================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q ------------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 Commission File Number 0-25346 ------------------- TRANSACTION SYSTEMS ARCHITECTS, INC. (Exact name of registrant as specified in its charter) Delaware 47-0772104 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 224 South 108th Avenue (402) 334-5101 Omaha, Nebraska 68154 (Registrant's telephone number, (Address of principal executive offices, including area code) including zip code) ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes_x_ No ___ The number of shares of the issuer's Class A Common Stock, par value $.005 per share, outstanding as of August 10, 2001 was 36,680,831 (including 654,434 Exchangeable Shares of TSA Exchangeco Limited which can be exchanged on a one-for-one basis for shares of the issuer's Class A Common Stock and 23,004 options to purchase shares of the issuer's Class A Common Stock at an exercise price of one cent per share issued to MessagingDirect Ltd. shareholders). ================================================================================
<TABLE> <CAPTION> TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION <S> <C> <C> Item 1. Condensed Consolidated Balance Sheets as of June 30, 2001 and September 30, 2000.................... 3 Condensed Consolidated Statements of Income for the three and nine months ended June 30, 2001 and 2000................................................................................................ 4 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2001 and 2000.... 5 Notes to Condensed Consolidated Financial Statements................................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 17 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.................................................................... 18 Signature..................................................................................................... 18 </TABLE>
<TABLE> <CAPTION> TRANSACTION SYSTEMS ARCHITECTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited and in thousands) June 30, September 30, 2001 2000 -------------- -------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 28,101 $ 23,400 Marketable securities 4,114 8,106 Billed receivables, net of allowances of $9,519 and $5,941, respectively 48,843 63,556 Accrued receivables 46,919 51,659 Prepaid income taxes 8,079 2,710 Deferred income taxes 21,344 11,208 Other 11,180 13,134 ------------ ------------ Total current assets 168,580 173,773 Property and equipment, net 15,471 19,614 Software, net 31,382 26,757 Intangible assets, net 86,084 65,254 Long-term accrued receivables 29,174 27,018 Investments and notes receivable 1,309 6,146 Deferred income taxes 3,631 2,958 Other 5,721 8,632 ------------ ------------ Total assets $ 341,352 $ 330,152 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 16,699 $ 18,396 Accounts payable 13,045 16,023 Accrued employee compensation 8,542 7,472 Accrued liabilities 24,685 20,003 Deferred revenue 42,747 43,373 ------------ ------------ Total current liabilities 105,718 105,267 Long-term debt 392 532 Long-term deferred revenue 11,394 13,993 Other 1,083 - ------------ ------------ Total liabilities 118,587 119,792 ------------ ------------ Stockholders' equity: Class A Common Stock 183 165 Additional paid-in capital 221,989 170,946 Retained earnings 45,563 85,033 Treasury stock, at cost (35,258) (35,258) Accumulated other comprehensive income (9,712) (10,526) ------------ ------------ Total stockholders' equity 222,765 210,360 ------------ ------------ Total liabilities and stockholders' equity $ 341,352 $ 330,152 ============ ============ </TABLE> See notes to condensed consolidated financial statements.
<TABLE> <CAPTION> TRANSACTION SYSTEMS ARCHITECTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited and in thousands, except per share amounts) Three Months Ended June 30, Nine Months Ended June 30, --------------------------------- ---------------------------------- 2001 2000 2001 2000 -------------- -------------- --------------- -------------- <S> <C> <C> <C> <C> Revenues: Software license fees $ 41,716 $ 46,498 $ 129,342 $ 128,259 Maintenance fees 18,387 17,340 51,772 51,229 Services 13,568 15,064 43,685 41,920 ------------ ------------ ------------ ------------ Total revenues 73,671 78,902 224,799 221,408 ------------ ------------ ------------ ------------ Expenses: Cost of software license fees 10,723 11,851 33,547 33,760 Cost of maintenance and services 20,311 17,952 57,033 52,008 Research and development 10,854 10,125 31,645 28,553 Selling and marketing 20,483 18,837 58,425 54,602 General and administrative 26,513 16,185 58,690 45,982 Amortization of goodwill and purchased intangibles 4,293 2,035 10,073 5,970 ------------ ------------ ------------ ------------ Total expenses 93,177 76,985 249,413 220,875 ------------ ------------ ------------ ------------ Operating income (loss) (19,506) 1,917 (24,614) 533 ------------ ------------ ------------ ------------ Other income (expense): Interest income 1,725 985 3,265 2,649 Interest expense (349) (178) (1,717) (313) Other (914) (1,065) (1,629) (933) Non-recurring items (7,406) - (21,717) - ------------ ------------ ------------ ------------ Total other income (expense) (6,944) (258) (21,798) 1,403 ------------ ------------ ------------ ------------ Income (loss) before income taxes (26,450) 1,659 (46,412) 1,936 Income tax benefit (provision) 4,935 (644) 6,941 (753) ------------ ------------ ------------ ------------ Net income (loss) $ (21,515) $ 1,015 $ (39,471) $ 1,183 ============ ============ ============ ============ Earnings per share information: Weighted average shares outstanding: Basic 35,086 31,621 33,765 31,789 ============ ============ ============ ============ Diluted 35,086 31,875 33,765 32,201 ============ ============ ============ ============ Earnings per share: Basic $ (0.61) $ 0.03 $ (1.17) $ 0.04 ============ ============ ============ ============ Diluted $ (0.61) $ 0.03 $ (1.17) $ 0.04 ============ ============ ============ ============ </TABLE> See notes to condensed consolidated financial statements.
<TABLE> <CAPTION> TRANSACTION SYSTEMS ARCHITECTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited and in thousands) Nine Months Ended June 30, -------------------------------------- 2001 2000 -------------- --------------- <S> <C> <C> Cash flows from operating activities: Net income (loss) $ (39,471) $ 1,183 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 6,066 6,438 Amortization 22,169 15,301 Non-recurring items 21,717 - Changes in operating assets and liabilities: Billed and accrued receivables 18,817 (11,297) Other current and noncurrent assets (11,280) (19,190) Accounts payable (4,132) 7,929 Deferred revenue (4,019) 3,219 Other current liabilities 4,319 (11,892) ------------ ------------ Net cash provided by (used in) operating activities 14,186 (8,309) ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (2,461) (4,926) Additions to software (4,405) (8,295) Acquisition of businesses, net of cash received 255 (7,959) Additions to investments and notes receivable (772) (4,222) Note receivable from executive officer (1,000) - ------------ ------------ Net cash used in investing activities (8,383) (25,402) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of Class A Common Stock 1,140 1,406 Proceeds from exercise of stock options 223 2,005 Purchases of Class A Common Stock - (21,008) Net borrowings on lines of credit (2,925) 10,000 Payments of long-term debt 706 (495) ------------ ------------ Net cash used in financing activities (856) (8,092) ------------ ------------ Effect of exchange rate fluctuations on cash (246) 822 ------------ ------------ Increase (decrease) in cash and cash equivalents 4,701 (40,981) Cash and cash equivalents, beginning of period 23,400 70,482 ------------ ------------ Cash and cash equivalents, end of period $ 28,101 $ 29,501 ============ ============ </TABLE> See notes to condensed consolidated financial statements.
TRANSACTION SYSTEMS ARCHITECTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Consolidated Financial Statements Transaction Systems Architects, Inc. ("TSA" or the "Company"), a Delaware corporation, develops, markets, installs and supports a broad line of software products and services primarily focused on facilitating electronic payments and electronic commerce. In addition to its own products, the Company distributes or acts as a sales agent for software developed by third parties. The products and services are used principally by financial institutions, retailers and e-payment processors, both in domestic and international markets. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The condensed consolidated financial statements at June 30, 2001, and for the three and nine months ended June 30, 2001 and 2000, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000. The results of operations for the three and nine months ended June 30, 2001 are not necessarily indicative of the results for the entire fiscal year ending September 30, 2001. 2. Revenue Recognition The Company generates revenues from licensing software and providing postcontract customer support (maintenance or "PCS") and other professional services. The Company uses written contracts to document the elements and obligations of arrangements with its customers. Arrangements that include the licensing of software typically include PCS, and at times, include other professional services. PCS includes the right to unspecified upgrades on a when-and-if-available basis and ongoing technical support. The other professional services may include training, installation or consulting. The Company also performs services for customers under arrangements that do not include the licensing of software. Revenues under multiple-element arrangements, which may include several software products or services sold together, are allocated to each element based upon the residual method in accordance with American Institute of Certified Public Accountants Statement of Position ("SOP") 98-9, "Software Revenue Recognition, With Respect to Certain Arrangements." Under the residual method, the fair value of the undelivered elements is deferred and subsequently recognized. The Company has established sufficient vendor specific objective evidence of fair value for PCS and other professional services based upon the price charged when these elements are sold separately. Accordingly, software license fees revenues are recognized under the residual method in arrangements in which the software is licensed with PCS and/or other professional services, and the undelivered elements of the arrangement are not essential to the functionality of the delivered software. The Company recognizes software license fees upon execution of the signed contract, delivery of the software to the customer, determination that the software license fees are fixed or determinable, and determination that the collection of the software license fees is probable. The software license is typically for a term of up to 60 months and does not include a right of return. The term for the PCS element of a software arrangement is typically for a period shorter than the term of the software license, and can be renewed by the customer over the remaining term of the software license. PCS or maintenance revenues are recognized ratably over the term of the arrangement on a straight-line basis. The other professional services element of a software arrangement is typically accounted for separately as the services are performed for time-and-materials contracts or on a percentage-of-completion basis for fixed-price contracts. In those instances where the services are essential to the functionality of any other element of the arrangement, contract accounting is applied to both the software and services elements of the arrangement. The Company follows two methods for pricing its software licenses. Under the first method, the software license is priced based upon the number of transactions processed by the customer ("transaction-based pricing"). Under transaction-based pricing, the customer is allowed to process a contractually predetermined maximum volume of transactions per month for a specified period of time. Once the customer's transaction volume exceeds this maximum volume level, the customer is required to pay additional license fees for each incremental volume level. Under the second method, the software license is priced on a per copy basis and tiered to recognize different performance levels of the customer's processing hardware ("designated-equipment-group pricing"). Under designated-equipment-group pricing, the customer pays a license fee for each copy of the software for a specified period of time. Licensees are typically given two payment options. Under the first payment option, the licensee can pay a combination of an Initial License Fee ("ILF"), where the licensee pays a portion of the total software license fees at the beginning of the software license term, and a Monthly License Fee ("MLF"), where the licensee pays the remaining portion of the software license fees over the software license term. In certain arrangements, the customer is contractually committed to making MLF payments for a minimum number of months. If the customer decides to terminate the arrangement prior to paying the minimum MLF payments, the remaining minimum MLF payments become due and payable. Under the second payment option, the Company offers a Paid-Up-Front ("PUF") payment option, whereby the total software license fees are due at the beginning of the software license term. Under either payment option, the Company is not obligated to refund any payments received from the customer. In the combination ILF and MLF payment option, the Company recognizes the ILF portion of the software license fees upon delivery of the software, assuming all other revenue recognition criteria were met. In the PUF payment option, the Company recognizes the total software license fees upon delivery of the software, assuming all other revenue recognition criteria were met. In addition to SOP 98-9, the Company accounts for its software arrangements in accordance with SOP 97-2, "Software Revenue Recognition." The primary software revenue recognition criteria outlined in SOP 97-2 include: evidence of an arrangement; delivery; fixed or determinable fees; and collectibility. SOP 97-2 specifies that extended payment terms in a software licensing arrangement may indicate that the software license fees are not deemed to be fixed or determinable. In addition, if payment of a significant portion of the software license fees is not due until more than twelve months after delivery, the software license fees should be presumed not to be fixed or determinable, and thus should be recognized as the payments become due. However, SOP 97-2 specifies that if the Company has a standard business practice of using extended payment terms in software licensing arrangements and has a history of successfully collecting the software license fees under the original terms of the software licensing arrangement without making concessions, the Company can overcome the presumption that the software license fees are not fixed or determinable. If the presumption is overcome, the Company should recognize the software license fees when all other SOP 97-2 revenue recognition criteria are met. The Company has concluded that for certain software arrangements where the customer is contractually committed to make MLF payments that extend beyond twelve months, the "fixed or determinable" presumption has been overcome and software license fees revenue should be recognized upon meeting the other SOP 97-2 revenue recognition criteria. In making this determination, the Company considered the characteristics of the software product, the customer purchasing the software, the similarity of the economics of the software arrangements with previous software arrangements and the actual history of successfully collecting under the original terms without providing concessions. The software license fees recognized under these arrangements are referred to as "Recognized-Up-Front MLFs." The present value of Recognized-Up-Front MLFs, net of third party royalties, recognized during the three months ended June 30, 2001 and 2000 totaled approximately $6.4 million and $11.2 million, respectively. The present value of Recognized-Up-Front MLFs, net of third party royalties, recognized during the nine months ended June 30, 2001 and 2000 totaled approximately $18.3 million and $21.7 million, respectively. The discount rates used to determine the present value of these software license fees, representing the Company's incremental borrowing rates, ranged from 9.25% to 11.00% during the nine months ended June 30, 2001, and from 10.25% to 11.00% during the nine months ended June 30, 2000. Recognized-Up-Front MLFs that have been recognized in software license fees revenues by the Company, but not yet billed, are reflected in accrued receivables in the accompanying condensed consolidated balance sheets. 3. Corporate Restructuring and Other Charges During the third quarter of fiscal 2001, the Company closed or significantly reduced the size of certain product development organizations and geographic sales offices. The Company also made executive management changes and transferred its 70% ownership in Hospital Health Plan Corporation ("HHPC") to the minority shareholder. These actions resulted in a charge of $21.8 million reflected in the accompanying statements of income for the three and nine months ended June 30, 2001. The allocation of this amount is as follows: $2.9 million in cost of maintenance and services, $0.3 million in research and development, $0.3 million in selling and marketing, $11.1 million in general and administrative, and $7.4 million as a non-recurring item, offset by $0.2 million in interest income. Charges associated with the corporate restructuring and included in operating expenses were as follows (in thousands): Asset impairments............................................. $3,125 Lease obligations.............................................. 1,738 Termination benefits........................................... 4,768 Other restructuring charges.................................... 4,935 -------- $14,566 ======== Asset impairments relate to the write-off of property and equipment in vacated office facilities and other-than-temporary declines in the fair value of certain notes receivables. Lease obligations relate to vacated corporate office facilities. Where possible, the Company is actively seeking third parties to purchase abandoned property and equipment or sub-lease vacated office facilities. Amounts expensed represent estimates of undiscounted future cash outflows, offset by anticipated third-party purchases or sub-leases. Termination benefits are comprised of severance-related payments for all employees terminated in connection with the operational restructuring and the partial forgiveness of a note receivable from an executive officer. Termination benefits do not include any amounts for employment-related services prior to termination. Other restructuring charges include settlement costs and allowance provisions for customers under related contractual obligations. At June 30, 2001, the accrued liability associated with the restructuring and other charges described above consisted of $0.9 million in lease obligations, $2.5 million in termination benefits and $1.2 million in other restructuring charges. The Company transferred its 70% ownership in HHPC to the minority shareholder. As a result of the transfer, the Company recorded a non-recurring charge of $7.4 million, related to the Company's carrying value in HHPC, in the three months ended June 30, 2001. The Company continually evaluates its investment holdings and long-lived assets for evidence of impairment. During the three months ended December 31, 2000, after considering current market conditions for technology companies and specific information regarding those companies in which the Company has an ownership interest, the Company determined that the declines in market value for certain of its investment holdings were "other than temporary" and a charge to earnings for the declines in market value was required. Therefore, the Company recorded a non-cash charge of $12.4 million in the three months ended December 31, 2000. In addition, due to unfavorable market conditions in the fourth quarter of fiscal 2000, the Company postponed its planned initial public offering ("IPO") of its wholly-owned subsidiary, Insession Technologies, Inc. Due to the time period which had elapsed without proceeding with this transaction and continuing uncertainty in market conditions, the Company expensed costs associated with the planned IPO totaling $1.9 million in the three months ended December 31, 2000. 4. Acquisition In January 2001, the Company acquired all of the outstanding securities of MessagingDirect Ltd. ("MDL"). MDL provides software applications to facilitate the secure delivery and e-processing of electronic statements and bills. Shareholders of MDL received 3,357,351 shares of Class A Common Stock (or Exchangeable Shares of TSA Exchangeco Limited which can be converted on a one-for-one basis for shares of TSA Class A Common Stock or options to purchase shares of TSA Class A Common Stock) with a fair market value at the time of purchase of approximately $49.5 million. The share exchange was accounted for using the purchase method of accounting. An independent valuation of MDL was performed and used as an aid in determining the fair market value of each identifiable intangible asset. Accordingly, the excess purchase price over the estimated fair value of each identifiable tangible and intangible asset acquired was allocated to goodwill, which is being amortized using the straight-line method over five years. Preliminarily, approximately $38.3 million of the purchase price was allocated to goodwill and $11.8 million to software. 5. Common Stock and Earnings Per Share Earnings per share ("EPS") has been computed in accordance with SFAS No. 128, "Earnings Per Share." Basic EPS is calculated by dividing net income available to common stockholders (the numerator) by the weighted average number of common shares outstanding during the period (the denominator). Diluted EPS is computed by dividing net income available to common stockholders, adjusted for the effect of any outstanding dilutive securities (the numerator), by the weighted average number of common shares outstanding, adjusted for the dilutive effect of outstanding dilutive securities (the denominator). For the three and nine months ended June 30, 2001, basic and diluted EPS are the same, as any outstanding dilutive securities were antidilutive due to the net loss in both periods. If the Company had reflected net income for the three and nine months ended June 30, 2001, weighted average shares from stock options of 3,739,083 and 3,786,830, respectively, would have been excluded from the computation of diluted EPS because the exercise prices of the stock options were greater than the average market price of the Company's common shares. The differences between the basic and diluted EPS denominators for the three and nine months ended June 30, 2000, which amounted to approximately 254,000 and 412,000 shares, respectively, were due to the dilutive effect of the Company's outstanding stock options using the treasury stock method. For the three and nine months ended June 30, 2000, weighted average shares from stock options of 3,668,875 and 2,064,457, respectively, have been excluded from the computation of diluted EPS because the exercise prices of the stock options were greater than the average market price of the Company's common shares. Exchangeable Shares and options received by shareholders of MDL (see Note 4) that have not yet been converted into TSA Class A Common Stock are included in Class A Common Stock for presentation purposes on the June 30, 2001 condensed consolidated balance sheet, and are included in common shares outstanding for EPS computations for the three and nine months ended June 30, 2001. 6. Comprehensive Income The Company's components of other comprehensive income were as follows (in thousands): <TABLE> <CAPTION> Three Months Ended June 30, Nine Months Ended June 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net income (loss) $ (21,515) $ 1,015 $ (39,471) $ 1,183 Other comprehensive income (loss): Foreign currency translation adjustments 1,327 (7,072) (3,246) 3,695 Unrealized investment holding gain, net of reclassification adjustment of $8,052 in the nine months ended June 30, 2001 1,415 (1,038) 4,060 (2,050) ----------- ----------- ----------- ----------- Comprehensive income (loss) $ (18,773) $ (7,095) $ (38,657) $ 2,828 =========== =========== =========== =========== The Company's components of accumulated other comprehensive income at each balance sheet date were as follows (in thousands): Foreign Unrealized Accumulated Currency Investment Other Translation Holding Comprehensive Adjustments Gain (Loss) Loss ----------------- ---------------- -------------- Balance, September 30, 2000 $ (4,723) $ (5,803) $ (10,526) Fiscal 2001 year-to-date activity (3,246) (3,992) (7,238) Reclassification adjustment for loss included in net income (loss) - 8,052 8,052 ----------------- ---------------- -------------- Balance, June 30, 2001 $ (7,969) $ (1,743) $ (9,712) ================= ================ ============== </TABLE> 7. Line-of-Credit Facilities As of June 30, 2001, the Company has a $25.0 million bank line-of-credit with a large United States bank secured by certain trade receivables of TSA. The line-of-credit agreement provides that the Company must satisfy certain specified EBITDAR, working capital and minimum tangible net worth requirements, as defined, and places restrictions on the Company's ability to, among other things, sell assets, incur debt, pay dividends, participate in mergers and make investments or guarantees. The Company is in compliance with all debt covenants as of June 30, 2001. The Company also has a line-of-credit with a large foreign bank in the amount of 3.0 million British Pounds, which translates to approximately $4.2 million. The foreign line requires the Company to maintain minimum tangible net worth within the Company's wholly-owned subsidiary, ACI Worldwide (EMEA) Ltd. Interest on the U.S. line-of-credit accrues at an annual rate equal to either the bank's prime rate less .25% or the LIBOR rate plus 1.75% and is payable monthly. Interest on the foreign line-of-credit accrues at an annual rate of 1% above the bank's "base rate." During the three and nine months ended June 30, 2001, the Company recorded interest expense of $0.3 million and $1.3 million, respectively, related to its line-of-credit facilities. The carrying amounts of the Company's line-of-credit facilities approximate fair value due to their variable interest rates. Current borrowings outstanding as of June 30, 2001 totaled approximately $15.0 million. The U.S. line-of-credit expires in June 2002 and the foreign bank line-of-credit expires in August 2002. 8. Segment Information In fiscal 2000, the Company reorganized its business into four business units or segments: Consumer e-Payments, Electronic Business Infrastructure, Corporate Banking e-Payments and Health Payment Systems. Prior period segment information has been restated to reflect these reorganizations. The Company's chief operating decision makers review business unit financial information, presented on a consolidated basis, accompanied by disaggregated information about revenues and operating income by business unit. The Company does not track assets by business unit. Consumer e-Payments products represent the Company's largest product line and include its most mature and well-established applications which are used primarily by financial institutions, retailers and e-payment processors. Its products are used to route and process transactions for automated teller machine networks; process transactions from traditional point of sale devices, wireless devices and the Internet; handle PC and phone banking transactions; control fraud and money laundering; process electronic benefit transfer transactions; authorize checks; establish frequent shopper programs; automate settlement, card management and claims processing; and issue and manage multi-functional applications on smart cards. Electronic Business Infrastructure products facilitate communication, data movement, monitoring of systems and business process automation across computing systems, involving mainframes, distributed computing networks and the Internet. Corporate Banking e-Payments products offer high-value payments processing, bulk/recurring payments processing, wire room processing, global messaging, integration payments management and continuous link settlement processing. Health Payment Systems products allow large corporations and health-care payment processors to automate claims eligibility determination, claims capture and claims payments. No single customer accounted for more than 10% of the Company's consolidated revenue during the three and nine months ended June 30, 2001 and 2000. The following are revenues and operating income (loss) for the Company's business unit segments for the three and nine months ended June 30, 2001 and 2000 (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------- ------------------------------------- 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Revenues: Consumer e-Payments $ 53,205 $ 58,399 $ 167,533 $ 160,062 Electronic Business Infrastructure 10,557 10,421 30,701 32,268 Corporate Banking e-Payments 8,855 9,114 23,113 26,364 Health Payment Systems 1,054 968 3,452 2,714 ---------------- ---------------- ---------------- ---------------- $ 73,671 $ 78,902 $ 224,799 $ 221,408 ================ ================ ================ ================ Operating loss: Consumer e-Payments $ (17,443) $ 1,366 $ (15,272) $ (5,267) Electronic Business Infrastructure (1,261) 1,016 (2,318) 4,693 Corporate Banking e-Payments (298) 208 (4,932) 1,804 Health Payment Systems (504) (673) (2,092) (697) ---------------- ---------------- ---------------- ---------------- $ (19,506) $ 1,917 $ (24,614) $ 533 ================ ================ ================ ================ </TABLE> During the third quarter of fiscal 2001, the Company transferred its 70% ownership in HHPC, which had been included in the Health Payment Systems business unit, to its minority shareholder. The remaining portion of the Health Payment Systems business unit consists of a facilities management services organization that will be integrated into the Consumer e-Payments business unit in the quarter ended September 30, 2001 The Company's products are sold and supported through distribution networks covering the geographic regions of the Americas, Europe/Middle East/Africa ("EMEA") and Asia/Pacific. The following are revenues and long-lived assets for these geographic regions (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------- ------------------------------------- 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Revenues: United States $ 30,899 $ 35,735 $ 94,832 $ 101,797 Americas - other 10,488 9,811 30,730 26,987 ---------------- ---------------- ---------------- ---------------- Total Americas 41,387 45,546 125,562 128,784 EMEA 23,550 26,386 75,333 71,192 Asia/Pacific 8,734 6,970 23,904 21,432 ---------------- ---------------- ---------------- ---------------- $ 73,671 $ 78,902 $ 224,799 $ 221,408 ================ ================ ================ ================ June 30, September 30, 2001 2000 ---------------- ---------------- Long-lived assets: United States $ 83,806 $ 107,925 Americas - other 25,145 5,337 ---------------- ---------------- Total Americas 108,951 113,262 EMEA 30,081 11,659 Asia/Pacific 935 1,482 ---------------- ---------------- $ 139,967 $ 126,403 ================ ================ </TABLE> The Company recently discontinued pursuing strategic alternatives for the Electronic Business Infrastructure and Corporate Banking e-Payments business units as the Company believes the value of the products and services it offers in these business units exceeds current technology company market valuations. 9. Accounting Pronouncements Issued But Not Yet Effective In December 1999, the Securities and Exchange Commission (the "SEC") released Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 requires, among other things, that license and other up-front fees be recognized over the term of the agreement, unless the fees are in exchange for products delivered or services performed that represent the culmination of a separate earnings process. The Company is required to be in conformity with the provisions of SAB No. 101 no later than the fourth quarter of fiscal 2001. The Company does not expect this change in accounting principle to have a material effect on the Company's financial position or results of operations. In June 2001, the Financial Accounting Standards Board (the "FASB") released Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," which addresses financial accounting and reporting for business combinations. SFAS No. 141 supersedes APB Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." SFAS No. 141 requires that all business combinations are to be accounted for using one method, the purchase method, and eliminates the pooling-of-interests method for all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 is not expected to have a material effect on the Company's financial position or results of operations. In June 2001, the FASB released SFAS No. 142, "Goodwill and Other Intangible Assets," which addresses financial accounting and reporting for acquired goodwill and other intangible assets, and supersedes APB Opinion No. 17, "Intangible Assets." SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill and some intangible assets will no longer be amortized. The Company is required to be in conformity with the provisions of SFAS No. 142 no later than the fiscal year beginning October 1, 2002; however, the Company is permitted to apply the provisions of SFAS No. 142 during its fiscal year beginning October 1, 2001. The Company is currently reviewing SFAS No. 142 and has not determined the impact of its adoption on the Company's financial position or results of operations.
TRANSACTION SYSTEMS ARCHITECTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company develops, markets, installs and supports a broad line of software products and services primarily focused on facilitating electronic payments and electronic commerce. In addition to its own products, TSA distributes software developed by third parties. The products and services are used principally by financial institutions, retailers and e-payment processors, both in domestic and international markets. Business Segments The Company's products and services are organized into four business units - - Consumer e-Payments, Electronic Business Infrastructure, Corporate Banking e-Payments and Health Payment Systems. Products in the Consumer e-Payments business unit represent the Company's largest product line and include its most mature and well-established applications. Products and services offered by this business unit, except community banking products, are marketed and supported through ACI Worldwide Inc ("ACI"), a wholly-owned subsidiary of the Company. ACI sells and supports the products and services through three distribution networks: the Americas, Europe/Middle East/Africa ("EMEA") and Asia/Pacific. Each distribution network primarily has its own sales force and supplements this with reseller and/or distributor networks. The community banking products are marketed and supported by Regency Systems, Inc., a wholly-owned subsidiary of the Company. Products and services offered by the other three business units are marketed and supported primarily through their own sales and support organizations. The following table sets forth total revenues and operating income (loss) for the Company's four business unit segments for the periods indicated (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended June 30, June 30, ------------------------------------- ------------------------------------- 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Revenues: Consumer e-Payments $ 53,205 $ 58,399 $ 167,533 $ 160,062 Electronic Business Infrastructure 10,557 10,421 30,701 32,268 Corporate Banking e-Payments 8,855 9,114 23,113 26,364 Health Payment Systems 1,054 968 3,452 2,714 ---------------- ---------------- ---------------- ---------------- $ 73,671 $ 78,902 $ 224,799 $ 221,408 ================ ================ ================ ================ Operating loss: Consumer e-Payments $ (17,443) $ 1,366 $ (15,272) $ (5,267) Electronic Business Infrastructure (1,261) 1,016 (2,318) 4,693 Corporate Banking e-Payments (298) 208 (4,932) 1,804 Health Payment Systems (504) (673) (2,092) (697) ---------------- ---------------- ---------------- ---------------- $ (19,506) $ 1,917 $ (24,614) $ 533 ================ ================ ================ ================ </TABLE> The Company recently discontinued pursuing strategic alternatives for the Electronic Business Infrastructure and Corporate Banking e-Payments business units as the Company believes the value of the products and services it offers in these business units exceeds current technology company market valuations. During the third quarter of fiscal 2001, the Company transferred its 70% ownership in Hospital Health Plan Corporation ("HHPC") to its minority shareholder. HHPC had been included in the Company's Health Payment Systems business unit. The remaining portion of the Health Payment Systems business unit consists of a facilities management services organization that will be integrated into the Consumer e-Payments business unit in the quarter ended September 30, 2001. Backlog The following table sets forth the Company's recurring and non-recurring revenue backlog, by business unit, at each balance sheet date (in thousands): <TABLE> <CAPTION> Recurring Revenue Non-recurring Revenue Backlog Backlog ------------------------------------- ------------------------------------- June 30, Sept. 30, June 30, Sept. 30, 2001 2000 2001 2000 ----------------- ---------------- ----------------- ---------------- <S> <C> <C> <C> <C> Consumer e-Payments $ 97,900 $ 101,100 $ 33,300 $ 39,100 Electronic Business Infrastructure 17,500 19,200 3,800 2,100 Corporate Banking e-Payments 17,000 16,100 12,500 12,900 Health Payment Systems 1,800 2,800 2,100 2,300 ----------------- ---------------- ----------------- ---------------- $ 134,200 $ 139,200 $ 51,700 $ 56,400 ================= ================ ================= ================ </TABLE> The Company defines recurring revenue backlog to be all monthly license fees, maintenance fees and facilities management fees specified in executed contracts to the extent that the Company contemplates recognition of the related revenue within one year. The Company includes in its non-recurring revenue backlog all fees (other than recurring) specified in executed contracts to the extent that the Company contemplates recognition of the related revenue within one year. There can be no assurance that contracts included in recurring or non-recurring revenue backlog will actually generate the specified revenues or that the actual revenues will be generated within the one-year period. Results of Operations The following table sets forth certain financial data and the percentage of total revenues of the Company for the periods indicated (amounts in thousands): <TABLE> <CAPTION> Three Months Ended June 30, Nine Months Ended June 30, ------------------------------------------------ ---------------------------------------------- 2001 2000 2001 2000 ------------------------ --------------------- --------------------- ---------------------- % of % of % of % of Amount Revenue Amount Revenue Amount Revenue Amount Revenue ------------- -------- ---------- --------- ----------- -------- ----------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenues: ILFs and PUFs $ 23,219 31.5 % $ 20,949 26.5 % $ 73,740 32.8 % $ 63,271 28.6 % MLFs (other than Recognized-Up-Front MLFs) 12,048 16.4 14,339 18.2 37,266 16.6 43,246 19.6 Recognized-Up-Front MLFs 6,449 8.7 11,210 14.2 18,336 8.2 21,742 9.8 ------------ ------ --------- ------ ---------- ------ ---------- ------ Software license fees 41,716 56.6 46,498 58.9 129,342 57.6 128,259 58.0 Maintenance fees 18,387 25.0 17,340 22.0 51,772 23.0 51,229 23.1 Services 13,568 18.4 15,064 19.1 43,685 19.4 41,920 18.9 ------------ ------ --------- ------ ---------- ------ ---------- ------ Total revenues 73,671 100.0 78,902 100.0 224,799 100.0 221,408 100.0 ------------ ------ --------- ------ ---------- ------ ---------- ------ Expenses: Cost of software license fees 10,723 14.6 11,851 15.0 33,547 14.9 33,760 15.2 Cost of maintenance and services 20,311 27.6 17,952 22.8 57,033 25.4 52,008 23.5 Research and development 10,854 14.7 10,125 12.8 31,645 14.1 28,553 12.9 Selling and marketing 20,483 27.8 18,837 23.9 58,425 26.0 54,602 24.7 General and administrative 26,513 36.0 16,185 20.5 58,690 26.1 45,982 20.8 Amortization of goodwill and purchased intangibles 4,293 5.8 2,035 2.6 10,073 4.5 5,970 2.7 ------------ ------ --------- ------ ---------- ------ ---------- ------ Total expenses 93,177 126.5 76,985 97.6 249,413 111.0 220,875 99.8 ------------ ------ --------- ------ ---------- ------ ---------- ------ Operating income (loss) (19,506) (26.5) 1,917 2.4 (24,614) (11.0) 533 0.2 ------------ ------ --------- ------ ---------- ------ ---------- ------ Other income (expense): Interest income 1,725 2.3 985 1.2 3,265 1.5 2,649 1.1 Interest expense (349) (0.5) (178) (0.2) (1,717) (0.8) (313) (0.1) Other (914) (1.2) (1,065) (1.3) (1,629) (0.7) (933) (0.4) Non-recurring items (7,406) (10.0) - - (21,717) (9.7) - - ------------ ------ --------- ------ ---------- ------ ---------- ------ Total other income (expense) (6,944) (9.4) (258) (0.3) (21,798) (9.7) 1,403 0.6 ------------ ------ --------- ------ ---------- ------ ---------- ------ Income (loss) before income taxes (26,450) (35.9) 1,659 2.1 (46,412) (20.7) 1,936 0.8 Income tax benefit (provision) 4,935 6.7 (644) (0.8) 6,941 3.1 (753) (0.3) ------------ ------ --------- ------ ---------- ------ ---------- ------ Net income (loss) $ (21,515) (29.2)% $ 1,015 1.3 % $ (39,471) (17.6)% $ 1,183 0.5 % ============ ====== ========= ====== ========== ====== ========== ====== During the third quarter of fiscal 2001, the Company closed or significantly reduced the size of certain product development organizations and geographic sales offices. The Company also made executive management changes and transferred its 70% ownership in HHPC to the minority shareholder. These actions resulted in a charge of $21.8 million reflected in the above results of operations for the three and nine months ended June 30, 2001. The allocation of this amount is as follows: $2.9 million in cost of maintenance and services, $0.3 million in research and development, $0.3 million in selling and marketing, $11.1 million in general and administrative, and $7.4 million as a non-recurring item, offset by $0.2 million in interest income. </TABLE> Revenues. Total revenues for the third quarter of fiscal 2001 decreased 6.6%, or $5.2 million, from the comparable period in fiscal 2000. Total revenues for the first nine months of fiscal 2001 increased $3.4 million, or 1.5%, over the first nine months of fiscal 2000. The three-month decrease is the result of a $4.8 million, or 10.3%, decrease in software license fees revenue and a decrease of $1.5 million, or 9.9%, decrease in services revenue offset by a $1.1 million, or 6.0%, increase in maintenance fees revenue. The nine-month increase is the result of a $1.1 million, or 0.8%, increase in software license fees revenue, a $1.8 million, or 4.2%, increase in services revenue and a $0.5 million, or 1.1%, increase in maintenance fees revenue. During the first quarter of fiscal 2000, the Company's large bank and merchant customers and potential new customers, in effect, locked down their systems in preparation for the Year 2000. This Year 2000 lock-down had a negative impact on the Company's Consumer e-Payments software license fees and services revenues due to the less than expected demand by customers and potential new customers to upgrade and enhance their current systems. In addition, since the Year 2000 cutover, the Company has found its customers increasingly scrutinizing their information technology purchases, which has led to further delays in software and services purchases. The Company believes overall demand for its products and services is increasing at a gradual pace. However, the Company believes that customer demand for its products and services will be slow to return to growth levels experienced prior to fiscal 2000. The decrease in software license fees and services revenue for the third quarter fiscal 2001 is primarily the result of a decreased demand for the Company's Consumer e-Payments products. In fiscal 2001, the Company changed its sales compensation plans for its Consumer e-Payments sales force to emphasize PUF contracts for both customer renewals and new customers rather than emphasizing ILF/MLF contracts. This change resulted in an increase in PUF revenue and a decrease in MLF revenue for the third quarter and the first nine months of fiscal 2001. Maintenance fees revenue decreased in the first quarter of fiscal 2001 due to a decrease in customer demand for the Company's enhanced maintenance support. During the second and third quarters of fiscal 2001, demand for the Company's enhanced maintenance support returned to normal levels. The decrease in services revenue for the third quarter of fiscal 2001 is primarily the result of a decreased demand for technical and project management services, which is primarily the result of a decrease in the sale of the Company's Consumer e-Payments products. Expenses. Total operating expenses for the third quarter of fiscal 2001 increased $1.6 million, or 2.1% (excluding $14.6 million of restructuring and other charges), over the comparable period of fiscal 2000. Total operating expenses for the first nine months of fiscal 2001 increased $14.0 million, or 6.3% (excluding $14.6 million of restructuring and other charges), over the first nine months of fiscal 2000. Amortization of goodwill and purchased intangibles has increased between fiscal years related to the acquisitions of WorkPoint Systems, Inc. in April 2000, Hospital Health Plan Corporation in May 2000 and MessagingDirect Ltd. in January 2001. Other changes in operating expense line items are discussed below. Cost of software license fees for the third quarter of fiscal 2001 decreased $1.2 million, or 9.9%, as compared to the third quarter of fiscal 2000. This decrease was due primarily to a decrease in royalties owed to the owners of third-party products resulting in decreases in third-party product sales volumes and a decrease in the royalty rate for one third-party product. Cost of software license fees for the first nine months of fiscal 2001 was comparable to the first nine months of fiscal 2000. Cost of maintenance and services for the third quarter of fiscal 2001 decreased $0.5 million, or 2.5% (excluding $2.9 million of restructuring and other charges), as compared to the third quarter of fiscal 2000. For the first nine months of fiscal 2001, cost of maintenance and services increased $2.2 million, or 4.3% (excluding $2.9 million of restructuring and other charges), over the comparable period of fiscal 2000. This increase was the result of an increase in personnel-related expenses primarily related to an EMEA Smart Card services project. Research and development ("R&D") costs for the third quarter of fiscal 2001 increased $0.4 million, or 3.8% (excluding $0.3 million of restructuring and other charges), over the comparable period in fiscal 2000. For the first nine months of fiscal 2000, R&D costs increased $2.8 million, or 9.6% (excluding $0.3 million of restructuring and other charges), over the comparable period of fiscal 2000. R&D consists primarily of compensation and related costs for R&D employees and contractors. R&D costs as a percentage of total revenues for the three and nine months of fiscal 2001 were 14.7% and 14.1%, respectively, as compared to 12.8% and 12.9%, respectively, for comparable periods of fiscal 2000. The Company capitalizes costs related to certain internally-developed software when the resulting products reach technological feasibility. Software development costs capitalized in the first nine months of fiscal 2001 and 2000 totaled approximately $3.2 million and $6.2 million, respectively. Selling and marketing costs for the third quarter of fiscal 2001 increased $1.4 million, or 7.4% (excluding $0.3 million of restructuring and other charges), over the comparable period in fiscal 2000. For the first nine months of fiscal 2001, selling and marketing costs increased $3.6 million, or 6.6% (excluding $0.3 million of restructuring and other charges), over the comparable period of fiscal 2000. The increase for the three and nine months of fiscal 2001 is due to an increase in sales personnel and marketing activities in each of the four business units. General and administrative costs for the third quarter of fiscal 2001 decreased $0.8 million, or 4.9% (excluding $11.1 million of restructuring and other charges), as compared to the third quarter of fiscal 2000. For the first nine months of fiscal 2001, general and administrative costs increased $1.6 million, or 3.5% (excluding $11.1 million of restructuring and other charges), over the comparable period of fiscal 2000. The increase for the first nine months of fiscal 2001 is attributable to an increase in bad debts expense and occupancy costs, offset by a decrease in personnel-related expenses. The decrease in personnel-related expenses is due to the consolidation of the Company's Consumer Banking, Electronic Commerce and Internet Banking operating units into the Consumer e-Payments business unit during the fourth quarter of fiscal 2000. Other Income and Expenses. The increase in interest expense in fiscal 2001 is due to an increase in borrowings on the Company's line-of-credit facilities. Other expenses resulted primarily from foreign currency translation losses recognized by the Company. During the third quarter of fiscal 2001, the Company transferred its 70% ownership in HHPC to the minority shareholder. As a result of the transfer, the Company recorded a non-recurring charge of $7.4 million in the three months ended June 30, 2001 related to the Company's carrying value in HHPC. During the first quarter of fiscal 2001, after considering current market conditions for technology companies and specific information regarding those companies in which the Company has an ownership interest, the Company determined that the declines in market value for certain of its investment holdings were "other than temporary" and a charge to earnings of $12.4 million for the declines in market value was required. The Company also expensed costs associated with the withdrawn IPO of Insession Technologies, Inc. totaling $1.9 million in the first quarter of fiscal 2001. These charges are reflected as non-recurring items under other expenses. Income Taxes. The effective tax rate for the first nine months of fiscal 2001 was approximately 15% as compared to 41% for all of fiscal 2000. The effective tax rate for the first nine months of fiscal 2001 was less than that of the comparable period for fiscal 2000 primarily due to non-deductible amortization expense associated with acquisitions accounted for as purchases and non-recognition of tax benefits for operating losses in certain foreign locations. As of June 30, 2001, the Company has deferred tax assets of $36.2 million and deferred tax liabilities of $2.3 million. Each quarter, the Company evaluates its historical operating results as well as its projections for the future to determine the realizability of the deferred tax assets. This analysis indicated that $25.0 million of the net deferred tax assets were more likely than not to be realized. Accordingly, the Company has a valuation allowance of $8.9 million as of June 30, 2001. The Company intends to analyze the realizability of the net deferred tax assets at each future reporting period. Such analysis may indicate that the realization of various deferred tax benefits is more likely than not and, therefore, the valuation reserve may be adjusted accordingly. Liquidity and Capital Resources As of June 30, 2001, the Company's principal sources of liquidity consisted of $28.1 million in cash and cash equivalents, and available bank lines-of-credit. The Company has a $25.0 million bank line-of-credit with a large United States bank secured by certain trade receivables of TSA. The line-of-credit agreement provides that the Company must satisfy certain specified EBITDAR, working capital and minimum tangible net worth requirements, as defined, and places restrictions on the Company's ability to, among other things, sell assets, incur debt, pay dividends, participate in mergers and make investments or guarantees. The Company is in compliance with all debt covenants as of June 30, 2001. The Company also has a line-of-credit with a large foreign bank in the amount of 3.0 million British Pounds, which translates to approximately $4.2 million. The foreign line requires the Company to maintain minimum tangible net worth within the Company's wholly-owned subsidiary, ACI Worldwide (EMEA) Ltd. As of June 30, 2001, outstanding borrowings totaled $15.0 million. The remaining $14.2 million is available to the Company for future borrowings. The Company's net cash flows provided by operating activities for the first nine months of fiscal 2001 amounted to $14.2 million as compared to $8.3 million used in operating activities during the first nine months of fiscal 2000. The improvement in operating cash flows in the first nine months of fiscal 2001 as compared to the same period of fiscal 2000 was primarily due to a decrease in billed and accrued receivables, which is due in part to the Company's emphasis on PUF contracts rather than ILF/MLF contracts. A contributor to the Company's cash management program is the factoring of accrued receivables, whereby an interest in Company receivables is transferred on a non-recourse basis to third-party financial institutions in exchange for cash. During the first nine months of fiscal 2001 and 2000, the Company generated operating cash flows from the factoring of accrued receivables of $17.0 million and $19.6 million, respectively. The Company's net cash flows used in investing activities totaled $8.4 million and $25.4 million during the first nine months of fiscal 2001 and 2000, respectively. The decrease in cash used in investing activities was due to a decrease in acquisition-related expenditures, and decreased purchases of software, property and equipment, offset by an additional advance during the first quarter of fiscal 2001 in the amount of $1.0 million to the Company's former CEO as part of his employment and incentive compensation package. The acquisition of business amount in fiscal 2000 consists of the final payment of $3.1 million related to the acquisition of Insession Inc. The Company's net cash flows used in financing activities was $0.9 million and $8.1 million for the first nine months of fiscal 2001 and 2000, respectively. During the first nine months of fiscal 2001, the Company had net payments on its bank line-of-credit facilities of $2.9 million as compared to net borrowings of $10.0 million during the comparable period of fiscal 2000. Also during the first nine months of fiscal 2000, pursuant to a stock repurchase program approved by the Company's Board of Directors, the Company acquired 1,000,300 shares at an average cost of $21.00 per share, totaling approximately $21.0 million. The Company used cash flow from operations to fund the common stock repurchases. The Company believes that its existing sources of liquidity, including cash provided by operating activities along with cash generated from its factoring program and borrowings available under its line-of-credit facilities, will satisfy the Company's projected working capital and other cash requirements for the foreseeable future. Forward-Looking Statements The statements in this report regarding projected results are preliminary and "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, this report contains other forward-looking statements including statements regarding the Company's or third parties' expectations, predictions, views, opportunities, plans, strategies, beliefs and statements of similar effect. The forward-looking statements in this report are subject to a variety of risks and uncertainties. Actual results could differ materially. Factors that could cause actual results to differ include but are not limited to the following: o The corporate divestiture strategy is subject to numerous factors, including market conditions and perception, demand for the other businesses by potential investors or potential acquirers, personnel, tax, business, general economic conditions, viability of businesses as stand-alone operations, and other factors that could affect the Company's decisions and ability to separate businesses, to divest, raise capital, or implement other alternatives for such businesses, and to implement other aspects of the Company's corporate strategy. There can be no assurance that the Company will implement any aspect of the corporate strategy or that if implemented the strategy will be successful. o The Year 2000 lock-down has interrupted the Company's normal sales cycle and therefore is likely to have a negative impact on the Company's revenues and net income for the remainder of fiscal 2001 and beyond. The Company also believes customer demand for system upgrades and enhancements will be slow to return to normal growth levels, as many of the Company's customers upgraded and enhanced their systems prior to the Year 2000. There can be no assurance that the Company's growth rates will return to historical levels. o The acquisition of MessagingDirect is subject to numerous risks, including the following: (i) MessagingDirect is in a highly competitive industry, (ii) MessagingDirect does not have a significant market presence, significant revenues, or widespread acceptance or prolonged use of its products, (iii) MessagingDirect has not been profitable, (iv) the electronic statement presentation and electronic bill presentment and payment markets may not achieve the predicted growth rates, (v) MessagingDirect's products, personnel, and operations may be difficult to combine with those of the Company, the products may not be accepted by the Company's customer base, and there will be significant integration costs of combining the businesses, and (vi) the acquisition will have a dilutive impact on earnings per share and amortization of intangible assets will have an adverse effect on earnings. o The Company is subject to risks of conducting international operations including difficulties in staffing and management, reliance on independent distributors, fluctuations in foreign currency exchange rates, compliance with foreign regulatory requirements, variability of foreign economic conditions, and changing restrictions imposed by U.S. export laws. o The Company will continue to derive a majority of its total revenues from licensing its BASE24 family of software products and providing services and maintenance related to those products. Any reduction in demand for, or increase in competition with respect to, BASE24 products would have a material adverse effect on the Company's financial condition and results of operations. o The Company's business is concentrated in the banking industry, making it susceptible to a downturn in that industry. o Fluctuations in quarterly operating results may result in volatility in the Company's stock price. No assurance can be given that operating results will not vary. The Company's stock price may also be volatile, in part, due to external factors such as announcements by third parties or competitors, inherent volatility in the high-technology sector and changing market conditions in the industry. o The diversion of management's time and attention to the search for a new permanent CEO, and related transition issues, may temporarily dilute management's focus on the Company's day-to-day operations. 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 attached hereto. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the Company's market risk for the nine months ended June 30, 2001. See the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2000 for additional discussions regarding quantitative and qualitative disclosures about market risk.
PART II - OTHER INFORMATION (a) Exhibits: 10.35 Credit Agreement with U.S. Bank National Association 99.01 Safe Harbor for Forward-Looking Statements under the Private Securities Litigation Reform Act of 1995 (b) Reports on Form 8-K: The registrant filed a Report on Form 8-K on May 15, 2001 pursuant to Item 5 (Other Events). SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANSACTION SYSTEMS ARCHITECTS, INC. (Registrant) Dated: August 14, 2001 By: /s/ EDWARD C. FUXA -------------------------------- Edward C. Fuxa Principal Accounting Officer and Controller