SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_______to_______ . 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.) 330 South 108th Avenue Omaha, Nebraska 68154 (Address of principal executive offices, including zip code) (402) 390-7600 (Registrant's telephone number, including area 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 . ---- ---- Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date: 24,004,708 shares of Class A Common Stock at January 31, 1997 2,171,252 shares of Class B Common Stock at January 31, 1997
TRANSACTION SYSTEMS ARCHITECTS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996 TABLE OF CONTENTS Page Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets as of December 31, 1996 and September 30, 1996 3 Condensed Consolidated Statements of Operations for the three months ended December 31, 1996 and 1995 4 Condensed Consolidated Statement of Stockholders' Equity for the three months ended December 31, 1996 5 Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 1996 and 1995 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 Part II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12 Index to Exhibits 13
TRANSACTION SYSTEMS ARCHITECTS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited and in thousands) <TABLE> <CAPTION> December 31, September 30, 1996 1996 ------------ ------------ ASSETS <S> <C> <C> Current assets: Cash and cash equivalents $ 31,012 $ 31,546 Receivables, net 59,345 49,135 Deferred income taxes 1,688 4,348 Other 1,269 1,010 ------------ ------------ Total current assets 93,314 86,039 Property and equipment, net 13,797 13,001 Software, net 4,913 5,424 Intangible assets, net 7,294 7,236 Installment receivables 1,789 1,593 Investment and notes receivable 8,796 8,105 Other 1,712 1,761 ------------ ------------ Total assets $ 131,615 $ 123,159 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,309 $ 1,147 Current portion of capital lease obligations 303 342 Accounts payable 7,815 8,322 Accrued employee compensation 3,395 5,210 Accrued liabilities 8,655 7,631 Income taxes 3,493 4,383 Deferred revenue 23,394 17,987 ------------ ------------ Total current liabilities 48,364 45,022 Long-term debt 1,574 1,431 Capital lease obligations 294 256 ------------ ------------ Total liabilities 50,232 46,709 ------------ ------------ Stockholders' equity: Class A Common Stock 120 119 Class B Common Stock 11 11 Additional paid-in capital 96,868 96,062 Accumulated translation adjustments 258 (236) Accumulated deficit (15,862) (19,494) Treasury stock, at cost (12) (12) ------------ ------------ Total stockholders' equity 81,383 76,450 ------------ ------------ Total liabilities and stockholders' equity $ 131,615 $ 123,159 ============ ============ See notes to condensed consolidated financial statements. </TABLE>
TRANSACTION SYSTEMS ARCHITECTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited and in thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended December 31 ------------------------------------ 1996 1995 -------------- --------------- <S> <C> <C> Revenues: Software license fees $ 25,251 $ 17,217 Maintenance fees 9,961 8,409 Services 11,877 8,618 Hardware, net 553 1,239 -------------- --------------- Total revenues 47,642 35,483 -------------- --------------- Expenses: Cost of software license fees: Software costs 5,397 3,905 Amortization of purchased software 801 788 Cost of maintenance and services 12,473 8,771 Research and development 3,955 3,537 Selling and marketing 10,282 8,404 General and administrative: General and administrative costs 7,666 5,695 Amortization of goodwill and purchased intangibles 217 150 -------------- --------------- Total expenses 40,791 31,250 -------------- --------------- Operating income 6,851 4,233 -------------- --------------- Other income (expense): Interest income 427 568 Interest expense (57) (44) Other (317) (30) -------------- --------------- Total other 53 494 -------------- --------------- Income before income taxes 6,904 4,727 Provision for income taxes (3,096) (1,798) -------------- --------------- Net income $ 3,808 $ 2,929 ============== =============== Net income per common and equivalent share $ 0.14 $ 0.11 ============== =============== Weighted average shares outstanding 26,998 26,908 ============== =============== See notes to condensed consolidated financial statements. </TABLE>
TRANSACTION SYSTEMS ARCHITECTS, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the three months ended December 31, 1996 (unaudited and in thousands) <TABLE> <CAPTION> Class A Class B Additional Accumulated Common Common Paid-in Translation Accumulated Treasury Stock Stock Capital Adjustments Deficit Stock Total -------- -------- -------- ---------- ---------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Balance, September 30, 1996 $ 119 $ 11 $ 96,062 $ (236)$ (19,494) $ (12)$ 76,450 Adjustment for Open Systems Solutions, Inc. pooling of interests 1 5 (176) (170) Issuance of Class A Common Stock 196 196 Exercise of stock options 165 165 Tax benefit of stock options exercised 440 440 Net Income 3,808 3,808 Translation adjustments 494 494 -------- -------- -------- ---------- ---------- -------- -------- Balance, December 31, 1996 $ 120 $ 11 $ 96,868 $ 258 $ (15,862) $ (12)$ 81,383 ======== ======== ======== ========== ========== ======== ========= See notes to condensed consolidated financial statements. </TABLE>
TRANSACTION SYSTEM ARCHITECTS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited and in thousands) <TABLE> <CAPTION> Three months ended December 31, ---------------------------------- 1996 1995 ------------ ------------- <S> <C> <C> Cash flows from operating activities: Net income $ 3,808 $ 2,929 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,273 997 Amortization 1,637 1,429 (Increase) decrease in receivables, net (8,394) 463 Decrease in other current assets 2,431 813 (Increase) decrease in installment receivables (196) 867 Increase in other assets (97) (61) Increase (decrease) in accounts payable (823) 1,065 Decrease in accrued employee compensation (1,919) (1,097) Increase (decrease) in accrued liabilities 1,458 (1,142) Decrease in income tax liabilities (585) (628) Increase (decrease) in deferred revenue 4,472 (1,136) ------------ ------------- Net cash provided by operating activities 3,065 4,499 ------------ ------------- Cash flows from investing activities: Purchases of property and equipment (1,802) (2,235) Additions to software (643) (1,020) Other 33 - Acquisiton of businesses, net of cash acquired - (1,536) Additions to investment and notes receivable (1,691) (1,000) ------------ ------------- Net cash used in investing activities (4,103) (5,791) ------------ ------------- Cash flows from financing activities: Proceeds from issuance of Class A Common Stock 197 - Purchase of Treasury Stock - (7) Proceeds from exercise of stock options 161 194 Payments of long-term debt - (130) Payments on capital lease obligations (32) (126) ------------ ------------ Net cash provided by (used in)financing activities 326 (69) Effect of exchange rate fluctuations on cash 178 (39) ------------ ----------- Decrease in cash and cash equivalents (534) (1,400) Cash and cash equivalents, beginning of period 31,546 35,511 ------------ ------------ Cash and cash equivalents, end of period $ 31,012 $ 34,111 ============ ============= See notes to condensed consolidated financial statements. </TABLE>
TRANSACTION SYSTEMS ARCHITECTS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Consolidated Financial Statements The condensed consolidated financial statements at December 31, 1996 and 1995 and for the three months then ended 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, 1996. The results of operations for the three months ended December 31, 1996 are not necessarily indicative of the results for the entire fiscal year ending September 30, 1997. The condensed consolidated financial statements include all domestic and foreign subsidiaries which are more than 50% owned and controlled. Investments in companies owned less than 20% are carried at cost. 2. Net Income Per Common and Equivalent Share Net income per common and common equivalent share is determined by dividing net income by the weighted average number of shares of common stock and dilutive common equivalent shares outstanding during each period using the treasury stock method. 3. Stock Split On June 7, 1996, the Company's Board of Directors authorized a two-for-one stock split effected in the form of a 100% stock dividend to be distributed on July 1, 1996 to shareholders of record on June 17, 1996. All references in the condensed consolidated financial statements to number of shares and per share amounts have been restated to retroactively reflect the stock split. 4. Acquisition On October 8, 1996, the Company completed the acquisition of Open Systems Solutions, Inc. (OSSI). Stockholders of OSSI received 209,993 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. 5. Investment and Notes Receivable The Company has entered into a transaction with Insession, Inc. (Insession) whereby the Company acquired a 7.5% minority interest in Insession for $1.5 million. In addition, the Company has loaned Insession $4.8 million under promissory notes. The promissory notes bear an interest rate of prime plus 0.25%, are payable in January 1999 ($1.0 million), January 2000 ($1.0 million) and January 2001 ($1.5 million). The remaining $1.3 million of promissory notes are payable upon demand. The promissory notes are secured by future royalties owed by the Company to Insession. The Company has extended a $4.5 million line of credit to U. S. Processing, Inc. (USPI), a start-up transaction processing business, and has the right to acquire the start-up venture. USPI has borrowed $4.5 million under the credit facility. Borrowings under the credit facility bear interest at prime plus 1.0% and are payable in quarterly installments of $250,000 commencing in June 1998.
TRANSACTION SYSTEMS ARCHITECTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- The following table sets forth certain financial data and the percentage of total revenues of the Company for the periods indicated: <TABLE> <CAPTION> Three Months Ended December 31, ------------------------------- 1996 1995 -------------------------------------- % of % of Amount Revenue Amount Revenue <S> <C> <C> <C> <C> Revenues: Software license fees $ 25,251 53.0 % $ 17,217 48.5 % Maintenance fees 9,961 20.9 8,409 23.7 Services 11,877 24.9 8,618 24.3 Hardware, net 553 1.2 1,239 3.5 ------------- ------------ ------------ ------------ Total Revenues 47,642 100.0 35,483 100.0 ------------- ------------ ------------ ------------ Expenses: Cost of software license fees: Software costs 5,397 11.3 3,905 11.0 Amortization of purchased software 801 1.7 788 2.2 Cost of maintenance and services 12,473 26.2 8,771 24.7 Research and development 3,955 8.3 3,537 10.0 Selling and marketing 10,282 21.6 8,404 23.7 General and administrative: General and administrative costs 7,666 16.1 5,695 16.0 Amortization of goodwill and purchased intangibles 217 0.5 150 0.4 ------------- ------------ ------------ ------------ Total expenses 40,791 85.6 31,250 88.1 ------------- ------------ ------------ ------------ Operating income 6,851 14.4 4,233 11.9 ------------- ------------ ------------ ------------ Other income (expense): Interest income 427 0.9 568 1.6 Interest expense (57) (0.1) (44) (0.1) Other (317) (0.7) (30) (0.1) ------------- ------------ ------------ ------------ Total other 53 0.1 494 1.4 ------------- ------------ ------------ ------------ Income before income taxes 6,904 14.5 4,727 13.3 Provision for income taxes (3,096) (6.5) (1,798) (5.1) ------------- ------------ ------------ ------------ Net income $ 3,808 8.0 % $ 2,929 8.3 % ============= ============ ============ ============ </TABLE>
Revenues Total revenues for the first quarter of fiscal 1997 increased 34.3% or $12.2 million over the comparable period in fiscal 1996. Of this increase, $8.0 million of the growth resulted from a 46.7% increase in software license fee revenue, $3.3 million from a 37.8% increase in services revenue and $1.6 million from a 18.5% increase in maintenance fee revenue. The growth in software license fee revenue is the result of increased demand for the Company's BASE24 products and 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 $6.8 million in the first quarter of fiscal 1997 compared to $4.5 million in the first quarter of fiscal 1996. The growth in services revenue for the first quarter of fiscal 1997 is the result of increased demand for technical and project management services which is a direct result of the increased installed base of the Company's BASE24 products. The increase in maintenance fee revenue for the first quarter of fiscal 1997 is a result of the continued growth of the installed base of the Company's BASE24 products. Expenses Total operating expenses for the first quarter of fiscal 1997 increased 30.5% or $9.5 million over the comparable period in fiscal 1996. The primary reason for the overall increase in operating expenses is the increase in staff required to support the increased demand for the Company's products and services. Total staff including both employees and independent contractors increased from 1,105 at December 31, 1995 to 1,391 at December 31, 1996. The Company's operating margin for the first quarter of fiscal 1997 was 14.4% as compared to 11.9% for the comparable period in fiscal 1996. These improvements are primarily due to the impact of the growth in the Company's recurring revenues (MLF's, maintenance and facilities management fees). The Company's gross margin (total revenues minus cost of software and cost of maintenance and services) for the first quarter of fiscal 1997 was 60.8% as compared to 62.1% for the comparable period in fiscal 1996. The decline in gross margin is primarily due to increased useage of independent contractors who typically are more expensive than employees and a general increase in technical staff labor costs. To allow for flexibility in its staffing requirements, the Company typically utilizes a mix of employees and independent contractors. The increase in technical staff labor costs is directly attributed to intense competition for such personnel. Research and development(R&D) costs for the first quarter of fiscal 1997 increased 11.8% or $418,000 over the comparable period in fiscal 1996. This increase is due to hiring of additional staff who are working on the development of new applications and enhancements. R&D costs as a percentage of total revenues were 8.3% and 10.0% for the first quarter of fiscal 1997 and 1996, repectively. This decrease is the result of the Company's total revenues increasing at a faster rate than the growth in R&D staffing levels. The Company capitalized software development costs of $368,000 and $331,000 in the first quarter of fiscal 1997 and 1996, respectively. Selling and marketing costs as a percentage of total revenues decreased to 21.6% in the first quarter of fiscal 1997 from 23.7% in the first quarter of fiscal 1996. This decrease is due primarily to higher levels of service revenues and backlog which typically have a lower level of sales commission expense associated with it. EBITDA The Company's earnings before interest expense, income taxes, depreciation and amortization (EBITDA) increased from $6.5 million in the first quarter of fiscal 1996 to $9.8 million for the first quarter of fiscal 1997. The increase in EBITDA can be attributed to the continued growth in both recurring and non-recurring revenues more than offsetting the growth in operating expenses. EBITDA is not intended to represent cash flows for the periods. Other Income and Expense Other income and expense consists primarily of interest income derived from short-term investments and foreign currency transaction losses. The Company incurred foreign currency transaction losses in the first quarter of fiscal 1997 as a result of revaluing U.S. dollar cash and receivables in its U.K. subsidiary. Income Taxes The effective tax rate for the first quarter of fiscal 1997 was 44.8% as compared to 38.0% for the first quarter of fiscal 1996. The increase in the effective tax rate is principally the result of deferred tax assets which were recognized in the first quarter of fiscal 1996 which reduced the effective tax rate for that period with no corresponding recognition of deferred tax assets in the first quarter of fiscal 1997. As of December 31, 1996, the Company has deferred tax assets of $ 9.6 million and deferred tax liabilities of $.6 million. Each quarter, the Company evaluates its historical operating results as well as its projections for the next 24 months to determine the realizability of the deferred tax assets. This analysis indicated that $1.7 million of the deferred tax assets were more likely than not to be realized. Accordingly, the Company has recorded a valuation allowance of $ 7.9 million as of December 31, 1996. Backlog - ------- As of December 31, 1996 and 1995, the Company had non-recurring revenue backlog of $21.9 million and $17.2 million in software license fees and $14.6 million and $10.7 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 December 31, 1996 and 1995, the Company had recurring revenue backlog of $75.0 million and $57.3 million, respectively. The Company defines recurring revenue backlog to be all monthly license fees, maintenance fees and facilities management fees specified in contracts which have been executed by the Company and its customers to the extent that the Company contemplates recognition of the related revenue within one year. There can be no assurance, however, that contracts included in recurring revenue backlog will actually generate the specified revenues. Liquidity and Capital Resources - ------------------------------- As of December 31, 1996, the Company had working capital of $45.0 million, cash and cash equivalents of $31.0 million and a $10 million bank line of credit of which there are no borrowings outstanding. The bank line of credit expires in June 1997. During the three months ended December 31, 1996, the Company's cash flow from operations amounted to $3.1 million and cash used in investing activities amounted to $4.1 million. Of the $4.1 million of cash used in investing activities, $1.7 million consisted of advances to Insession ($800,000) and USPI ($900,000) under promissory notes. In the normal course of business, the Company evaluates potential acquisitions of complementary businesses, products or technologies. In October 1996, the Company acquired 100% of OSSI in exchange for 209,993 shares of the Company's Class A Common Stock. Management believes that the Company's working capital, cash flow generated from operations and borrowing capacity are sufficient to meet the Company's working capital requirements for the foreseeable future.
TRANSACTION SYSTEMS ARCHITECTS, INC. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.24 Lease respecting facility at 200 Wellington Street West, Toronto, Canada 27.00 Financial Data Schedule (b) Reports on Form 8-K None
SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: February 7, 1997 TRANSACTION SYSTEMS ARCHITECTS, INC (Registrant) /s/ Dwight G. Hanson -------------------- Dwight G. Hanson Controller (Principal Accounting Officer)
TRANSACTION SYSTEMS ARCHITECTS, INC. INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- 10.24 Lease respecting facility at 200 Wellington Street West, Toronto, Canada 27.00 Financial Data Schedule