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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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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
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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).
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TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
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
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands)
June 30, September 30,
2001 2000
-------------- --------------
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
============ ============
See notes to condensed consolidated financial statements.
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
-------------- -------------- --------------- --------------
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
============ ============ ============ ============
See notes to condensed consolidated financial statements.
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Nine Months Ended June 30,
--------------------------------------
2001 2000
-------------- ---------------
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
============ ============
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):
Three Months Ended June 30, Nine Months Ended June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
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)
================= ================ ==============
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):
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
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
================ ================ ================ ================
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):
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
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
================ ================
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):
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
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
================ ================ ================ ================
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):
Recurring Revenue Non-recurring Revenue
Backlog Backlog
------------------------------------- -------------------------------------
June 30, Sept. 30, June 30, Sept. 30,
2001 2000 2001 2000
----------------- ---------------- ----------------- ----------------
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
================= ================ ================= ================
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):
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
------------- -------- ---------- --------- ----------- -------- ----------- ---------
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.
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
34
CREDIT AGREEMENT
Dated as of June 28, 2001
TRANSACTION SYSTEMS ARCHITECTS, INC., a Delaware corporation ("TSA") and ACI
WORLDWIDE INC., a Nebraska corporation ("ACI") (TSA and ACI are sometimes
hereinafter individually and collectively referred to as the "Borrower"), and
U.S. BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"),
hereby agree as follows:
ARTICLE I
AMOUNTS AND TERMS OF ADVANCES
SECTION 1.01. COMMITMENT AND ADVANCES
(A) Commitment. The Bank agrees, on the terms and conditions hereinafter set
forth, to make advances (the "Advances") to the Borrower from time to time
during the period from the date hereof to and including June 27, 2002 (the
"Termination Date") in an aggregate amount not to exceed at any time outstanding
the sum of Twenty-Five Million Dollars ($25,000,000) (the Bank's obligation to
make such Advances under the terms of this Agreement is hereinafter referred to
as the "Commitment"). Within the limits of the Commitment, the Borrower may
borrow, repay pursuant to Section 1.04, and reborrow under this Section 1.01(A).
(B) Purpose of Advances. The Advances shall be used only for working capital and
general corporate purposes of the Borrower.
(C) Recordation of Amount of Advances. In the absence of manifest error, the
books and records of the Bank shall be conclusive and binding upon the Borrower
as to the principal balance of the Advances outstanding at any time and the
amount of accrued interest.
SECTION 1.02. MAKING ADVANCES.
(A) Advance Requests. Each Advance shall be made on written notice from the
Borrower to the Bank signed by Larry G. Fendley, Dwight G. Hanson, Edward C.
Fuxa, or James R. Walker, or such other person or persons as the Borrower may
from time to time designate in writing to the Bank (such persons are hereinafter
referred to as "Designated Individuals") delivered before 12:00 p.m. (Omaha,
Nebraska time) on a Business Day (as defined below) specifying the amount of
such Advance, the interest rate applicable thereto under Section 1.04, and, for
each LIBOR Rate Advance, the Interest Period applicable thereto (each such
notice is hereinafter referred to as an "Advance Request"); provided, however,
that:
(1) Any Advance Request for a LIBOR Rate Advance (as defined below)
shall be delivered to the Bank not later than 12:00 p.m. (Omaha,
Nebraska time) at least two New York Banking Days preceding the first
day of the Interest Period applicable to such LIBOR Rate Advance; and
(2) The Bank may, in its discretion, make Advances at the Index-Based
Rate pursuant to verbal requests (whether in person or by telephone)
from any of the Designated Individuals, provided, that: (a) the
Borrower shall confirm such verbal request in writing promptly after
making such verbal request, and (b) the Bank shall have no liability to
the Borrower or any other person with respect to Advances made by the
Bank in good faith pursuant to any such verbal request.
(B) Availability of Advances. Subject to the advance notification requirements
for a LIBOR Interest Period set forth in Section 1.02(A)(1), not later than 2:30
p.m. (Omaha, Nebraska time) on the date of such Advance Request (or, in the case
of a LIBOR Rate Advance, on the second New York Banking Day following the date
of such Advance Request) and upon fulfillment of the applicable conditions set
forth in Article II, the Bank will make such Advance available to the Borrower
in same day funds by depositing such Advance in an account maintained by the
Borrower at the Bank, at the Bank's address referred to in Section 6.02. The
Bank may rely without further investigation on the information set forth in any
Advance Request.
(C) Minimum Amounts. Each LIBOR Rate Advance (as defined below) shall be in the
minimum amount of $1,000,000 or an integral multiple of $500,000 in excess
thereof. Each Index Rate Advance (as defined below) shall be in the minimum
amount of $10,000 or any integral multiple of $5,000 in excess thereof.
SECTION 1.03. BORROWING BASE REPORTING.
(A) Borrowing Base Defined. As used in this Agreement, the "Borrowing Base"
shall be an amount equal to seventy-five percent (75%) of Eligible Domestic
Accounts, plus (2) zero percent (0%) of Eligible Foreign Accounts. From time to
time as required herein, the Borrower shall deliver to the Bank a certificate in
substantially the form of Exhibit "A" attached hereto, signed by the chief
financial officer of the Borrower, setting forth the information and
calculations necessary for the determination of the Borrowing Base (each, a
"Borrowing Base Certificate").
(B) Eligible Accounts Defined; Exclusions. "Eligible Domestic Accounts" shall
consist solely of trade accounts of the Borrower and the Borrower's subsidiaries
listed on Schedule 1.03(B) attached hereto (collectively, the "Primary
Subsidiaries") with respect to account debtors located in the United States, for
which invoices have been delivered to the respective account debtors, which
accounts have been created in the ordinary course of the business and upon which
the right to receive payment is absolute and not contingent upon the fulfillment
of any condition whatsoever. "Eligible Foreign Accounts" shall consist solely of
those trade accounts of the Borrower and the Primary Subsidiaries with respect
to account debtors located outside of the United States, which accounts have
been created in the ordinary course of business and upon which the right to
receive payment is absolute and not contingent upon the fulfillment of any
condition whatsoever. Notwithstanding the foregoing, the following shall not be
included in either Eligible Domestic Accounts or Eligible Foreign Accounts:
(1) Any Eligible Domestic Account which is more than one hundred twenty
(120) days past invoice date, unless such account is supported by a
letter of credit acceptable to the Bank;
(2) Any Eligible Foreign Account which is more than ninety (90) days
past invoice date, unless such account is supported by a letter of
credit acceptable to the Bank;
(3) Any Eligible Domestic Account if more than twenty-five percent
(25%) of the aggregate amount of accounts of such customer have at the
time remained unpaid for more than one hundred twenty (120) days after
invoice date;
(4) Any Eligible Foreign Account if more than twenty-five percent (25%)
of the aggregate amount of accounts of such customer have at the time
remained unpaid for more than ninety (90) days after invoice date;
(5) any account for which there exists any right of setoff, defense or
discount (except regular discounts allowed in the ordinary course of
business to promote prompt payment) or for which any defense or
counterclaim has been asserted; provided, however, in cases where the
account debtor has a contractual right of setoff against an account
owed by such debtor to the Borrower or the Primary Subsidiaries (which
right of offset is not disputed by Borrower or the Primary
Subsidiaries), such account shall only be excluded under this Section
1.03(B)(2) to the extent of the setoff claimed by the account debtor;
(6) any account which arises from the sale or lease to or
performance of services for, or represent an obligation of, an
employee, affiliate, parent or subsidiary;
(7) customer clearing accounts, bank overdrafts, and outstanding
checks or drafts;
(8) accounts subject to any Factoring Agreement (as defined
below); and
(9) any account deemed ineligible by the Bank in its reasonable
discretion based on the creditworthiness of the account debtor, as
determined by the Bank in a manner generally consistent with similar
determinations made by the Bank from time to time.
SECTION 1.04. REPAYMENT AND INTEREST.
(A) Repayment. The Borrower shall repay the aggregate unpaid principal amount of
all Advances, with interest thereon as provided herein, in accordance with the
terms of this Agreement and the Promissory Note of the Borrower in substantially
the form of Exhibit "B" attached hereto (the "Note").
(B) Interest Rate Options. Interest on each Advance hereunder shall accrue from
the date of such Advance until such Advance is paid in full at one of the
following per annum rates selected by Borrower in the applicable Advance
Request:
(1) The prime rate announced by the Bank from time to time, as and when
such rate changes (the "Index Rate"), less One-Quarter of One Percent
(0.25%) (the "Index-Based Rate"); or
(2) Subject to the advance notification requirements set forth in
Section 1.02(A)(1), the 1, 2, 3 or 6 month LIBOR rate quoted by the
Bank from Telerate Page 3750 or any successor thereto (which shall be
the LIBOR rate in effect two New York banking days prior to
commencement of the LIBOR Rate Advance)(the "LIBOR Rate") plus One and
Three-Quarters Percent (1.75%) (the "LIBOR-Based Rate").
The Bank's internal records of applicable interest rates shall be determinative
in the absence of manifest error. Advances to which the Index-Based Rate are
applicable are referred to herein as "Index Rate Advances", and Advances to
which the LIBOR-Based Rate are applicable are referred to herein as "LIBOR Rate
Advances."
(C) Payment of Interest. Interest on Advances shall be payable as follows: (1)
for all Index Rate Advances, interest shall be payable monthly in arrears; and
(2) for all LIBOR Rate Advances, interest shall be payable at the earlier to
occur of: (a) the next Quarterly Payment Date, or (b) the end of the applicable
Interest Period. All accrued interest remaining unpaid on all Advances shall be
due on the Termination Date.
(D) Payment of Principal. Principal of all Index-Rate Advances shall be due and
payable in full on the Termination Date. Principal of all LIBOR Rate Advances
shall be due and payable at the end of the applicable Interest Period, but in no
event later than the Termination Date.
(E) Prepayment. The Borrower may prepay any Index Rate Advance, in whole or in
part, at any time and without penalty. The Borrower may not prepay any LIBOR
Rate Advance prior to the expiration of the then-applicable Interest Period
without the express written consent of the Bank, which the Bank will not grant
except upon the terms and subject to the conditions hereinafter provided.
Lender's consent to the prepayment of any LIBOR Rate Advance prior to the end of
the then-applicable Interest Period shall be conditioned upon the following:
(1) The Borrower shall have given to the Bank not less than five days
prior written notice of the Borrower's intent to prepay such LIBOR Rate
Advance, specifying the amount to be prepaid and the date of
prepayment;
(2) Any prepayment of a LIBOR Rate Advance shall be in an amount equal
to the remaining entire principal balance of such LIBOR Rate Advance.
(3) Together with such prepayment, the Borrower shall pay all
Breakage Costs (as defined below).
(F) Breakage Costs. In connection with the prepayment of any LIBOR Rate Advance
prior to the last business day of the applicable Interest Period, whether as a
result of a voluntary prepayment or due to acceleration upon default or
otherwise, the Borrower agrees to pay all of the Bank's costs, expenses and the
Interest Differential (as determined by the Bank) incurred as a result of such
prepayment (collectively, "Breakage Costs"). The term "Interest Differential"
shall mean that sum equal to the greater of zero (0) or the financial loss
incurred by the Bank resulting from prepayment, calculated as the difference
between the amount of interest the Bank would have earned (from like investments
as of the first day of the LIBOR Rate Advance) had prepayment not occurred and
the interest the Bank will actually earn (from like investments as of the date
of prepayment) as a result of the redeployment of funds from the prepayment.
Because of the short-term nature of this facility, the Borrower agrees that the
Interest Differential shall not be discounted to its present value.
(G) Failure to Select Interest Rate Option or Interest Period. In the event that
no rate is selected in an Advance Request, the applicable interest rate shall be
deemed to be the Index-Based Rate. In the event that any Advance Request
specifies a LIBOR Rate Advance but fails to specify an Interest Period, the
Interest Period applicable to such LIBOR Rate Advance shall be deemed to be one
month. In the event that the Borrower does not timely select an interest rate
option at least two banking days before a LIBOR Rate Advance expires and such
Advance is not paid in full at the expiration of such Interest Period, such
LIBOR Rate Advance shall automatically be converted to an Index Rate Advance,
such conversion being effective as of the expiration of the Interest Period for
such LIBOR Rate Advance.
(H) Interest Period for LIBOR Rate Advances. The interest period of 1, 2, 3 or 6
months for any LIBOR Rate Advance, as selected by Borrower in the applicable
Advance Request (each, an "Interest Period"), shall begin on the date of such
LIBOR Rate Advance and end on the last day of such Interest Period, provided,
however, that no Interest Period shall extend beyond the Termination Date.
(I) Unavailability of LIBOR Rate. Notwithstanding anything to the contrary
contained herein, if on any date on which a LIBOR Based Rate is to be determined
pursuant hereto, the Bank determines that deposits in U.S. dollars are not being
offered in the relevant amounts or for the relevant maturities to its lending
office in the London interbank dollar market and/or the LIBOR Rate is otherwise
not determinable for any reason whatsoever and/or the LIBOR Rate does not
accurately cover the cost to the Bank of making or maintaining such type of
Advances, then the Bank's obligation to make LIBOR Rate Advances shall be
suspended until the Bank notifies the Borrower that the circumstances giving
rise to such suspension no longer exist. The Borrower shall pay interest on the
unpaid principal amount of each Advance made during the period of any such
suspension from the date of such Advance until such principal amount is paid in
full, payable on the last day of each calendar month during such period at a
fluctuating interest rate equal to the Index-Based Rate (as defined below).
(J) Changes In Index Rate. Changes in the Index Based Rate shall be
effective immediately upon the corresponding change in the Index Rate.
(K) Default Rate. Upon the occurrence of an Event of Default, the Borrower shall
pay interest on demand at the Default Rate on the principal amount of all
Advances outstanding until the date such Advances are paid in full. The "Default
Rate" is a fluctuating rate equal to 2% per annum above the then-applicable
Index Rate.
(L) Usury. It is the intention of the Bank and the Borrower hereof that the Note
and this Agreement and all provisions hereof and of all documents securing the
Note conform in all respects to applicable law so that no payment of interest or
other sum construed to be interest shall exceed the highest lawful rate
permissible. In determining the rate of interest paid or payable under this
Agreement and the Note or any of the loan Documents, all funds paid or to be
paid as interest or construed to be interest shall be prorated, allocated, or
spread as permitted under applicable law. If, through any circumstances, the
contract of the Borrower and the Bank would result in payment, receipt or
reservation of sums exceeding the highest lawful interest rate applicable to
this transaction, or if the Borrower pays or lender receives or reserves any sum
as interest or construed to be interest in excess of such rate, then, ipso
facto, (1) the amount contracted for shall be automatically reduced to the
highest lawful rate authorized for this transaction, and (2) the amount of
excess interest paid shall be applied to the reduction of the principal balance
of the Note, if any, and if the principal balance has been fully paid, the
excess interest shall be refunded to the Borrower and the Borrower agrees to
accept such refund. Thereupon, to the extent permitted by law, the Bank shall
not be subject to any penalty provided for the contracting for, charging, or
receiving of interest in excess of such highest lawful rate, regardless of when
or the circumstances under which such refund or application was made.
SECTION 1.05. [RESERVED].
SECTION 1.06. PAYMENTS AND COMPUTATIONS. The Borrower shall make each payment
hereunder and under the Note not later than 12:00 noon (Omaha, Nebraska time) on
the day when due in lawful money of the United States of America to the Bank at
its address referred to in Section 6.02 in same day funds. All computations of
interest and fees hereunder and under the Note shall be made by the Bank on the
basis of a year of 360 days for the actual number of days (including the first
day but excluding the last day) elapsed.
SECTION 1.07. PAYMENT ON NONBUSINESS DAYS. Whenever any payment to be made
hereunder or under the Note shall be stated to be due on a Saturday, Sunday or a
public or bank holiday in Omaha, Nebraska (any other day being a "Business
Day"), such payment may be made on the next succeeding Business Day (except that
in the case of a LIBOR Rate Advance where the next succeeding Business Day falls
in the next succeeding calendar month, then such payment shall be made on the
next preceding Business Day with interest adjusted accordingly), and such
extension of time shall in such case be included in the computation of payment
of interest or commitment fee, as the case may be.
SECTION 1.08. COMMITMENT FEE. The Borrower agrees to pay to the Bank a
commitment fee ("Commitment Fee") on the average daily unused portion of the
Commitment from the date hereof at the rate of one quarter of one percent
(0.25%) per annum payable in arrears on each Quarterly Payment Date and on the
Termination Date.
ARTICLE II
CONDITIONS PRECEDENT
SECTION 2.01. CONDITION PRECEDENT TO INITIAL ADVANCE. The obligation of the Bank
to make its initial Advance is subject to the condition precedent that the Bank
shall have received at least two Business Days before the day of such Advance
the following, each in form and substance satisfactory to the Bank:
(A) Loan Documents. The following documents, duly executed (and
acknowledged, if required by form) by all parties thereto (collectively, the
"Loan Documents"):
(1) This Agreement;
(2) The Note;
(3) Pledge Agreements from TSA and ACI, each in substantially
the form attached hereto as Exhibit C" (the "Pledge Agreements");
(4) Security Agreements of the Borrower and each of the Primary
Subsidiaries, in substantially the form attached hereto as Exhibit
"D" (the "Security Agreements");
(5) Acknowledgement copies of proper Financing Statements (Form UCC-1)
of the Borrower and each of the domestic Primary Subsidiaries duly
filed under the Uniform Commercial Code of all jurisdictions as may be
necessary or, in the opinion of the Bank, desirable to perfect the
security interests created by the Security Agreements to which such
domestic Primary Subsidiaries are a party (collectively, the "Financing
Statements");
(6) Guaranties of each of the Primary Subsidiaries, substantially in
the form of Exhibit "E" attached hereto, pursuant to which such Primary
Subsidiaries unconditionally guarantee the prompt payment and
performance of all obligations of the Borrower under the Loan Documents
(collectively, the "Guaranties").
(B) UCC Searches. Certified copies of Requests for Information (Form UCC-11), or
equivalent reports, listing the Financing Statements and all other effective
financing statements which name the Borrower (under its present name and any
previous name) or any of the Primary Subsidiaries as debtor and which are filed
in the jurisdictions in which the Financing Statements are to be filed, together
with copies of such other financing statements (none of which shall cover the
collateral purported to be covered by the Security Agreements);
(C) Evidence of Insurance. Evidence of the insurance required by the
terms of the Loan Documents;
(D) Evidence of Actions Relating to Security Interests. Evidence that
all other actions necessary or, in the opinion of the Bank, desirable to
create, perfect and protect the security interests created by the Loan
Documents have been taken;
(E) Resolutions. Certified copies of the resolutions of the board of directors
(or other governing body, as appropriate) of the Borrower and each of the
Primary Subsidiaries approving each Loan Document to which it is a party and
certified copies of all documents evidencing other necessary action and
governmental approvals, if any, with respect to such Loan Document.
(F) Incumbency Certificate. A certificate of the Secretary of the Borrower
certifying the names, titles, and true signatures of the President or other
officers of the Borrower authorized to sign each Loan Document and the other
documents to be delivered by it hereunder, together with similar documentation
for each of the Primary Subsidiaries.
(G) Opinion. A favorable opinion of Erickson & Sederstrom, P.C., counsel for the
Borrower, substantially the form of Exhibit "F" as to: (1) the existence and
authority of the Borrower and each Primary Subsidiary organized under the laws
of any of the United States (the "Domestic Subsidiaries"); (2) the
enforceability of each Loan Document to which the Borrower or any of the
Domestic Subsidiaries is a party against the Borrower or such Domestic
Subsidiary, as applicable, and (3) such other matters as the Bank may reasonably
request.
(H) Intercreditor Agreements. The original, fully-executed Intercreditor
Agreement among the Bank, the Borrower, and Fleet, in substantially the form
attached hereto as Exhibit "G".
(I) Collateral Inspection. The Bank shall have conducted an examination of all
collateral described in the Loan Documents, with the results of such examination
being acceptable to the Bank.
(J) Certificates. The Bank shall have received a Borrowing Base Certificate and
Compliance Certificate satisfactory to the Bank.
SECTION 2.02. CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of the Bank
to make each Advance (including the initial Advance) shall be subject to the
further conditions precedent that on the date of such Advance:
(A) Accuracy of Representations, Etc.; No Default. The following statements
shall be true (and the submission of each Advance Request and receipt by the
Borrower of any proceeds of such Advance shall be deemed to constitute a
representation and warranty by the Borrower that such statements are true on
such date):
(1) The representations and warranties contained in Article III of this
Agreement and the other Loan Documents are correct on and as of the
date of such Advance as though made on and as of such date;
(2) no event has occurred and is continuing, or would result from such
Advance, which constitutes an Event of Default (as defined in Section
5.01 hereof) or would constitute an Event of Default but for any
requirement that notice be given or time elapse or both.
(B) Other Approvals. The Bank shall have received such other approvals,
opinions or documents as the Bank may reasonably request.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower
represents and warrants to the Bank as follows:
(A) Organization. TSA is a corporation duly formed, validly existing and in good
standing under the laws of the state of Delaware. ACI is a corporation duly
formed, validly existing and in good standing under the laws of Nebraska. Each
of the Primary Subsidiaries is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization. Each of TSA and
the Primary Subsidiaries are authorized to transact business in the State of
Nebraska (or the failure to be so authorized will not have a material adverse
effect on the obligations of such parties under the Loan Documents). Each of TSA
and the Primary Subsidiaries have obtained all licenses, authorizations and
permits required under applicable law for the conduct of its business in each
jurisdiction in which such licensure or permitting is required.
(B) Power and Authority. The Borrower and each of its subsidiaries (including
the Primary Subsidiaries) have all necessary power and authority to conduct
their respective businesses as presently conducted. The execution, delivery and
performance by the Borrower and each of the Primary Subsidiaries of each Loan
Document to which it is or will be a party are within the powers of the Borrower
and such Primary Subsidiary, have been duly authorized by all necessary action,
do not contravene:
(1) The articles of incorporation or bylaws (or other formation
and operation documents and agreements) of the Borrower or such
Primary Subsidiary, or
(2) any law or any contractual restriction binding on or
affecting the Borrower or such Primary Subsidiary.
Such execution, delivery and performance do not result in or require the
creation of any lien, security interest or other charge or encumbrance (other
than pursuant thereto) upon or against the Borrower or any such Primary
Subsidiary or with respect to any of their respective properties.
(C) No Authorization Required. No authorization or approval or other action by,
and no notice to or filing with, any governmental authority or regulatory body
is required for the due execution, delivery and performance by the Borrower and
the Primary Subsidiaries of any Loan Document to which it is a party.
(D) Binding Obligations. This Agreement is, and each other Loan Document to
which the Borrower or any Primary Subsidiary is or will be a party when
delivered hereunder will be, legal, valid and binding obligations of the
Borrower and such Primary Subsidiary, respectively enforceable against the
Borrower and such Primary Subsidiary, respectively in accordance with their
respective terms.
(E) Financial Statements. The Borrower has heretofore delivered to the Bank a
copy of TSA's: (i) Annual Report on Form 10-K for the fiscal year ended as of
September 30, 2000; (ii) Quarterly Report on Form 10-Q for the quarterly periods
ended December 31, 2000 and March 31, 2001 (the "TSA Reports"). The financial
statements contained in the TSA Reports were prepared on a consolidated basis in
accordance with generally accepted accounting principles on a basis consistent
with that of the previous fiscal year or period (hereinafter, "GAAP"), except
where otherwise noted in the financial statements, and fairly reflect the
financial position of the Borrower and all of its subsidiaries as of the date
thereof, and the results of the respective operations for the Borrower and its
subsidiaries for the period covered thereby. Neither the Borrower nor any of its
subsidiaries has any significant known contingent liabilities other than as
indicated on said financial statements, and since said date of March 31, 2001,
there has been no material adverse change in the condition, financial or
otherwise, of the Borrower or any of its subsidiaries.
(F) No Liens, Etc. Except for a portion of receivables which have been factored
by the Borrower in the ordinary course of business pursuant to an existing
factoring agreement dated March 31, 2000 (the "Fleet Factoring Agreement"),
between the Borrower and Fleet Business Credit Corporation ("Fleet"), none of
the assets of the Borrower is subject to any mortgage, pledge, title retention
lien, or other lien, encumbrance or security interest, except for: (a) current
taxes not delinquent or taxes being contested as provided by law in good faith
and by appropriate legal proceedings; (b) liens arising in the ordinary course
of business for sums not due or sums being contested in good faith and by
appropriate legal proceedings, but not involving any deposits or advances of
borrowed money or the deferred purchase price of property or services; and (c)
to the extent specifically shown in the financial statement referred to above.
(G) Other Restrictions. Neither the Borrower nor any of its subsidiaries is a
party to any agreement or instrument, or subject to any charter or other
corporate restriction, nor subject to any judgment, decree or order of any court
or governmental body, which the Borrower knows or reasonably should know may
have a material and adverse effect on the business, assets, liabilities,
financial condition, or operations of the Borrower or such subsidiary, or the
obligations of the Borrower under the Loan Documents. Except as disclosed in
Schedule 3.01(G) attached hereto, the Borrower has no, nor with reasonable
diligence should have had, knowledge of or notice that the Borrower or any of
its subsidiaries is in default with respect to the performance, observance or
fulfillment of any obligations, covenants or conditions contained in any
agreement, instrument, charter or other corporate restriction, judgment, decree
or order of any court or governmental body that might have a material adverse
impact on the Borrower or its subsidiaries.
(H) No Transfer of Assets. Except for: (1) transfers in the ordinary course of
business, (2) transfers made pursuant to the Fleet Factoring Agreement described
above, and (3) those transfers disclosed in Schedule 3.01(H) attached hereto,
neither the Borrower nor any of its subsidiaries has sold, conveyed,
transferred, disposed of, or otherwise further encumbered, any material amount
of their respective assets within the last ninety (90) days.
(I) No Litigation. There is no pending or threatened action or proceeding
affecting the Borrower or any of its subsidiaries before any court, governmental
agency or arbitrator, which, if adversely determined, would result in a material
adverse effect on the financial condition or operations of the Borrower or any
of its subsidiaries, except as disclosed in Schedule 3.01(I) attached hereto.
(J) Use of Proceeds. No proceeds of any Advance will be used to acquire any
security in any transaction which is subject to Sections 13 and 14 of the
Securities Exchange Act of 1934.
(K) Margin Stock. Neither the Borrower nor any of its subsidiaries is engaged in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation U issued by the Board of
Governors of the Federal Reserve System), and no proceeds of any Advance will be
used to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.
(L) Status Under Investment Company Act. None of the Borrower or its
subsidiaries are an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
(M) No Violation of Environmental Laws. The Borrower has not received notice of,
nor knows of, nor suspects any facts which might constitute any violations by
the Borrower or its subsidiaries of any federal, state and local, environmental,
health, and safety laws, codes and ordinances in all rules and regulations
promulgated thereunder (hereinafter collectively referred to as "Environmental
Laws") with respect to the business, operations, assets, equipment, property,
leaseholds or other facilities of the Borrower or its subsidiaries. There is no
present violation of Environmental Laws with respect to any property owned,
leased, or occupied by the Borrower or its subsidiaries.
(N) Taxes. The Borrower and each of its subsidiaries have: (1) timely filed all
state, federal, local and foreign tax returns which it is obligated to file, and
(2) paid when due all taxes and other impositions of any nature whatsoever
imposed by any federal, state or foreign government or other authority, on or
with respect to the Borrower or its subsidiaries or any of their respective
properties, including, without limitation, all income taxes, ad valorem property
taxes, sales and use taxes, excise taxes, and general or special assessments.
(O) ERISA. The Borrower and all of its subsidiaries are in compliance in all
material respects with the Employee Retirement Income Security Act of 1974, as
amended, and all regulations promulgated thereunder (collectively, "ERISA") to
the extent applicable to the Borrower and its subsidiaries, except for any
noncompliance which could not reasonably be expected to result in any material
adverse change in the properties, business or operations of the Borrower.
Borrower has received no notice to the contrary from the Pension Benefits
Guaranty Corporation ("PBGC") or any other governmental agency.
ARTICLE IV
COVENANTS
SECTION 4.01. AFFIRMATIVE COVENANTS OF THE BORROWER. So long as any amount
payable hereunder or under the Note shall remain unpaid or the Bank shall have
any Commitment hereunder, the Borrower will (and, to the extent applicable, will
cause each of its subsidiaries to):
(A) Corporate Existence, Etc. Preserve and maintain its corporate existence and
keep in force and effect all licenses, permits and franchises necessary and
material to the proper conduct of its business; maintain, preserve and keep its
property, plant and equipment, including, without limitation, all tangible and
intangible assets, in good repair, working order and condition.
(B) Compliance With Laws, Etc. Comply in all material respects with all
applicable laws, rules, regulations and orders, including without limitation,
all applicable Environmental Laws and ERISA, such compliance to include, without
limitation, paying before the same become delinquent all taxes, assessments and
governmental charges imposed upon it or upon its property prior to the initial
Advance hereunder and thereafter except to the extent contested in good faith.
(C) Visitation Rights; Collateral Examination. Permit the Bank or any agents or
representatives thereof to examine and make copies of abstracts from the records
and books of account of, and visit the properties of the Borrower and its
subsidiaries, conduct field collateral examinations at the expense of the
Borrower and at any reasonable time and from time to time discuss the affairs,
finances and accounts of the Borrower and its subsidiaries with any of their
respective officers or directors.
(D) Reporting Requirements. Furnish to the Bank:
(1) as soon as available and in any event within 50 days after the end
of each fiscal quarter of TSA, a copy of the consolidated financial
statements (including balance sheets, statements of income and cash
flows, all accompanying notes thereto and management letters) for the
Borrower and all of its subsidiaries for such quarter, prepared on a
consolidated basis in accordance with GAAP, reviewed in accordance with
Statement on Accounting Standards No. 71 by Arthur Andersen or other
independent certified public accountants reasonably acceptable to the
Bank, together with related 10-Q filings made with the Securities and
Exchange Commission (the "SEC"), which documents shall be sent directly
by such accountants to the Bank (provided, however, that to the extent
such documentation is available for downloading by the Bank through the
SEC's EDGAR database, and the Bank has received from such accountants
all remaining documentation required under this paragraph, the delivery
requirement of this Section 4.01(D)(1) shall be deemed satisfied);
(2) as soon as available and in any event within 100 days after the end
of each fiscal year of TSA, a copy of the consolidated financial
statements (including balance sheets, statements of income and cash
flows, all accompanying notes thereto and management letters) for the
Borrower and all of its subsidiaries for such year, prepared on a
consolidated basis in accordance with GAAP, audited and certified
without qualification by Arthur Andersen or other independent certified
public accountants reasonably acceptable to the Bank, together with
related 10-K filings made with the SEC; which documents shall be sent
directly by such accountants to the Bank (provided, however, that to
the extent such documentation is available for downloading by the Bank
through the SEC's EDGAR database, and the Bank has received from such
accountants all remaining documentation required under this paragraph
together with a letter from such accountants to the Bank indicating
that the information available through EDGAR has been audited and
certified by such accountants as provided herein, the delivery
requirement of this Section 4.01(D)(2) shall be deemed satisfied);
(3) promptly after the filing or receiving thereof, copies of all
reports and notices which the Borrower or any of its subsidiaries files
under ERISA with the Internal Revenue Service or the PBGC or the U.S.
Department of Labor or which the Borrower or any of its subsidiaries
receives from such entities;
(4) as soon as available and in any event within thirty (30) days after
the end of each Quarterly Payment Date, unless requested more often by
the Bank, a duly completed Borrowing Base Certificate setting forth the
Borrowing Base as of such Quarterly Payment Date;
(5) promptly upon the completion of each fiscal quarter, a compliance
certificate, in substantially the form of Exhibit "H" attached hereto
(each, a "Compliance Certificate"), setting forth the Borrower's
calculations of its Consolidated Tangible Net Worth, Consolidated
Working Capital, and Consolidated EBITDAR (each as defined below),
signed by the Chief Financial Officer of the Borrower.
(6) promptly, upon the occurrence of an Event of Default or an event
that but for the passage of time or the giving of notice or both would
constitute an Event of Default, notice of such Event of Default or
event;
(7) promptly, upon the occurrence or claimed occurrence of a default,
breach or event of default under any note or any other evidence of
indebtedness or agreement of the Borrower or any subsidiary (or any
event that but for the passage of time or the giving of notice or both
would constitute a default) under any other agreement to which the
Borrower or any of its subsidiaries is a party pursuant to which the
obligations or liabilities (or claimed obligations or liabilities) of
the Borrower or such subsidiary are in excess of $1,000,000, notice of
such occurrence, default, event or claim;
(8) promptly, upon filing of, or receipt of notice or service thereof,
notice of any litigation filed by or against the Borrower or any of its
subsidiaries (including the Primary Subsidiaries), where the amount in
question exceeds $1,000,000, or which could have a material adverse
effect on the ability of the Borrower or such subsidiary to perform its
obligations under the Loan Documents to which it is a party;
(9) if requested by the Bank, (a) a listing of all accounts, notes
receivable and inventory of the Borrower and its subsidiaries, and (b)
listing of all of accounts payable of the Borrower and its
subsidiaries, all of the foregoing certified by the chief financial
officer of the Borrower;
(10) promptly, upon the occurrence or claimed occurrence of any event
(including, without limitation, any default, breach or event of
default) which, under the terms of any Factoring Agreement, could
result in any obligation of the Borrower to Fleet or claim for damages
by Fleet against the Borrower in excess of $1,000,000.
(11) such other information respecting the condition or operations,
financial or otherwise, of the Borrower and its subsidiaries as the
Bank may from time to time reasonably request; and
(E) Net Worth. Maintain at all times a Consolidated Tangible Net Worth of not
less than $140,000,000. "Consolidated Tangible Net Worth" means the total
stockholders' equity of the Borrower and the Primary Subsidiaries, minus the
amount of all intangibles, and excluding "accumulated other comprehensive
income," all as determined in accordance with GAAP.
(F) Working Capital. Maintain at all times a minimum Consolidated Working
Capital of $60,000,000. "Consolidated Working Capital" means the excess of
current assets of the Borrower and the Primary Subsidiaries over current
liabilities of the Borrower and the Primary Subsidiaries, current assets and
current liabilities each to be determined in accordance with GAAP.
(G) EBITDAR. Maintain at all times a minimum Consolidated EBITDAR of
$40,000,000. "Consolidated EBITDAR" means for any period, the total of the
following each calculated without duplication for the Borrower and the Primary
Subsidiaries on a consolidated basis for such period: (i) net income from
operations; plus (ii) any provision for (or less any benefit from) income taxes
included in determining such net income; plus (iii) interest expense deducted in
determining such net income; plus (iv) amortization and depreciation expense
deducted in determining such net income; plus (v) rental expense deducted in
determining such net income; plus (vi) other extraordinary non-cash charges
(such as writing off good will), plus (vii) for measurement periods ending no
later than September 30, 2001, certain extraordinary cash charges shown on
Schedule 4.01(G) not to exceed $6,500,000 in the aggregate as they are incurred;
in each case determined in accordance with GAAP to the extent applicable.
Consolidated EBITDAR shall be measured quarterly based upon the four quarter
period then ended.
(H) GAAP. Maintain a standard accounting system in accordance with GAAP.
(I) Insurance. In addition to and without limiting any insurance requirements in
the Loan Documents, maintain and keep in force insurance of the types and in the
amounts customarily carried in lines of business similar to the Borrower's (and
its subsidiaries'), including but not limited to fire, extended coverage, public
liability and property damage, carried with companies and in amounts
satisfactory to the Bank. Schedules setting forth all insurance then in effect
shall be delivered to the Bank from time to time at the Bank's request; cause
the Bank to be named as loss payee on all such insurance relating to the
collateral described in the Loan Documents; cause such policies of insurance to
provide that any policy may not be cancelled or terminated without the insurance
company giving the Bank at least 15 days written notice; and, within 30 days
after notice in writing from the Bank, obtain such additional insurance as the
Bank may reasonably request.
(J) Additional Guaranties. As requested by the Bank, cause Borrower's
majority-owned subsidiaries (whether now existing or hereafter created by the
Borrower) to execute and deliver to the Bank an unconditional guaranty
substantially in the form attached hereto as Exhibit "E".
(K) Accounts. Maintain the primary operating accounts of the Borrower
and its subsidiaries with the Bank.
SECTION 4.02. NEGATIVE COVENANTS OF THE BORROWER. So long as any amount payable
hereunder or under the Note shall remain unpaid or the Bank shall have any
Commitment hereunder, the Borrower will not (nor will it permit any of its
subsidiaries to):
(A) Liens, Etc. Create or suffer to exist any lien, security interest or other
charge or encumbrance, or any other type of preferential arrangement, upon or
with respect to any properties of the Borrower or its subsidiaries, whether now
owned or hereafter acquired, or assign any right to receive income, in each case
to secure any Debt. "Debt" means (A) indebtedness for borrowed money or for the
deferred purchase price of property or services, (B) obligations as lessee under
leases which shall have been or should be, in accordance with GAAP, recorded as
capital leases, (C) obligations under direct or indirect guaranties in respect
of, and obligations (contingent or otherwise) to purchase or otherwise acquire,
or otherwise to assure a creditor against loss in respect of, indebtedness or
obligations of others of the kinds referred to in clause (A) or (B) above, and
(D) liabilities in respect of unfunded vested benefits under plans covered by
Title IV of the Employee Retirement Income Security Act of 1974 ("ERISA").
(B) Dividends, Etc. Declare or pay any dividends, purchase or otherwise acquire
for value any of its stock, preferred or otherwise, now or hereafter
outstanding, or make any distribution of assets to its shareholders in excess of
$100,000 per year.
(C) Debt. Create, incur, assume or permit to exist any Debt or any other
liabilities or obligations, whether matured or unmatured, liquidated or
unliquidated, direct or contingent, joint or several, except (1) the liabilities
of the Borrower to the Bank for money borrowed hereunder, (2) those trade
payables incurred in the ordinary course of business, (3) unsecured indebtedness
of the Borrower and its subsidiaries in amounts not exceeding $5,000,000 in the
aggregate, and (4) those obligations set forth on Schedule 4.02(D).
(D) Other Expenditures. Incur capital expenditures, lease obligations (whether
classified as capital or operating leases) or other expenditures resulting in an
aggregate amount of expenditures for the Borrower and its subsidiaries in any
fiscal year in excess of $5,000,000.
(E) Merger, Consolidation, Acquisitions, Transfers of Assets. Without the prior
written consent of the Bank (which consent shall not be unreasonably withheld or
delayed), merge into or consolidate with any corporation or other entity; make
any substantial change in the nature of the business of the Borrower or its
subsidiaries or recapitalize, reclassify or repurchase any of stock of the
Borrower or its subsidiaries, acquire any other enterprise or entity or all or
substantially all of the assets of any other entity; sell, lease, assign,
transfer or otherwise dispose of all or substantially all of the assets of the
Borrower or any of its subsidiaries.
(F) Change in Management. Change the current management of TSA or ACI, which the
Borrower represents to the Bank to be as follows:
TSA: Chairman--Gregory J. Duman
Interim Chief Executive Officer/President--Larry G. Fendley
Chief Financial Officer--Dwight G. Hanson
ACI: President--Mark R. Vipond
Treasurer--Dwight G. Hanson
Provided, however, that the Bank acknowledges that TSA is currently engaged in
an executive search process for the purpose of selecting a new Chief Executive
Officer/President to serve on a permanent basis. Such selection and replacement
shall not constitute a violation of this paragraph.
(G) Change in Location of Offices. Change the location of the chief executive
offices of TSA or ACI from their current chief executive offices located in
Omaha, Nebraska.
(H) Guarantees. Guarantee or become liable in any way as surety, endorser (other
than as endorser of negotiable instruments for deposit or collection in the
ordinary course of business), accommodation endorser or otherwise for any
liabilities or obligations of any other person or entity, except for guarantees
by the Borrower of indebtedness otherwise permitted under Section 4.02(C) of
this Agreement which is incurred by a Primary Subsidiary.
(I) Loans, Advances, Investments. Without the Bank's prior written consent
(which consent shall not be unreasonably withheld or delayed), make any loans or
advances to or investment in any person or entity, other than: (1) trade
accounts receivable generated in the ordinary course of business, and (2) loans
made pursuant those existing commitments described in Schedule 4.02(J) attached
hereto.
(J) Futures Transactions. Use Advances to purchase, assume or hold any
position in any commodity futures, market or exchange.
(K) Factoring Arrangements. Enter into any factoring arrangements or other
transactions pursuant to which accounts are sold, except that so long as no
Event of Default (or event which with the passage of time or the giving of
notice or both, would become an Event of Default) has occurred:
(1) The Borrower may from time to time sell specifically identified
accounts to Fleet pursuant to the Fleet Factoring Agreement if either:
(a) The accounts to be sold are not Eligible Domestic
Accounts or Eligible Foreign Accounts; or
(b) The following requirements shall have been
satisfied:
(i) The Borrower shall have provided the Bank with
not less than three (3) Business Days' advance
written notice of its intent to sell such accounts,
which notice shall include: (A) an itemization of the
specific accounts to be sold, the amounts thereof,
and the purchase price therefor, (B) copies of any
documentation reflecting such sale, (C) a
then-current Borrowing Base Certificate reflecting
the exclusion of such accounts; and (D) a then
current Compliance Certificate; and
(ii) The Bank shall have determined that, after
exclusion of the accounts to be sold from the
Borrowing Base, the aggregate amount of all Advances
outstanding, together with all Advance Requests
Pending, does not exceed an amount equal to: (A)
eighty-five percent (85%) of Eligible Domestic
Accounts, plus (B) the lesser of (1) fifty percent
(50%) of Eligible Foreign Accounts, or (2) fifty
percent of the aggregate amount of all Advances
outstanding and Advance Requests pending (the sum of
(A) plus (B) is hereinafter referred to as the
"Factoring Limit").
(2) The Borrower may from time to time sell specifically identified
accounts to other parties pursuant to other factoring arrangements if
either:
(a) The accounts to be sold are not Eligible Domestic Accounts
or Eligible Foreign Accounts, and the Borrower shall have
provided the Bank with reasonable advance written notice (in
no event less than three (3) business days) of its intent to
sell such accounts, which notice shall include: (A) an
itemization of the specific accounts to be sold, the amounts
thereof, and the purchase price therefor, (B) copies of any
documentation reflecting such sale, (C) a statement indicating
that the accounts to be sold are neither Eligible Foreign
Accounts nor Eligible Domestic Accounts, (D) a then-current
Borrowing Base Certificate; and (E) a then current Compliance
Certificate; or
(b) The following requirements shall have been
satisfied:
(i) The Borrower shall have provided the Bank with
not less than ten (10) Business Days' advance written
notice of its intent to sell such accounts, which
notice shall include: (A) an itemization of the
specific accounts to be sold, the amounts thereof,
and the purchase price therefor, (B) copies of any
documentation reflecting such sale, (C) a
then-current Borrowing Base Certificate reflecting
the exclusion of such accounts; and (D) a then
current Compliance Certificate; and
(ii) The Bank shall have determined that, after
exclusion of the accounts to be sold from the
Borrowing Base, the aggregate amount of all Advances
outstanding, together with all Advance Requests
Pending, does not exceed the Factoring Limit;
The Fleet Factoring Agreement, together with any and all agreements entered into
pursuant to Section 4.02(K)(2), are collectively referred to herein as the
"Factoring Agreements." In no event shall any accounts which are subject to any
Factoring Agreement be included in the calculation of the Borrowing Base or the
Factoring Limit at any time.
ARTICLE V
EVENTS OF DEFAULT
SECTION 5.01. EVENTS OF DEFAULT.
(A) Events of Default. Any of the following events shall constitute an "Event of
Default" hereunder:
(1) The Borrower shall fail to pay any amount payable hereunder
or under the Note when due; or
(2) Any representation or warranty made by the Borrower or any Primary
Subsidiary, and/or any of their respective officers under or in
connection with any Loan Document shall prove to have been incorrect in
any material respect when made; or
(3) The Borrower or any of its subsidiaries shall fail to perform or
observe any other term, covenant or agreement contained in any Loan
Document on its part to be performed or observed and any such failure
shall remain unremedied for thirty (30) days after written notice
("Notice Period") thereof shall have been given to the Borrower by the
Bank, provided, however, that during the Notice Period the Bank may
suspend the making of Advances; or
(4) The Borrower or any of its subsidiaries shall fail to pay any
Material Indebtedness (defined below) to any party (excluding
indebtedness evidenced by the Note) or any interest or premium thereon,
when due (whether by scheduled maturity, required repayment,
acceleration, demand or otherwise) and such failure shall continue
after the applicable grace period, if any, specified in the agreement
or instrument relating to such Material Indebtedness; or any other
default under any agreement or instrument relating to any such Material
Indebtedness, or any other event, shall occur and shall continue after
the applicable grace period, if any, specified in such agreement or
instrument, if the effect of such default or event is to accelerate, or
to permit the acceleration of, the maturity of such Material
Indebtedness; or any such Material Indebtedness shall be declared to be
due and payable, or required to be prepaid (other than by a regularly
scheduled required repayment), prior to the stated maturity thereof (as
used herein, the words "Material Indebtedness" shall mean any
indebtedness or obligation where the aggregate amount due or subject to
acceleration upon default is in excess of $1,000,000); or
(5) The Borrower or any of its subsidiaries shall generally not pay its
debts as such debts become due, or shall admit in writing its inability
to pay its debts generally, or shall make a general assignment for the
benefit of creditors; or any proceeding shall be instituted by or
against the Borrower or any of its subsidiaries seeking to adjudicate
it a debtor or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or
composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking the entry
of an order for relief or the appointment of a receiver, trustee or
other similar official for it or for any substantial part of its
property, and, in the case of any such proceeding instituted against it
(but not instituted by it) either such proceeding shall remain
undismissed or unstayed for a period of sixty (60) days or any of the
actions sought in such proceeding (including, without limitation, the
entry of an order for relief against it or the appointment of a
receiver, trustee, custodian or other similar official for it or for
any substantial part of its property) shall occur; or the Borrower
shall take any action to authorize any of the actions set forth above
in this subsection (5); or
(6) Any judgment or order for the payment of money in excess of
$1,000,000 shall be rendered against the Borrower or any of its
subsidiaries and either:
(a) enforcement proceeding shall have been commenced by
any creditor upon such judgment or order, or
(b) the Borrower (or subsidiary, as applicable) shall have
failed to supersede such judgment or order with a surety
reasonably acceptable to the Bank on or before the lapse of
the time period for appeal thereof or therefrom;
(7) Any material provision of any of the Loan Documents shall for any
reason cease to be valid and binding on the Borrower or any Primary
Subsidiary, or the Borrower or any Primary Subsidiary shall so state or
assert in writing;
(8) The Security Agreements or Pledge Agreements shall for any reason,
except to the extent permitted by the terms thereof, cease to create a
valid and perfected first priority security interest in any of the
collateral purported to be covered thereby;
(9) The acquisition by any person or entity, or two or more persons or
entities acting in concert, of beneficial ownership (within the meaning
of SEC Rule 13d-3 under the Securities Exchange Act of 1934) of 20% or
more of the outstanding shares of voting stock of either TSA or ACI.
(10) Any event of default specified under any of the Loan
Documents.
(11) There shall occur or exist any facts which lead the Bank to
believe in good faith that the Borrower will not, or will be unable to,
pay when due any amounts due under this Agreement or any of the Loan
Documents.
(B) Remedies. Upon the occurrence of any Event of Default, the Bank may declare
its obligation to make Advances to be terminated or suspended as the Bank may
determine, whereupon the same shall forthwith terminate, and the Bank may, by
notice to the Borrower, declare the Note, all interest thereon and all other
amounts payable under this Agreement to be forthwith due and payable, whereupon
the Note, all such interest and all such amounts shall become and be forthwith
due and payable, without presentment, demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Borrower; and may exercise
all rights and remedies provided in any Loan Document and/or by applicable law,
provided, however, that in the event of an actual or deemed entry of an order
for relief with respect to any Loan Party under the Federal Bankruptcy Code, (x)
the obligation of the Bank to make Advances shall automatically be terminated
and (y) the Note, all such interest and all such amounts shall automatically
become due and payable, without presentment, demand, protest or any notice of
any kind, all of which are hereby expressly waived by the Borrower.
ARTICLE VI
MISCELLANEOUS
SECTION 6.01. AMENDMENTS, ETC. No amendment or waiver of any provision of any
Loan Document, nor consent to any departure by the Borrower shall in any event
be effective unless the same shall be in writing and signed by the Bank and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
SECTION 6.02. NOTICES, ETC. All notices and other communications provided for
under any Loan Document shall be in writing (including telegraphic, telex,
facsimile or cable communication) and mailed, telegraphed, telexed, cabled,
faxed or delivered, if to the Borrower, at its address at 224 South 108th
Avenue, Omaha, Nebraska 68154, Attention: Chief Financial Officer, and if to the
Bank, at its address at 8800 West Center Road, Omaha, Nebraska 68124, Attention:
Kevin D. Munro, Vice President, or, as to each party, at such other address as
shall be designated by such party in a written notice to the other party. All
such notices and communications shall, when mailed, telegraphed, telexed, faxed
or cabled, be effective when received or confirmed by telex answerback,
respectively, except that notices to the Bank pursuant to the provisions of
Article I shall not be effective until actually received by the Bank.
Notwithstanding the other provisions of this Section 6.02, the Bank may accept
oral borrowing notices pursuant to Section 1.02 hereof, provided that the Bank
shall incur no liability to the Borrower in acting on any such communication
that the Bank believes to have been given by a person authorized to give such
notice on behalf of the Borrower. Any confirmation sent by the Bank to the
Borrower of any borrowing under this Agreement shall, in the absence of manifest
error, be conclusive and binding for all purposes as to the Borrower.
SECTION 6.03. NO WAIVER, REMEDIES. No failure on the part of the Bank to
exercise, and no delay in exercising, any right under any Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right under any Loan Document preclude any other or further exercise thereof or
the exercise of any other right. The remedies provided in the Loan Documents are
cumulative and not exclusive of any remedies provided by law.
SECTION 6.04. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP.
SECTION 6.05. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand:
(A) Closing Costs. All costs and expenses in connection with the preparation,
execution, delivery, filing, recording and administration of the Loan Documents
(whether or not the transaction contemplated by the Loan Documents is
consummated), including, without limitation, on-site collateral examinations and
due diligence, the reasonable fees and out-of-pocket expenses of counsel for the
Bank (who may be in-house counsel for the Bank), and local counsel who may be
retained by said counsel, with respect thereto and with respect to advising the
Bank as to its rights and responsibilities under the Loan Documents. In
addition, the Borrower shall pay any and all stamp and other taxes (excluding
income taxes of the Bank) and fees payable or determined to be payable in
connection with the execution, delivery, filing and recording of the Loan
Documents and the other documents to be delivered under the Loan Documents, and
agrees to save the Bank harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes
and fees;
(B) Enforcement Costs. All costs and expenses (including reasonable counsel fees
and expenses) in connection with the enforcement of the Loan Documents and the
other documents to be delivered in connection with the Loan Documents, including
without limitation all such costs and expenses related directly or indirectly to
any enforcement, sale, collection or disposition of collateral or incurred
directly or indirectly with respect to any litigation or bankruptcy proceeding.
SECTION 6.06. RIGHT OF SETOFF. If any payment of principal, interest or other
sums is not made when due, or upon the occurrence of any other Event of Default,
the Bank is hereby authorized to set off and apply any and all deposits (general
or special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by the Bank to or for the credit or the account
of the Borrower against any and all of the obligations of the Borrower now or
hereafter existing under any Loan Document, irrespective of whether or not the
Bank shall have made any demand under such Loan Document and irrespective of
whether or not such deposits, indebtedness or such obligations may be unmatured
or contingent, and although the amount of such deposits may be in excess of the
Bank's share of the obligations and Advances. The rights of the Bank under this
Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which the Bank may have.
SECTION 6.07. SEVERABILITY. Any provision of this Agreement or of any other Loan
Document which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or thereof
or affecting the validity or unenforceability of such provision in any other
jurisdiction.
SECTION 6.08. CONSENT TO JURISDICTION AND SERVICE.
(A) THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEBRASKA
STATE OR FEDERAL COURT SITTING IN OMAHA, NEBRASKA IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY LOAN DOCUMENT AND THE
BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEBRASKA STATE COURT OR IN SUCH
FEDERAL COURT. THE BORROWER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT
MAY IT MAY EFFECTIVELY DO SO, THE DEFENSE OF ANY INCONVENIENT FORUM TO THE
MAINTENANCE OF SUCH ACTION OR PROCEEDING.
(B) THE BORROWER IRREVOCABLY CONSENTS TO THE SERVICE OF COPIES OF THE SUMMONS
AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED IN ANY ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT TO WHICH THE BORROWER IS A PARTY BY THE MAILING OF COPIES OF SUCH
PROCESS TO THE BORROWER AT ITS ADDRESS SPECIFIED IN SECTION 6.02. THE BORROWER
AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE
CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR
IN ANY OTHER MANNER PROVIDED BY LAW.
(C) NOTHING IN THIS SECTION 6.08 SHALL AFFECT THE RIGHT OF THE BANK TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE
BANK TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN
THE COURTS OF OTHER JURISDICTIONS.
SECTION 6.09. BINDING EFFECT, GOVERNING LAW. This Agreement shall be binding
upon and inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower shall not assign any of its
respective rights hereunder or any interest herein without the prior written
consent of the Bank. The Loan Documents shall be governed by, and construed in
accordance with, the laws of the State of Nebraska without regard to principles
of conflicts of laws.
SECTION 6.10. INDEMNIFICATION. The Borrower hereby indemnifies and holds the
Bank harmless from and against and shall reimburse the Bank with respect to any
and all claims, demands, causes of action, losses, damages, liabilities, costs
and expenses (including attorneys fees and court costs) of any and every kind or
character, known or unknown, fixed or contingent, asserted against the Bank at
any time and from time to time by reason of or arising out of: (1) the breach of
any representation or warranty of the Borrower or any Primary Subsidiary as set
forth in this Agreement or any Loan Document to which the Borrower or any
Primary Subsidiary is a party, (2) the failure of the Borrower or any Primary
Subsidiary to perform any obligation in this Agreement or any Loan Document to
which the Borrower or such Primary Subsidiary is a party, required to be
performed by the Borrower or such Primary Subsidiary, or (3) the exercise of any
rights of the Bank under the Loan Documents, including, without limitation,
attempts to realize on any collateral. The indemnification obligations of the
Borrower under this section shall survive the repayment of all Advances and the
termination of this Agreement.
SECTION 6.11. WAVIER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY IRREVOCABLY
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT TO WHICH IT IS A PARTY OR ANY
INSTRUMENT OR DOCUMENT DELIVERED IN CONNECTION THEREWITH.
SECTION 6.12. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which when taken together shall constitute but one and the same
agreement. This Agreement shall be effective only when accepted by the Bank, as
indicated by the signature of its duly authorized officers set forth below.
SECTION 6.13. ENTIRE AGREEMENT. This Agreement and the Loan Documents constitute
the entire understanding between the Borrower and the Bank with respect to the
subject matter hereof, and supersedes all prior written or oral understandings.
This Agreement may not be modified, amended or terminated except by a written
agreement signed by the party against whom enforcement is sought.
SECTION 6.14. OBLIGATIONS JOINT AND SEVERAL.
(A) Obligations Joint and Several. In the event that the Borrower consists of
more than one individual or entity, each Borrower expressly acknowledges that it
has benefited and will benefit, directly and indirectly, from each and every
Advance, and hereby acknowledges and undertakes, together with each other
Borrower, joint and several liability for the punctual payment when due, whether
at stated maturity, by acceleration or otherwise, of all obligations of the
Borrower under this Agreement and the other Loan Documents (including, without
limitation, any and all post-petition interest and expenses whether or not
allowed under any bankruptcy, insolvency or other similar law)(collectively, the
"Obligations"). Each Borrower hereby acknowledges that this Agreement is the
independent and several obligation of each Borrower and may be enforced against
each Borrower separately, whether or not enforcement of any right or remedy
hereunder has been sought against any other Borrower. Each Borrower further
agrees that its liability hereunder and under any other Loan Document shall be
absolute, unconditional, continuing and irrevocable. Each Borrower expressly
waives any requirement that the Bank exhaust any right, power or remedy and
proceed against any other Borrower under this Agreement or any other Loan
Documents, or against any Primary Subsidiary or other person under any guaranty
of, or security for, any of the Obligations.
(B) Joint and Several Obligations Absolute. If acceleration of the time for
payment of any amount payable by a Borrower with respect to the Obligations is
stayed upon the insolvency, bankruptcy, or reorganization of any other Borrower,
all such amounts otherwise subject to acceleration under the terms of this
Agreement shall nonetheless be payable by the other Borrower hereunder forthwith
on demand by the Bank. Each Borrower hereby agrees that its joint and several
liability for the Obligations of any other Borrower (the "Other Obligations")
under this Agreement shall not be released, discharged, diminished, impaired,
reduced, or affected for any reason or by the occurrence of any event,
including, without limitation, one or more of the following events, whether or
not with notice to or the consent of any Borrower: (a) the taking or accepting
of collateral as security for any or all of the Other Obligations or the
release, surrender, exchange, or subordination of any collateral now or
hereafter securing any or all of the Other Obligations; (b) any partial release
of the liability of any Borrower hereunder; (c) any disability of the other
Borrower, or the dissolution, insolvency, or bankruptcy of any other Borrower or
any other party at any time liable for the payment of any or all of the Other
Obligations; (d) any renewal, extension, modification, waiver, amendment, or
rearrangement of any or all of the Other Obligations or any instrument,
document, or agreement evidencing, securing, or otherwise relating to any or all
of the Other Obligations; (e) any adjustment, indulgence, forbearance, waiver,
or compromise that may be granted or given by the Bank to any other Borrower or
any other party ever liable for any or all of the Other Obligations; (f) any
neglect, delay, omission, failure, or refusal of the Bank to take or prosecute
any action for the collection of any of the Other Obligations or to foreclose or
take or prosecute any action in connection with any instrument, document, or
agreement evidencing, securing, or otherwise relating to any or all of the Other
Obligations; (g) the unenforceability or invalidity of any or all of the Other
Obligations or of any instrument, document, or agreement evidencing, securing,
or otherwise relating to any or all of the Other Obligations; (h) any payment by
any other Borrower or any other party to the Bank is held to constitute a
preference under applicable bankruptcy or insolvency law or if for any other
reason the Bank is required to refund any payment or pay the amount thereof to
someone else; (i) the settlement or compromise of any of the Other Obligations;
(j) the non-perfection of any security interest or lien securing any or all of
the Other Obligations; (k) any impairment of any collateral securing any or all
of the Other Obligations; (l) the failure of the Bank to sell any collateral
securing any or all of the Other Obligations in a commercially reasonable manner
or as otherwise required by law; (m) any change in the corporate existence,
structure, or ownership of any other Borrower; or (n) any other circumstance
which might otherwise constitute a defense available to, or discharge of, any
other Borrower (other than payment of the Other Obligations).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
BORROWER: TRANSACTION SYSTEMS ARCHITECTS,
INC., a Delaware corporation
By: /s/ Dwight G. Hanson
------------------------
Dwight G. Hanson, Senior Vice
President and Chief Financial Officer
ACI WORLDWIDE INC.,
a Nebraska corporation
By: /s/ Dwight G. Hanson
------------------------
Dwight G. Hanson, Treasurer
and Attorney-in-fact
BANK: U.S. BANK NATIONAL ASSOCIATION,
a national banking association
By: /s/ Kevin D. Munro
------------------------
Kevin D. Munro, Vice President
A LOAN AGREEMENT MUST BE IN WRITING TO BE ENFORCEABLE UNDER NEBRASKA LAW. TO
PROTECT YOU AND US FROM ANY MISUNDERSTANDINGS OR DISSAPPOINTMENTS, ANY CONTRACT,
PROMISE, UNDERTAKING, OR OFFER TO FOREBEAR REPAYMENT OF MONEY OR TO MAKE ANY
OTHER FINANCIAL ACCOMMODATION IN CONNECTION WITH ANY LOAN OF MONEY OR GRANT OR
EXTENSION OF CREDIT, OR ANY AMENDMENT OF, CANCELLATION OF, WAIVER OF, OR
SUBSTITUTION FOR ANY OR ALL OF THE TERMS OR PROVISIONS OF ANY INSTRUMENT OR
DOCUMENT EXECUTED IN CONNECTION WITH ANY LOAN OF MONEY OR GRANT OR EXTENSION OF
CREDIT, MUST BE IN WRITING TO BE EFFECTIVE.
EXHIBIT/SCHEDULE LIST TO CREDIT AGREEMENT
Exhibit A Form of Borrowing Base Certificate
Exhibit B Form of Promissory Note
Exhibit C Form of Pledge Agreement
Exhibit D Form of Security Agreement
Exhibit E Form of Guaranty
Exhibit F Form of Opinion of Borrower's Counsel
Exhibit G Form of Intercreditor Agreement
Exhibit H Form of Compliance Certificate
Schedule 1.03(B) Primary Subsidiaries
Schedule 3.01(G) Existing Defaults
Schedule 3.01(H) Transfers of Assets
Schedule 3.01(I) Pending Litigation
Schedule 4.01(G) Anticipated Extraordinary Cash Charges
Schedule 4.02(D) Permitted Debt
Schedule 4.02(J) Permitted Loans
EXHIBIT 99.01
TRANSACTION SYSTEMS ARCHITECTS, INC.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
CERTAIN CAUTIONARY STATEMENTS AND RISK FACTORS
Transaction Systems Architects, Inc. and its subsidiaries
(collectively, the Company) or their representatives from time to time may make
or may have made certain forward-looking statements, whether orally or in
writing, including without limitation, any such statements made or to be made in
the Management's Discussion and Analysis contained in its various SEC filings or
orally in conferences or teleconferences. The Company wishes to ensure that such
statements are accompanied by meaningful cautionary statements, so as to ensure
to the fullest extent possible the protections of the safe harbor established in
the Private Securities Litigation Reform Act of 1995.
ACCORDINGLY, THE FORWARD-LOOKING STATEMENTS ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO AND ARE ACCOMPANIED BY THE FOLLOWING MEANINGFUL
CAUTIONARY STATEMENTS IDENTIFYING CERTAIN IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING
STATEMENTS.
This list of factors is likely not exhaustive. The Company operates in
a rapidly changing and evolving business involving electronic commerce and
payments, and new risk factors will likely emerge. Management cannot predict all
of the important risk factors, nor can it assess the impact, if any, of such
risk factors on the Company's business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
in any forward-looking statements.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT FORWARD-LOOKING STATEMENTS
WILL BE ACCURATE INDICATORS OF FUTURE ACTUAL RESULTS AND IT IS LIKELY THAT
ACTUAL RESULTS WILL DIFFER FROM RESULTS PROJECTED IN FORWARD-LOOKING STATEMENTS.
SUCH DIFFERENCES MAY BE MATERIAL.
TSA is dependent on its BASE24 products
TSA has derived a substantial majority of its total revenues from
licensing its BASE24 family of software products and providing services and
maintenance related to those products. The BASE24 products and related services
and maintenance are expected to provide the majority of TSA's revenues in the
foreseeable future. TSA's results will depend upon continued market acceptance
of its BASE24 products and related services as well as TSA's ability to continue
to adapt and modify them to meet the changing needs of its customers. Any
reduction in demand for, or increase in competition with respect to, BASE24
products would have a material adverse effect on TSA's financial condition and
results of operations.
TSA is subject to risks of conducting international operations
TSA has derived a majority of its total revenues from sales to
customers outside the United States. International operations generally are
subject to certain risks, including:
o difficulties in staffing and management,
o reliance on independent distributors,
o fluctuations in foreign currency exchange rates,
o compliance with foreign regulatory requirements,
o variability of foreign economic conditions, and
o changing restrictions imposed by U.S. export laws.
There can be no assurance that TSA will be able to manage the risks related to
selling its products and services in international markets.
TSA is dependent on the banking industry
TSA's business is concentrated in the banking industry, making TSA
susceptible to a downturn in that industry. For example, a decrease in bank
spending for software and related services could result in a smaller overall
market for electronic payment software. Furthermore, banks are continuing to
consolidate, decreasing the overall potential number of buyers for TSA's
products and services. These factors as well as others negatively affecting the
banking industry could have a material adverse effect on TSA's financial
condition and results of operations.
TSA's future results depend on the success of Compaq Computer Corporation
(Compaq) and TSA's relationship with Compaq
Historically, TSA has derived a substantial portion of its total
revenues from the licensing of software products that operate on Compaq
computers. TSA's BASE24 product line as well as TSA's CoACH, MoneyNet and ICE
products run exclusively on Compaq computers. The BASE24 product line is
expected to provide a majority of TSA's revenues in the foreseeable future.
TSA's future results depend on market acceptance of Compaq computers and the
financial success of Compaq. Any reduction in demand for these computers or in
Compaq's ability to deliver products on a timely basis could have a material
adverse effect on TSA's financial condition and results of operations.
Although TSA has several written agreements with Compaq, none of those
agreements governs the primary relationship between TSA and Compaq, which is
that TSA's major product line, BASE24, runs exclusively on Compaq computers. The
cooperation and past affiliation between TSA and Compaq have facilitated TSA's
ability to develop and market Compaq-compatible products. However, this
cooperation is not mandated by contract. The cessation of such cooperation would
adversely affect TSA's business. None of TSA's agreements with Compaq would
protect TSA if Compaq's cooperation ceased or if Compaq were unable to deliver
products on a timely basis. The written agreements cover such discrete matters
as funding of market development efforts.
Implementation of the Corporate Strategy to Focus on Consumer e-Payments
business may not be successful
TSA has announced a corporate strategy to focus on its Consumer
e-Payments business and to consider and implement alternatives for its
Electronic Business Infrastructure, Corporate Banking e-Payments and Health
Payments Systems businesses ("Other Businesses"). The decision of TSA to
implement any aspect of its corporate strategy and the feasibility of
implementing the strategy is subject to numerous factors, including market
conditions and perceptions, demand for the Other Businesses by potential
investors or potential acquirers, personnel, tax, business, general economic
conditions, viability of the Other Businesses as stand alone operations, and
other factors that could affect TSA's decisions and ability to separate
businesses, to divest, raise capital, or implement other alternatives for such
businesses, and to implement other aspects of TSA's corporate strategy. There
can be no assurance that TSA will implement any aspect of the corporate strategy
or that if implemented the strategy will be successful.
The Post Year 2000 business downturn may continue
During the first quarter of fiscal 2000, TSA'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 has had a negative
impact on TSA's software license fee and services revenue due to the less than
expected demand by TSA's customers and potential new customers to upgrade and
enhance their current systems. In addition, since the Year 2000 cutover, TSA has
found its customers increasingly scrutinizing their information technology
purchases which has led to further delays in software and services purchases as
compared to the activity in prior periods. The Year 2000 lock-down has
interrupted TSA's normal sales cycle and therefore is likely to have a negative
impact on the company's revenue and net income beyond fiscal 2000. TSA 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
TSA's growth rates will return to historical levels.
Changes in Accounting Standards Could Affect the Calculation of Revenues and
Operating Results
Additional revenue recognition standards, interpretations or guidance
regarding existing standards could be issued in the future. These
interpretations and additional standards and guidance could lead to
unanticipated changes in TSA's current revenue recognition policies which could
affect the timing of the recognition of revenue and cause fluctuations in
operating results. Statement of Position 97-2, "Software Recognition" ("SOP
97-2") was issued in October 1997 by the American Institute of Certified Public
Accountants. TSA was required to adopt SOP 97-2 beginning in fiscal 1999. As a
result of adopting SOP 97-2, TSA was required to change its revenue recognition
policy. Under the revised policy, for certain software license contracts with
fixed payment terms that extent beyond 12 months, software license fees are
recognized upon delivery of the software. Prior to the adoption of SOP 97-2,
these software license fees were recognized as the fees were billed and
collected.
TSA may not be able to attract and retain key personnel
TSA's success depends on certain of its executive officers, the loss of
one or more of whom could have a material adverse effect on TSA's financial
condition and results of operations. None of TSA's U.S.-based executive officers
is a party to an employment agreement, except for the Company's Chief Executive
Officer. TSA believes that its future success also depends on its ability to
attract and retain highly-skilled technical, managerial and marketing personnel,
including, in particular, personnel in the areas of research and development and
technical support. Competition for personnel is intense. There can be no
assurance that TSA will be successful in attracting and retaining the personnel
it requires.
The market for electronic payment software and services is highly competitive
Many applications software vendors offer products that are directly
competitive with BASE24 and other products of TSA. TSA also experiences
competition from software developed internally by potential customers and
experiences competition for its consulting services from professional services
organizations. In addition, processing companies provide services similar to
those made possible by TSA's products. Many of TSA's current and potential
competitors have significantly greater financial, marketing, technical and other
competitive resources than TSA. Current and potential competitors, including
providers of transaction-based software, processing, or professional services,
may establish cooperative relationships with one another or with third parties
to compete more effectively against TSA. It is also possible that new
competitors may emerge and acquire market share. In either case, TSA's financial
condition and results of operations could be adversely affected. TSA's future
success depends on its ability to timely develop and market product enhancements
and new products.
The market for software in general is characterized by rapid change in
computer hardware and software technology and is highly competitive with respect
to the need for timely product innovation and new product introductions. TSA
believes that its future success depends upon its ability to enhance its current
applications and develop new products that address the increasingly complex
needs of customers. In particular, TSA believes that it must continue to respond
quickly to users' needs for additional functionality and multi-platform support.
The introduction and marketing of new or enhanced products requires TSA to
manage the transition from current products in order to minimize disruption in
customer purchasing patterns. There can be no assurance that TSA will continue
to be successful in the timely development and marketing of product enhancements
or new products that respond to technological advances, that its new products
will adequately address the changing needs of the domestic and international
markets or that it will successfully manage the transition from current
products.
TSA is continually developing new products, product versions and
individual features within a large, complex software system. Development
projects can be lengthy and are subject to changing requirements, programming
difficulties and unforeseen factors which can result in delays in the
introduction of new products and features. Delays could have a material adverse
effect on TSA's financial condition and results of operations.
In addition, new products, versions or features, when first released by
TSA, may contain undetected errors that, despite testing by TSA, are discovered
only after a product has been installed and used by customers. To date,
undetected errors have not caused significant delays in product introduction and
installation or required substantial design modifications. However, there can be
no assurance that TSA will avoid problems of this type in the future.
A majority of TSA's license fee revenue is generated by licenses for
software products designed to run on Compaq's fault-tolerant mainframe
computers. TSA has developed, and continues to develop, certain products for
other platforms. However, revenues from these products have not been significant
to date. There can be no assurance that TSA will be successful in selling these
software products or other products under development. TSA's failure in this
regard could have a material adverse effect on its financial condition and
results of operations.
TSA is dependent on proprietary technology
TSA relies on a combination of trade secret and copyright laws,
nondisclosure and other contractual and technical measures to protect its
proprietary rights in its products. There can be no assurance that these
provisions will be adequate to protect its proprietary rights. In addition, the
laws of certain foreign countries do not protect intellectual property rights to
the same extent as the laws of the United States. Although TSA believes that its
intellectual property rights do not infringe upon the proprietary rights of
third parties, there can be no assurance that third parties will not assert
infringement claims against TSA.
Fluctuations in quarterly operating results may result in volatility in TSA's
stock price
TSA's quarterly revenues and operating results may fluctuate depending
on the timing of executed contracts, license upgrades and the delivery of
contracted business during the quarter. In addition, quarterly operating results
may fluctuate due to the extent of commissions associated with third party
product sales, timing of TSA's hiring of additional staff, new product
development and other expenses. No assurance can be given that operating results
will not vary due to these factors.
TSA's stock price may be volatile
The stock market has from time to time experienced extreme price and
volume fluctuations, particularly in the high technology sector, which have
often been unrelated to the operating performance of particular companies. Any
announcement with respect to any variance in revenue or earnings from levels
generally expected by securities analysts for a given period could have an
immediate and significant effect on the trading price of the Class A Common
Stock. In addition, factors such as announcements of technological innovations
or new products by TSA, its competitors or other third parties, as well as
changing market conditions in the computer software or hardware industries, may
have a significant impact on the market price of the Class A Common Stock.
TSA's charter contains provisions that may affect changes in control
TSA's Certificate of Incorporation contains provisions that may
discourage acquisition bids for TSA. The effect of such provisions may be to
limit the price that investors might be willing to pay in the future for shares
of the Class A Common Stock.
TSA's acquisition strategy involves numerous risks and challenges
TSA has expanded and will seek to continue to expand its operations
through the acquisition of additional businesses that complement it's core
skills and have the potential to increase it's overall value. TSA's future
growth may depend, in part, upon the continued success of its acquisition
strategy. TSA may not be able to successfully identify and acquire, on favorable
terms, compatible businesses. Acquisitions involve many risks, which could have
a material adverse effect on TSA's business, financial condition and results of
operations, including:
o Acquired businesses may not achieve anticipated revenues,
earnings or cash flow;
o Integration of acquired businesses and technologies may not be
successful and TSA may not realize anticipated economic,
operational and other benefits in a timely manner,
particularly if TSA acquires a business in a market in which
TSA has limited or no current expertise or with a corporate
culture different from TSA's;
o Potential dilutive effect on TSA's stockholders from
continued issuance of Common Stock as consideration for
acquisitions;
o Adverse effect on net income of amortization expense related
to goodwill and other intangible assets and other
acquisition-related charges, costs and expenses on net income;
o Competing with other companies, many of which have greater
financial and other resources to acquire attractive companies
makes it more difficult to acquire suitable companies on
acceptable terms; and
o Disruption of TSA's existing business, distraction of
management and other resources and difficulty in maintaining
TSA's current business standards, controls and procedures.
The acquisition of MessagingDirect Ltd. involves risks and the related
strategies may not be successful.
TSA's objectives and strategies relating to the acquisition of
MessagingDirect are subject to numerous risks, including the following: (i) the
acquisition is subject to a number of conditions to closing which may not be
satisfied, (ii) MessagingDirect is in a highly competitive industry and TSA and
MessagingDirect may not be successful against more established competitors,
(iii) MessagingDirect is a relatively new company and does not have a
significant market presence, revenues, or widespread acceptance of its products,
(iv) MessagingDirect's products have not yet been tested by significant and
prolonged use in the marketplace, (v) MessagingDirect has not been profitable to
date and may not become profitable, (vi) with rapid developments in technology
and of competitive products and technologies, MessagingDirect's products may
become obsolete before achieving significant revenues and the entire Electronic
Statement Presentment ("EBP") and Electronic Bill Presentment and Payment
("EBPP") markets may not achieve the predicted growth rates, (vii) TSA will
incur significant expenses and devote significant management time and other
resources in assimilating and integrating MessagingDirect which could have a
material adverse effect on TSA's operations and financial results, (viii)
MessagingDirect's products, personnel, and operations may be difficult to
combine with those of TSA, (ix) the issuance of TSA's shares in the acquisition
will have a dilutive impact on earnings per share, and amortization of
intangible assets will have an adverse effect on earnings, and (x) TSA may incur
undisclosed liabilities with respect to MessagingDirect. The strategies and
synergies which are the objects of the acquisition depend on numerous factors
including acceptance of MessagingDirect's products by TSA's existing customer
base and the rapid growth of the ESP and EBPP markets for MessagingDirect's
products and there can be no assurance that these factors will materialize, that
TSA will implement any aspects of the strategies, or that if implemented the
strategies will be successful or the synergies achieved.