ACIW

Business Context and Reporting Period

Company: Transaction Systems Architects, Inc. (TSA)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three months ended December 31, 1998 (First Quarter of Fiscal 1999)

Business Overview: TSA develops, markets, and supports software products and services focused on electronic payments and commerce, primarily for financial institutions and retailers. The company operates globally, with 50% of Q1 1999 revenues derived from international operations.

Key Financial Metrics

Note: Debt consists of $1.3 million current portion and $2.5 million long-term. The company has a $10 million bank line of credit with no outstanding borrowings.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 24.6% ($17.0 million) year-over-year.
  • Services: Increased 46.1% ($7.3 million) due to higher demand for technical and project management services.
  • Software License Fees: Increased 19.5% ($7.5 million), driven by demand for BASE24 and System Solutions products and growth in Monthly License Fee (MLF) revenue ($12.0M vs $10.0M).
  • Maintenance Fees: Increased 18.2% ($2.4 million) due to an expanding installed base.
• Expense Growth: Total operating expenses rose 24.4% ($13.9 million), primarily due to increased staffing (from 1,711 to 2,260 employees/contractors) and higher royalties.
• Acquisitions:
  • Media Integration BV (MINT): Acquired 100% in November 1998 via stock exchange (740,000 shares). Accounted for as a pooling of interests.
  • US Processing, Inc. (USPI): Acquired remaining interests in December 1998 for $3.6 million cash and $5.6 million debt forgiveness. Recorded $9.4 million goodwill.
  • South African Distributor: Purchased remaining 49% interest for $3.5 million cash. Recorded $3.5 million goodwill.
• Transaction Costs: Incurred $653,000 in non-recurring transaction-related expenses associated with the MINT acquisition.

Outlook, Risks, and Management Commentary

• Backlog: As of December 31, 1998, non-recurring revenue backlog was $67.7 million ($35.5M software, $32.2M services). Recurring revenue backlog was $131.2 million.
• Year 2000 (Y2K) Compliance:
  • Status: 96% of licensed software applications are Y2K compliant. Internal IT/non-IT projects are 65% complete, with full compliance expected by June 1999.
  • Costs: Total project cost estimated at $10 million. $7.8 million incurred to date; $2.2 million remaining.
  • Risks: Primary risks involve third-party dependencies (telecommunications, hardware providers) and customers who have not remediated their own systems. Contingency plans are being developed for the "Y2K weekend."
• Liquidity: Management believes working capital ($90.0 million) and cash flow are sufficient for foreseeable requirements. No borrowings on the $10 million credit line.
• Tax Position: Effective tax rate was 38.0%. A valuation allowance of $11.1 million was recorded against deferred tax assets, leaving $5.0 million considered realizable.

Investor Verification Checklist

• Acquisition Integration: Verify the financial impact and integration progress of MINT, USPI, and the South African subsidiary.
• Y2K Execution: Confirm the timeline for completing the remaining 4% of software compliance and the 35% of internal IT/non-IT compliance by June 1999.
• Third-Party Dependencies: Assess the risk exposure related to customers and vendors who may not be Y2K compliant, potentially affecting transaction volumes.
• Deferred Tax Assets: Monitor future evaluations of the $11.1 million valuation allowance and potential adjustments to the tax provision.
• International Exposure: Review the stability of the 50% international revenue stream given varying Y2K preparedness in foreign markets.