Business Context and Reporting Period
Company: Transaction Systems Architects, Inc. (TSA), a Delaware corporation developing software for electronic payments and commerce.
Reporting Period: Quarterly period ended June 30, 2002 (Fiscal Q3 2002) and the nine months ended June 30, 2002.
Accounting Status: The financial statements are unaudited and have not been reviewed by independent accountants due to an ongoing re-audit of fiscal years 1999, 2000, and 2001. The Company terminated its relationship with Arthur Andersen LLP and appointed KPMG LLP as its new independent accountants on June 5, 2002.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2002 |
Nine Months Ended June 30, 2002 |
Nine Months Ended June 30, 2001 |
|---|---|---|---|
| Total Revenues | $64.98 million | $195.96 million | $224.80 million |
| Operating Income (Loss) | $3.14 million | $4.08 million | ($24.61 million) |
| Net Income (Loss) | $1.27 million | ($22.69 million) | ($39.47 million) |
| Diluted EPS | $0.04 | ($0.64) | ($1.17) |
| Cash and Equivalents | $59.27 million | $59.27 million | $28.10 million |
| Operating Cash Flow | N/A | $35.92 million | $14.19 million |
| Debt (Current + Long-term) | $1.73 million | $1.73 million | $13.32 million |
Revenue Composition (Nine Months 2002): Software license fees ($105.6M), Maintenance fees ($58.2M), Services ($32.2M).
Liquidity: The Company holds $59.3 million in cash and has $19.6 million in available credit lines ($15.0M U.S. and $4.6M foreign) with no outstanding borrowings.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 11.8% in Q3 and 12.8% for the nine-month period compared to 2001. This was driven by an 18.4% drop in software license fees and a 26.2% drop in services revenue, attributed to global economic conditions and reduced IT spending by customers.
- Profitability Improvement: The Company returned to profitability in Q3 2002 ($1.27M net income) compared to a net loss of $21.5M in Q3 2001. The nine-month net loss narrowed significantly to $22.7M from $39.5M in the prior year.
- Goodwill Impairment: A one-time cumulative effect of accounting change (SFAS No. 142) resulted in a $25.7 million net charge in the first quarter of fiscal 2002, impacting the nine-month net loss. No goodwill amortization was recorded in 2002, compared to $10.1 million in 2001.
- Asset Sales: The Company sold its Regency Systems subsidiary in February 2002, recording a gain of $4.1 million in Q2 and an additional $0.5 million in Q3.
- Debt Reduction: The Company repaid $12.0 million on its line of credit during the nine months ended June 30, 2002, reducing total debt significantly.
Outlook, Risks, and Contingencies
- Re-audit and Restatement Risk: The Company is re-auditing fiscal years 1999, 2000, and 2001 due to concerns regarding revenue recognition and valuation of transactions with a specific customer. While management believes aggregate pretax income may not change materially, the timing of recognition and classification of items may shift. Restatements are deferred until the re-audit is complete.
- Investment Impairment: The Company holds S1 Corporation stock received from the Regency sale. The value has declined by approximately $3.6 million since acquisition. Currently treated as a temporary decline, but if deemed "other than temporary," a non-cash charge will be required.
- Market Risks: Significant exposure to the banking industry consolidation, reliance on Compaq hardware (impacted by HP merger), and foreign currency volatility. The Company derives a majority of revenue from international operations.
- Backlog: As of June 30, 2002, recurring revenue backlog was $124.7 million and non-recurring backlog was $54.4 million.
Investor Verification Checklist
- Re-audit Outcome: Monitor the completion of the KPMG re-audit and any subsequent restatements of prior financial periods, specifically regarding revenue recognition for the customer in question.
- S1 Stock Valuation: Track the fair value of the S1 Corporation stock holding to determine if a permanent impairment charge will be recognized in future quarters.
- Revenue Trends: Verify if the decline in software license fees and services revenue stabilizes as global economic conditions improve.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly the minimum tangible net worth requirements for the foreign subsidiary.
- Goodwill Testing: Review future annual goodwill impairment tests under SFAS No. 142, as the initial adoption resulted in a significant write-down.