HNC Software has filed a counterclaim in the Rhode Island lawsuit alleging infringement by Nestor of HNC Software’s patents which claims are essentially the same as those filed by HNC Software against the Company and ACI Worldwide in the San Diego lawsuit. Neither the Company nor ACI Worldwide was a party to the Rhode Island lawsuit. However, because the same patents and the same products are at issue in both lawsuits, the Company and ACI Worldwide are seeking to have the San Diego lawsuit transferred to Rhode Island and consolidated with the proceedings there. Whatever the final procedural posture of the lawsuit, the Company intends to vigorously defend against HNC Software’s allegations. In addition, 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. 10. STOCK-BASED COMPENSATION PLANS 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 and 1999 Stock Option Plan whereby a total of 2,008,000 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. F-25 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: 1999 1998 1997 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.................................. 2,811,507 894,890 285,445 67,978 – $ 30.57 $ 7.53 $ 31.76 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 $ 26.27 $ 4.57 $ 13.83 Outstanding on September 30 ......... 3,352,974 $ 23.91 2,811,507 $ 20.30 2,794,437 $ 16.82 Options exercisable at end of year .... Shares available on September 30 for options that may be granted............................... Weighted-average grant date fair value of options granted during the year – exercise price equals stock market price at grant .............. 1,497,100 $ 17.09 1,275,778 $ 11.19 909,429 $ 5.04 347,375 174,287 516,728 $ 14.10 $ 17.74 $ 13.01 The following table summarizes information about stock options outstanding at September 30, 1999. Range of Exercise prices $2.50 ........................................ $5.00 ........................................ $7.50 to $9.75 .......................... $12.00 to $16.50 ...................... $20.25 to $25.875 .................... $26.4375 to $31.625 ................ $32.0625 to $35.75 .................. $36.00 to $45.00 ...................... Number Outstanding 244,273 383,455 10,397 16,917 1,157,434 901,228 529,595 109,675 3,352,974 Options Outstanding Weighted Average Remaining Contractual Life Options Exercisable Weighted Average Exercise Price Number Weighted Average Exercise Price Exercisable 4.36 5.09 5.43 6.18 7.33 9.39 8.31 8.58 7.60 $ 2.50 5.00 7.93 14.19 24.40 30.23 33.27 38.28 $23.91 244,273 383,330 10,397 15,833 594,725 41,546 186,743 20,253 $ 2.50 5.00 7.93 14.11 24.43 29.70 33.28 38.24 1,497,100 $17.09 Employee Stock Purchase Plan The Company has a 1996 and 1999 Employee Stock Purchase Plan whereby a total of 1,150,000 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 these plans. 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 these plans for the years ended September 30, 1999, 1998 and 1997 totaled 48,148, 30,881 and 27,748, respectively. F-26 Stock-Based Compensation Plans The Company adopted the disclosure provisions of SFAS No. 123. 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 1999, 1998 and 1997 would approximate the pro forma amounts as follows (in thousands, except per share amounts): Year ended September 30, Net income–historical: 1999 1998 1997 As reported .......................................................................................... Pro forma............................................................................................. $ 44,700 42,820 Unaudited net income–pro forma: As reported .......................................................................................... Pro forma............................................................................................. Pro forma net income per share–basic ....................................................... Pro forma net income per share–diluted..................................................... 44,613 42,733 1.35 1.32 $ $ $ 32,259 30,233 31,432 29,406 0.97 0.94 $ $ $ 27,163 25,850 25,278 23,965 0.80 0.78 $ $ 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, 1999 1998 1997 Expected life ........................................................................................... Interest rate ............................................................................................ Volatility.................................................................................................. Dividend yield ......................................................................................... 5.8 5.7% 38% – 5.8 5.5% 39% – 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 since fiscal year 1996, and additional awards in future years are anticipated. 11. EMPLOYEE BENEFIT PLANS 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, 1999, 1998 and 1997 were $2,318,000, $1,197,000 and $489,000, respectively. ACI Profit Sharing Plan and Trust The Company had a Profit Sharing Plan and Trust which was a non-contributory profit 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 fiscal year ended September 30, 1997 was $480,000. TSA Deferred Compensation Plan Effective January 1, 1999, the Company adopted a Deferred Compensation Plan for a select group of management or highly compensated employees who elect to participate in the plan. No company contributions are made to the plan and participants are 100% vested in their contributions. F-27 ACIL Pension Plan ACIL has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employees’ compensation during employment. Contributions to the plan are determined by an independent actuary on the basis of periodic valuations using the projected unit cost method. Participants contribute 5% of their pensionable salaries and ACIL contributes at the rate of 10% of pensionable salaries. Net periodic pension expense includes the following components (in thousands): Year Ended September 30, 1999) 1998) 1997) Service cost............................................................................................. Interest cost on projected benefit obligation ............................................... Return on plan assets: $ 2,301) 1,156) $ 1,666) 1,192) $ 1,307) 830) Actual and gain deferred ....................................................................... Amortization of unrecognized gain.......................................................... (1,657) 136) (1,501) (85) (1,055) 3) Total periodic pension expense.................................................................. $ 1,936) $ 1,272) $ 1,085) The following table summarizes the funded status of the plan and the related amounts recognized in the Company’s consolidated balance sheet (in thousands): September 30, Projected benefit obligation ............................................................................................... Plan assets at fair value, primarily investments in marketable equity securities of 1999) 1998) $ 23,339) $ 18,439) United Kingdom companies............................................................................................ 22,776) 17,467) Plan assets less than projected benefit obligation ................................................................ Unrecognized gain ............................................................................................................ (563) (1,682) (972) (826) Accrued pension cost ........................................................................................................ $ (2,245) $ (1,798) The most significant actuarial assumptions used in determining the pension expense and funded status of the plan are as follows: Discount rate for valuing liabilities ................................................................ Expected long-term rate of return on assets.................................................... Rate of increase in future compensation levels ............................................... 1999 6.25% 9.25% 3.75% 1998 6.0% 7.0% 3.5% 1997 8.0% 9.0% 6.0% 12. TREASURY STOCK In fiscal 1999, the Company acquired 475,000 shares of its Class A Common Stock at an average cost of $29.98 per share in connection with a stock repurchase program announced in May 1999. The program authorized the Company to purchase up to 2,000,000 common shares from time to time through February 2000 for cash at market prices in open market, negotiated or block transactions. The purpose of the stock repurchase program is to replace the shares issued in the SDM acquisition completed in July 1999, and to fund a reserve of shares for future employee stock options grants, acquisitions or other corporate purposes. F-28 13. SEGMENT INFORMATION The Company adopted SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” in fiscal 1999. The Company has a single operating segment encompassing the development, marketing, installation and technical support of a broad line of software products and services primarily focused on facilitating electronic payments and electronic commerce. The Company’s chief operating decision makers review financial information, presented on a consolidated basis, accompanied by disaggregated information about revenue and contribution margin by product, as organized into four line-of-business groups, and revenue and contribution margin by geographic area. The Company’s four line-of-business groups are Consumer Banking, Corporate Banking, Retail Solutions and System Solutions. Products are developed by the line-of-business groups and are sold and supported through three distribution networks covering the geographic areas of the Americas, Europe/Middle East/Africa (EMEA) and Asia/Pacific. The Company allocates resources to and evaluates performance of its lines-of-business groups and geographic areas based upon revenue and contribution margin. The following is revenues and contribution margin for the Company’s four lines-of-business groups for fiscal years 1999, 1998 and 1997: Revenues: Consumer Banking............................................................................. Corporate Banking ............................................................................. Retail Solutions ................................................................................. System Solutions ............................................................................... $ 256,430) 30,061) 22,579) 45,724) $ 215,947) 30,825) 23,023) 29,454) $ 175,014) 31,063) 16,476) 21,596) $ 354,794) $ 299,249) $ 244,149) 1999) 1998) 1997) Contribution margin from lines-of-business groups: Consumer Banking............................................................................. Corporate Banking ............................................................................. Retail Solutions ................................................................................. System Solutions ............................................................................... $ 219,803) 7,807) 5,763) 40,552) $ 186,364) 7,595) 10,108) 25,966) $ 273,925) $ 230,033) Profit reconcilliation: Contribution margin from lines-of-business groups................................ Direct costs for geographic areas: Americas ....................................................................................... EMEA............................................................................................ Asia/Pacific.................................................................................... Corporate expenses ............................................................................ $ 273,925) $ 230,033) (86,725) (64,729) (19,257) (32,944) (64,860) (59,474) (20,724) (33,487) Operating Income .............................................................................. $ 70,260) $ 51,488) The Company does not track assets by line-of-business group. Direct costs for lines-of-business groups for fiscal 1997 are not available. F-29 The following is revenue, contribution margin and long-lived assets for the Company’s three geographic areas for fiscal years 1999, 1998 and 1997: 1999) 1998) 1997) Revenues: United States .................................................................................... Americas – other ............................................................................... $ 167,236) 43,070) $ 134,506) 39,564) $ 112,455) 33,370) Total Americas ............................................................................... EMEA ............................................................................................... Asia/Pacific ....................................................................................... 210,306) 113,096) 31,392) 174,070) 96,979) 28,200) 145,825) 70,408) 27,916) $ 354,794) $ 299,249) $ 244,149) Contribution margin from geographic areas: Total Americas................................................................................... EMEA ............................................................................................... Asia/Pacific ....................................................................................... $ 123,581) 48,367) 12,125) $ 109,210) 37,505) 7,476) $ 91,061) 6,722) 5,448) $ 184,073) $ 154,191) $ 103,231) Profit Reconcilliation: Contribution margin for geographic areas ............................................. Direct Costs for lines-of-business groups: Consumer Banking ......................................................................... Corporate Banking .......................................................................... System Solutions............................................................................ Retail Solutions.............................................................................. Corporate expenses ............................................................................ $ 184,073) $ 154,191) (36,627) (22,254) (16,816) (5,172) (32,944) (29,583) (23,230) (12,915) (3,488) (33,487) Operating Income .............................................................................. $ 70,260) $ 51,488) Long-lived assets: Americas (primarily United States) ...................................................... EMEA ............................................................................................... Asia/Pacific ....................................................................................... $ 103,425) 11,520) 1,620) $ 47,044) 10,530) 1,255) $ 35,072) 9,937) 1,408) $ 116,555) $ 58,829) $ 46,417) No single customer accounted for more than 10% of the Company’s consolidated revenue during fiscal years 1999, 1998 and 1997. F-30 14. INCOME TAXES 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 expected 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 enactments 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, 1999) 1998)) 1997) Current) Deferred) Total) Current) Deferred) Total) Current) Deferred) Total) Federal .................... State ....................... Foreign .................... $ 18,360) $ (2,413) $ 15,947) 2,830) 8,393) 3,171) 8,393) (341) –) $ 13,433) $ (1,212) $ 12,221) 1,995) 5,260) 2,252) 5,260) (257) –) $ 7,022) 1,905) 3,803) $ 1,355) $ 8,377) 2,145) 3,803) 240) –) Total........................ $ 29,924) $ (2,754) $ 27,170) $ 20,945) $ (1,469) $ 19,476) $ 12,730) $ 1,595) $ 14,325) The difference between the income tax provision computed at the statutory federal income tax rate and the financial statement provision for income taxes is summarized as follows: For the Year Ended September 30, 1999) 1998) 1997) Tax expense at federal rate of 35% .......................................................... 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 ..................................................................................................... $ 25,155) 240) 2,112) 1,097) –) –) (3,235) 1,269) 239) 293) $ 17,932) 22) 1,508) 385) –) (564) (830) –) 461) 562) $ 14,028) 1,503) 1,394) 1,160) (663) (766) (2,979) –) –) 648) $ 27,170) $ 19,476) $ 14,325) F-31 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: 1999) 1998) 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............................................................................................................................ $ 138) 3,807) 2,082) 1,575) 3,004) 5,518) 1,184) 1,376) $ 167) 4,822) 1,122) 1,167) 1,058) 6,016) 1,094) 1,140) $ 18,684) 16,586) Deferred tax asset valuation allowance................................................................................ (11,216) (11,665) Deferred liabilities: Acquired Software ......................................................................................................... Other............................................................................................................................ (5,953) (254) (6,207) –) (288) (288) $ 1,261) $ 4,633) At September 30, 1999 management evaluated its 1999 and 1998 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 $7.5 million as of September 30, 1999. F-32 PRINCIPAL OFFICES OF TSA ARGENTINA ACI Worldwide de Argentina S.A. Peru 345, Piso 10 Of. C (1067) Buenos Aires, ARGENTINA Tel: +(54-11) 4331-0139/4716 Fax: +(54-11) 4334-9722 AUSTRALIA ACI Worldwide (Pacific) Pty. Ltd. Level 9, 50 Berry Street North Sydney, NSW 2060 AUSTRALIA Tel: +61-2-8923-4300 Fax: +61-2-9929-2136 ACI Worldwide (Pacific) Pty. Ltd. Level 1 1601 Malvern Road Glen Iris, VIC 3146 AUSTRALIA Tel: +61-3-9823-4500 Fax: +61-3-9885-0766 ACI Worldwide (Pacific) Pty. Ltd. 10 Stirling Highway P.O. Box 885 Nedlands WA 6009 AUSTRALIA Tel: +61-8-9389-4401 Fax: +61-8-9389 4402 BAHRAIN ACI Worldwide (EMEA) Limited Al Salam Tower P.O. Box 15134 9th Floor Manama BAHRAIN Tel: +973-535-510 Fax: +973-535-512 BRASIL ACI Worldwide (Brasil) Ltda. Rua Luigi Galvani, 200-10 andar CEP 04575-020 São Paulo-SP BRASIL Tel: +55-11-5505-0594 Fax: +55-11-5506-4198 CANADA ACI Worldwide (Canada) Inc. 200 Wellington Street West Suite 700 Toronto, Ontario M5V 3C7 CANADA Tel: 416-813-3000 Fax: 416-813-0653 ACI Worldwide (Canada) Inc. 2000, Avenue McGill College Suite 820 Montreal, Quebec H3A 3H3 CANADA Tel: 514-985-5734 Fax: 514-985-5745 GERMANY ACI Worldwide (Germany) GmbH & Co. KG Mainzer Str. 98-102 D-65189 Wiesbaden, GERMANY Tel: +49-611-977-130 Fax: +49-611-977-1377 ITALY ACI Worldwide (Italia) S.r.l. Via Scarlatti, 88 80127 Naples ITALY Tel: +39-081-2209711 Fax: +39-081-2209712 JAPAN ACI Worldwide (Japan) K.K. Ichiboshi Shiba Building 7F, 2-2-14, Shiba, Minato-ku, Tokyo 105-0014 JAPAN Tel: +81-3-5418-4458 Fax: +81-3-5418-4450 MALAYSIA ACI Worldwide (Malaysia) Inc. Suite 26.00, 26th Floor Menara IMC No. 8 Jalan Sultan Ismail 50250 Kuala Lumpur MALAYSIA Tel: +60-3-209-4318 Fax: +60-3-209-4356 MEXICO ACI Worldwide (Mexico) S.A. de C.V. Insurgentes Sur 1605, Torre Mural Piso 14, Modulo 1 San Jose Insurgentes 03900 Mexico, D.F. MEXICO Tel: +525-663-8000 Fax: +525-663-8047 THE NETHERLANDS ACI Worldwide B.V. Antwerpseweg 1 2803 AW Gouda THE NETHERLANDS Tel: +31-182-573-600 Fax: +31-182-573-513 NEW ZEALAND ACI Worldwide (New Zealand) Limited Level 16, ASB Bank Centre 135 Albert Street Auckland NEW ZEALAND Tel: +64-9-359-7414 Fax: +64-9-359-7415 NORWAY ACI Worldwide (Norway) AS Karenslyst Alle' 8 b, 3rd floor Skoyen N-0278 Oslo, NORWAY Tel: +47-23-12-06-20 Fax: +47-23-12-05-95 RUSSIA Applied Communication Inc. (CIS) Limited Riverside Towers Building Kosmodamianskaya Nab. 52/1A, 11th Floor Moscow 113054 RUSSIA Tel: +7-095-725-4280 Fax: +7-095-725-4285 SINGAPORE ACI Worldwide (Asia) Pte. Ltd. 182 Clemenceau Avenue, #04-00 SINGAPORE 239923 Tel: +65-3344-843 Fax: +65-3348-517 SOUTH AFRICA ACI Worldwide (South Africa) (Pty) Ltd. Protea Assurance House, 3 Sturdee Avenue, Rosebank, 2196 P.O. Box 2861 Parklands 2121 SOUTH AFRICA Tel: +27-11-447-7989 Fax: +27-11-447-5279 SWEDEN ACI Worldwide (Nordic) AB World Trade Centre Kungsbron 1 Box 70396 S-107 24 Stockholm, SWEDEN Tel: +46-8-50-63-63-20 Fax: +46-8-50-63-63-18 UNITED KINGDOM ACI Worldwide (EMEA) Limited 59 Clarendon Road Watford, Herts WD1 1LA ENGLAND Tel: +44-1-923-816393 Fax: +44-1-923-816133 F-33 UNITED STATES CORPORATE HEADQUARTERS Transaction Systems Architects, Inc. 224 South 108th Avenue Omaha, NE 68154 Tel: 402-334-5101 Fax: 402-390-8077 ACI Worldwide Inc. 330 South 108th Avenue Omaha, NE 68154 Tel: 402-390-7600 Fax: 402-330-1528 ACI Worldwide (Florida) Inc. 15950 Bay Vista Drive Suite 235 Clearwater, FL 33760 Tel: 727-530-1555 Fax: 727-530-7160 Insession, Inc. Canyonside Office Park 100 Arapahoe Avenue Suite 5 Boulder, CO 80302 Tel: 303-440-3300 Fax: 303-440-3525 IntraNet, Inc. One Gateway Center 7th Floor Newton, MA 02458 Tel: 617-527-7020 Fax: 617-527-6779 ACI Worldwide (Professional Resources) Inc. 10777 Barkley Street Suite 100 Overland Park, KS 66211 Tel: 913-649-8088 Fax: 913-649-8084 Regency Systems, Inc. 15820 Addison Road Addison, TX 75001 P.O. Box 809023 Dallas, TX 75380 Tel: 972-934-3066 Fax: 972-387-0839 SDM International, Inc. 134 Spring Avenue P.O. Box 579 Fuquay-Varina, NC 27526-0579 Tel: 919-552-1100 Fax: 919-552-6116 F-34 TRANSACTION SYSTEMS ARCHITECTS, INC. 224 South 108th Avenue Omaha, Nebraska 68154 INVESTOR INFORMATION A copy of the Company’s Annual Report on Form 10-K for the year ended September 30, 1999, as filed with the Securities and Exchange Commission, will be sent to stockholders free of charge upon written request to: LeRoy D. Peterson, Director - Investor Relations Transaction Systems Architects, Inc. 224 South 108th Avenue Omaha, NE 68154 HOME PAGE: WWW.TSAINC.COM STOCK INFORMATION Transaction Systems Architects’ common stock is traded on the NASDAQ stock market under the symbol TSAI. There were 358 holders of record of the Company’s common stock as of December 31, 1999. The high and low sale prices for the company’s common stock for each quarterly period during the fiscal year 1999 and fiscal year 1998, are as follows: 1999 First Quarter .......................... Second Quarter ...................... Third Quarter ......................... Fourth Quarter ....................... High 50 1/2 50 1/2 39 3/4 40 1/8 Low 1998 27 1/2 35 3/4 30 7/8 25 9/16 First Quarter ........................ Second Quarter .................... Third Quarter ....................... Fourth Quarter ..................... High 44 1/2 43 1/2 43 1/2 39 7/8 Low 36 5/8 34 5/8 37 1/8 32 3/4 DIVIDENDS The Company has not declared or paid cash dividends on its common stock since its incorporation. TRANSFER AGENT Communications regarding change of address, transfer of stock ownership or lost stock certificates should be directed to: Norwest Bank Minnesota, N.A. 161 North Concord Exchange South St. Paul, Minnesota 55075 ANNUAL MEETING The Annual Meeting of Shareholders will be held at 10:00 a.m. on Tuesday, February 22, 2000, at the Company’s Corporate Meeting Center, 230 South 108th Avenue, in Omaha, Nebraska. INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP 1700 Farnam Street Omaha, Nebraska 68102 The statements in this report regarding future results are preliminary and “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, this report contains other forward-looking statements including statements regarding the Company’s expectations, plans and beliefs. The forwarding-looking statements in this report are subject to a variety of risks and uncertainties. Actual results could differ materially. Factors that could cause actual results to differ include but are not limited to the following: • • • • That the Company will continue to derive a substantial majority of its total revenue from licensing its BASE24 family of software products and providing services and maintenance related to those products. Any reduction in demand for, or increase in competition with respect to, BASE24 products would have a material adverse effect on TSA’s financial condition and results of operations. That the Company’s business is concentrated in the banking industry, making it susceptible to a downturn in that industry. Fluctuations in quarterly operating results may result in volatility in TSA’s stock price. No assurance can be given that operating results will not vary. TSA’s stock price may be volatile, in part due to external factors such as announcements by 3rd parties or competitors, inherent volatility in the high-technology sector and changing market conditions in the industry. For a detailed discussion of these and other risk factors, interested parties should review the Company’s filings with the Securities and Exchange Commission, including Exhibit 99.01 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 1999. Copyright 2000 Transaction Systems Architects, Inc. All rights reserved. Transaction Systems Architects, Inc. 1999 Annual Report