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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 December 31, 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)
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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 February 8, 2002 was 35,308,548 (excluding
1,476,145 shares held as Treasury Stock, and including 574,051 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 18,014 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. Financial Statements.................................................................................. 2
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................................... 19
Signature....................................................................................................... 19
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Index to condensed consolidated financial statements filed as part of this Form 10-Q: Page
----
Condensed Consolidated Balance Sheets as of December 31, 2001 and September 30, 2001....................... 3
Condensed Consolidated Statements of Operations for the three months ended December 31, 2001 and 2000...... 4
Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2001 and 2000...... 5
Notes to Condensed Consolidated Financial Statements....................................................... 6
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands, except share amounts)
December 31, September 30,
2001 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 36,753 $ 32,252
Marketable securities 2,100 2,650
Billed receivables, net of allowances of $9,100 and $8,700, respectively 50,973 50,277
Accrued receivables 44,970 50,932
Prepaid income taxes 2,185 1,911
Deferred income taxes 9,399 8,700
Other 9,456 10,990
-------------- --------------
Total current assets 155,836 157,712
Property and equipment, net 15,089 14,580
Software, net 24,527 27,954
Goodwill, net 49,944 82,327
Long-term accrued receivables 19,895 24,916
Investments and notes receivable 1,259 1,309
Deferred income taxes 20,632 13,627
Other 4,549 5,028
-------------- --------------
Total assets $ 291,731 $ 327,453
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,655 $ 12,559
Accounts payable 9,919 13,542
Accrued employee compensation 7,792 9,030
Accrued liabilities 23,795 23,369
Deferred revenue 40,154 35,857
-------------- --------------
Total current liabilities 87,315 94,357
Long-term debt 1,409 761
Long-term deferred revenue 9,666 12,610
Other 1,016 1,057
-------------- --------------
Total liabilities 99,406 108,785
-------------- --------------
Stockholders' equity:
Class A Common Stock, 36,748,667 and 36,687,658 shares issued
and outstanding, respectively 184 184
Additional paid-in capital 222,832 222,501
Retained earnings 13,512 42,016
Treasury stock, 1,476,145 shares (35,258) (35,258)
Accumulated other comprehensive income (8,945) (10,775)
-------------- --------------
Total stockholders' equity 192,325 218,668
-------------- --------------
Total liabilities and stockholders' equity $ 291,731 $ 327,453
============== ==============
See notes to condensed consolidated financial statements.
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
Three Months Ended December 31,
---------------------------------------
2001 2000
-------------- --------------
Revenues:
Software license fees $ 34,321 $ 42,467
Maintenance fees 19,478 15,965
Services 11,511 16,204
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Total revenues 65,310 74,636
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Expenses:
Cost of software license fees 10,995 11,591
Cost of maintenance and services 15,768 18,711
Research and development 9,049 10,069
Selling and marketing 16,622 19,695
General and administrative 13,637 16,127
Amortization of goodwill - 2,367
-------------- --------------
Total expenses 66,071 78,560
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Operating loss (761) (3,924)
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Other income (expense):
Interest income, net 920 205
Other (4,006) (14,038)
-------------- --------------
Total other income (expense) (3,086) (13,833)
-------------- --------------
Loss before income taxes (3,847) (17,757)
Income tax benefit 1,047 3,405
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Loss from continuing operations before cumulative
effect of accounting change (2,800) (14,352)
Cumulative effect of accounting change (25,704) -
-------------- --------------
Net loss $ (28,504) $ (14,352)
============== ==============
Earnings per share information:
Weighted average shares outstanding 35,255 31,654
============== ==============
Basic and diluted earnings per share:
Continuing operations $ (0.08) $ (0.45)
Cumulative effect of accounting change (0.73) -
-------------- --------------
Net loss $ (0.81) $ (0.45)
============== ==============
See notes to condensed consolidated financial statements.
TRANSACTION SYSTEMS ARCHITECTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Three Months Ended December 31,
---------------------------------------
2001 2000
-------------- --------------
Cash flows from operating activities:
Net loss $ (28,504) $ (14,352)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 1,775 2,088
Amortization 4,799 5,430
Non-cash and other charges 2,900 14,311
Goodwill impairment 31,885 -
Changes in operating assets and liabilities:
Billed and accrued receivables, net 10,287 (12,316)
Other current and noncurrent assets (6,379) (3,250)
Accounts payable (3,623) (4,717)
Deferred revenue 1,353 1,790
Other current and noncurrent liabilities (343) 2,041
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Net cash provided by (used in) operating activities 14,150 (8,975)
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Cash flows from investing activities:
Purchases of property and equipment (2,333) (853)
Additions to software (911) (2,372)
Additions to investments and notes receivable (100) (1,820)
-------------- --------------
Net cash used in investing activities (3,344) (5,045)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of Class A Common Stock 301 435
Proceeds from exercise of stock options 20 94
Line of credit borrowings (payments) (7,000) 10,755
Borrowings (payments) of long-term debt 744 (171)
-------------- --------------
Net cash provided by (used in) financing activities (5,935) 11,113
-------------- --------------
Effect of exchange rate fluctuations on cash (370) 88
-------------- --------------
Net increase (decrease) in cash and cash equivalents 4,501 (2,819)
Cash and cash equivalents, beginning of period 32,252 23,400
-------------- --------------
Cash and cash equivalents, end of period $ 36,753 $ 20,581
============== ==============
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. (the "Company" or "TSA"), 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
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 preparation of the consolidated
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The condensed consolidated financial statements at December 31, 2001, and
for the three months ended December 31, 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, 2001. The results of operations for the three months ended
December 31, 2001 are not necessarily indicative of the results that may be
achieved for the entire fiscal year ending September 30, 2002.
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 professional 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 professional 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 fee 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 a 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 BASE24 and ICE 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 fee revenues 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." For all other products, it has been
concluded that (1) the Company does not have a standard business practice of
using extended payment terms, and/or (2) the Company does not have a long-range
history of successful collections for those products.
The present value of Recognized-Up-Front MLFs, net of third-party
royalties, recognized during the three months ended December 31, 2001 and 2000
totaled approximately $4.0 million and $9.1 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 9.00% to
9.25% during the three months ended December 31, 2001, and from 9.50% to 11.00%
during the three months ended December 31, 2000. Recognized-Up-Front MLFs that
have been recognized as software license fee revenues by the Company, but not
yet billed, are reflected in accrued receivables in the accompanying condensed
consolidated balance sheets.
3. Line of Credit Facilities
The Company has a $25.0 million bank line of credit agreement with a large
United States bank secured by certain trade receivables. This credit agreement
provides that the Company must satisfy certain specified earnings, 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 also has a line of credit agreement with a large foreign bank in the
amount of 3.0 million British Sterling, which translates to approximately $4.4
million as of December 31, 2001. The foreign credit agreement requires the
Company to maintain minimum tangible net worth within the Company's wholly-owned
subsidiary, ACI Worldwide (EMEA) Ltd. The U.S. credit facility expires in June
2002 and the foreign credit facility expires in October 2002.
Interest on the U.S. credit facility 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 credit facility accrues at an annual
rate of 1% above the bank's "base rate." During the three months ended December
31, 2001 and 2000, the Company recorded interest expense of $128,000 and
$481,000, respectively, related to its line of credit facilities. The carrying
amounts of the Company's credit facilities approximate fair value due to their
variable interest rates. Current U.S. line of credit borrowings outstanding
totaled $5.0 million as of December 31, 2001, with an interest rate on these
borrowings of 4.50%. The remaining $24.4 million is available to the Company for
future borrowings. The Company is in compliance with all debt covenants as of
December 31, 2001.
4. Non-Cash and Other Charges
The Company continually evaluates its investment holdings and long-lived
assets for evidence of impairment. During the three months ended December 31,
2001 and 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 charges to earnings for the declines in market value were required.
Therefore, the Company recorded non-cash charges of $2.9 million and $12.4
million, respectively, during the three months ended December 31, 2001 and 2000.
In addition, the Company expensed costs of $1.9 million associated with the
cancelled initial public offering of its wholly-owned subsidiary, Insession
Technologies, Inc. in the three months ended December 31, 2000.
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
to the minority shareholder. These actions resulted in a charge of $22.0 million
during the third quarter of fiscal 2001.
Charges associated with these actions related to asset impairments, lease
obligations, termination benefits and other restructuring charges. Asset
impairments related 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 related to vacated corporate
office facilities. Amounts expensed represent estimates of undiscounted future
cash outflows, offset by anticipated third-party purchases or sub-leases.
Termination benefits were 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 included settlement
costs and allowance provisions for customers under related contractual
obligations.
At September 30, 2001, the remaining accrued liability associated with
the restructuring and other charges described above was $4.0 million and
consisted of $1.4 million in lease obligations, $1.5 million in termination
benefits and $1.1 million in other restructuring charges. During the first
quarter of fiscal 2002, the Company reduced the liability related to these
items by approximately $100,000. The Company expects approximately $3.1
million of the remaining $3.9 million liability to be paid during the
remainder of fiscal 2002. The remaining portion, consisting primarily of lease
obligations, will be paid during fiscal 2003.
5. Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board (the "FASB")
released Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill
and Other Intangible Assets," which established new accounting and reporting
requirements for goodwill and other intangible assets (with indefinite lives)
acquired in business combinations. Upon adoption of SFAS No. 142, goodwill and
other intangible assets with indefinite lives will continue to be recognized as
assets, but will not be amortized as previously required by Accounting
Principles Board Opinion No. 17, "Intangible Assets."
SFAS No. 142 requires that goodwill be tested for impairment at the
reporting unit level at the time of adoption and at least annually thereafter,
utilizing a two-step methodology. The initial step requires the Company to
determine the fair value of each reporting unit and compare it to the carrying
value, including goodwill, of such unit. If the fair value exceeds the carrying
value, no impairment loss would be recognized. However, if the carrying value of
the reporting unit exceeds its fair value, the goodwill of this unit may be
impaired. The amount of impairment, if any, would then be measured in the second
step.
Effective October 1, 2001, the Company adopted SFAS No. 142 and hired an
independent consultant to perform valuations of the Company's reporting units
that contain goodwill. Completion of the initial step of testing indicated that
the carrying value of one reporting unit exceeded its estimated fair value. Fair
value was determined using a discounted cash flow methodology. Thereafter, given
the indication of a potential impairment, the independent consultant completed
step two of the test. Based on that analysis, an impairment loss of $25.7
million (net of income tax benefit of $6.2 million), or $0.73 per basic and
diluted share, was recognized as a cumulative effect of accounting change. The
impairment within this reporting unit resulted primarily from overall softness
in discretionary information technology spending and slower than expected
adoption of secure document delivery technology.
Changes in the carrying amount of goodwill attributable to each reportable
operating segment with goodwill balances for the three months ended December 31,
2001 are as follows (in thousands):
Insession MessagingDirect
ACI Worldwide Technologies Ltd.
------------- ------------ ---------------
Balance, September 30, 2001.......................................$ 14,609 $ 35,353 $ 32,365
Foreign currency translation adjustment........................... (18) - (480)
Impairment adjustment............................................. - - (31,885)
------------ ------------ ------------
Balance, December 31, 2001........................................$ 15,964 $ 33,980 $ -
============ ============ ============
In connection with adopting SFAS No. 142, the Company reassessed the useful
lives of intangible assets subject to amortization, consisting only of
internally-developed software and purchased software, and determined that they
continue to be appropriate. Amortization of software is computed using the
straight-line method over an estimated useful life of three years. The gross
carrying amount and accumulated amortization of software at each balance sheet
date are as follows (in thousands):
Dec. 31, Sept. 30,
2001 2001
------------ ------------
Internally-developed software................................$ 25,304 $ 25,008
Purchased software........................................... 54,012 53,720
------------ ------------
79,316 78,728
Less: accumulated amortization............................... (54,789) (50,774)
------------ ------------
Software, net................................................$ 24,527 $ 27,954
============ ============
Software amortization expense recorded in the first quarter of fiscal 2002
was $4,224,000. Estimated amortization expense for fiscal 2002 and each of the
five succeeding fiscal years is as follows (in thousands):
2002........................................... $13,116
2003........................................... 9,656
2004........................................... 4,425
2005........................................... 1,413
2006........................................... 0
2007........................................... 0
Actual results of operations for the three months ended December 31, 2001,
and results of operations for the three months ended December 31, 2000, shown as
if the Company had applied the nonamortization provisions of SFAS No. 142 during
that period, are as follows (in thousands, except per share amounts):
Three Months Ended
December 31,
--------------------------
2001 2000
------------ ------------
Net loss, as reported............................................$ (28,504) $ (14,352)
Add back: cumulative effect of accounting change................. 25,704 -
------------ ------------
Net loss from continuing operations.............................. (2,800) (14,352)
Add back: goodwill amortization.................................. - 2,367
------------ ------------
Adjusted net loss................................................$ (2,800) $ (11,985)
============ ============
Basic and diluted earnings per share:
Net loss, as reported......................................... $ (0.81) $ (0.45)
Cumulative effect of accounting change........................ 0.73 -
------------ ------------
Net loss from continuing operations........................... (0.08) (0.45)
Goodwill amortization......................................... - 0.07
------------ ------------
Adjusted net loss............................................. $ (0.08) $ (0.38)
============ ============
6. Common Stock and Earnings Per Share
Exchangeable shares and options received by shareholders of MessagingDirect
Ltd. ("MDL") that have not yet been converted into TSA Class A Common Stock are
included in Class A Common Stock for presentation purposes on the September 30,
2001 and December 31, 2001 condensed consolidated balance sheets, and are
included in common shares outstanding for earnings per share ("EPS")
computations for the three months ended December 31, 2001. Exchangeable shares
and MDL options included in Class A Common Stock totaled 636,243 shares and
18,992 options as of December 31, 2001, and 650,146 shares and 20,040 options as
of September 30, 2001.
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 months ended
December 31, 2001 and 2000, basic and diluted EPS are the same, as any
outstanding dilutive securities were antidilutive due to the net loss in both
periods.
7. Comprehensive Loss
The Company's components of other comprehensive loss were as follows (in
thousands):
Three Months Ended
December 31,
--------------------------
2001 2000
------------ ------------
Net loss........................................................................$ (28,504) $ (14,352)
Other comprehensive income (loss):
Foreign currency translation adjustments..................................... (520) 539
Change in unrealized loss on investments..................................... 2,350 1,803
------------ ------------
Comprehensive loss..............................................................$ (26,674) $ (12,010)
============ ============
The Company's components of accumulated other comprehensive loss at each
balance sheet date were as follows (in thousands):
Foreign Unrealized Accumulated
Currency Investment Other
Translation Holding Comprehensive
Adjustments Loss Income
------------ ------------ ------------
Balance, September 30, 2001.......................................$ (8,425) $ (2,350) $ (10,775)
Fiscal 2002 year-to-date activity................................. (520) (550) (1,070)
Reclassification adjustment for loss included in net loss......... - 2,900 2,900
------------ ------------ ------------
Balance, December 31, 2001........................................$ (8,945) $ - $ (8,945)
============ ============ ============
8. Segment Information
The Company's products and services are currently organized within three
business units: (1) ACI Worldwide, (2) Insession Technologies and (3) IntraNet,
Inc. Another business unit, Health Payment Systems, was disbanded in fiscal
2001. ACI Worldwide 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. MDL activities are included in the ACI Worldwide
business unit. Insession Technologies products facilitate communication, data
movement, monitoring of systems and business process automation across computing
systems, involving mainframes, distributed computing networks and the Internet.
IntraNet, Inc. products offer high-value payments processing, bulk/recurring
payments processing, wire room processing, global messaging, integration
payments management and continuous link settlement processing.
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 (loss) by business
unit. The Company does not track assets by business unit. No single customer
accounted for more than 10% of the Company's consolidated revenue during the
three months ended December 31, 2001 and 2000. The following are revenues and
operating income (loss) for these business units for the periods indicated (in
thousands):
Three Months Ended
December 31,
--------------------------
2001 2000
------------ ------------
Revenues (1):
ACI Worldwide.............................................$ 45,906 $ 58,416
Insession Technologies.................................... 9,315 9,284
IntraNet, Inc............................................. 10,089 6,608
Health Payment Systems (HHPC only)........................ - 328
------------ ------------
$ 65,310 $ 74,636
============ ============
Operating income (loss) (1):
ACI Worldwide.............................................$ (3,925) $ 1,122
Insession Technologies.................................... 1,533 (757)
IntraNet, Inc............................................. 1,631 (2,897)
Health Payment Systems (HHPC only)........................ - (1,392)
------------ ------------
$ (761) $ (3,924)
============ ============
------------------------------------
(1) In the third quarter of fiscal 2001, the Company transferred its 70
percent ownership in Hospital Health Plan Corporation ("HHPC"), which
comprised the majority of its Health Payment Systems business unit, to
the minority shareholder. The remaining portion of the Health Payment
Systems business unit, consisting of a health and drug claims
adjudication facilities management services organization, was
integrated into the ACI Worldwide business unit at the beginning of the
fourth quarter of fiscal 2001. Prior period segment information has
been restated to reflect this change.
Most of 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 for the
periods indicated and long-lived assets at each balance sheet date for these
geographic regions (in thousands):
Three Months Ended
December 31,
--------------------------
2001 2000
------------ ------------
Revenues:
United States..............................................$ 28,858 $ 32,005
Other Americas............................................. 9,361 8,986
------------ ------------
Total Americas.......................................... 38,219 40,991
EMEA....................................................... 19,780 26,990
Asia/Pacific............................................... 7,311 6,655
------------ ------------
$ 65,310 $ 74,636
============ ============
Dec. 31, Sept. 30,
2001 2001
------------ ------------
Long-lived assets:
United States..............................................$ 76,816 $ 78,809
Other Americas............................................. 6,118 22,491
------------ ------------
Total Americas.......................................... 82,934 101,300
EMEA....................................................... 11,626 28,960
Asia/Pacific............................................... 808 938
------------ ------------
$ 95,368 $ 131,198
============ ============
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
Transaction Systems Architects, Inc. ("TSA" or 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, 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.
Business Segments
The Company's products and services are currently organized within three
business units: (1) ACI Worldwide, (2) Insession Technologies and (3) IntraNet,
Inc. Most of the Company's products and services are marketed and supported
through distribution networks covering three geographic regions: the Americas,
Europe/Middle East/Africa ("EMEA") and Asia/Pacific. Each distribution network
has its own sales force and supplements this with reseller and/or distributor
networks.
The following are revenues and operating income (loss) for these business
units for the three months ended December 31, 2001 and 2000 (in thousands):
Three Months Ended
December 31,
--------------------------
2001 2000
------------ ------------
Revenues (1):
ACI Worldwide.............................................$ 45,906 $ 58,416
Insession Technologies.................................... 9,315 9,284
IntraNet, Inc............................................. 10,089 6,608
Health Payment Systems (HHPC only)........................ - 328
------------ ------------
$ 65,310 $ 74,636
============ ============
Operating income (loss) (1):
ACI Worldwide.............................................$ (3,925) $ 1,122
Insession Technologies.................................... 1,533 (757)
IntraNet, Inc............................................. 1,631 (2,897)
Health Payment Systems (HHPC only)........................ - (1,392)
------------ ------------
$ (761) $ (3,924)
============ ============
------------------------------------
(1) In the third quarter of fiscal 2001, the Company transferred its 70
percent ownership in Hospital Health Plan Corporation ("HHPC"), which
comprised the majority of its Health Payment Systems business unit, to
the minority shareholder. The remaining portion of the Health Payment
Systems business unit, consisting of a health and drug claims
adjudication facilities management services organization, was
integrated into the ACI Worldwide business unit at the beginning of the
fourth quarter of fiscal 2001. Prior period segment information has
been restated to reflect this change.
Backlog
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.
The following table sets forth the Company's recurring and non-recurring
revenue backlog, by business unit, as of December 31, 2001 and 2000 (in
thousands):
Non-Recurring Revenue
Recurring Revenue Backlog Backlog
----------------------------- -----------------------------
December 31, December 31,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
ACI Worldwide...................................$ 98,600 $ 100,000 $ 24,700 $ 36,000
Insession Technologies.......................... 15,200 18,000 4,900 3,200
IntraNet, Inc................................... 16,400 16,400 15,300 9,100
Health Payment Systems (HHPC only).............. - 1,400 - -
------------ ------------ ------------ ------------
$ 130,200 $ 135,800 $ 44,900 $ 48,300
============ ============ ============ ============
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 December 31,
---------------------------------------------
2001 2000
---------------------- ---------------------
% of % of
Amount Revenue Amount Revenue
---------- --------- ---------- ---------
Revenues:
ILFs and PUFs..................................... $ 18,069 27.7 % $ 20,099 26.9 %
MLFs (other than Recognized-Up-Front MLFs)........ 12,207 18.7 13,244 17.8
Recognized-Up-Front MLFs.......................... 4,045 6.2 9,124 12.2
---------- --------- ---------- ---------
Total software license fees....................... 34,321 52.6 42,467 56.9
Maintenance fees.................................. 19,478 29.8 15,965 21.4
Services.......................................... 11,511 17.6 16,204 21.7
---------- --------- ---------- ---------
Total revenues................................. 65,310 100.0 74,636 100.0
---------- --------- ---------- ---------
Expenses:
Cost of software license fees..................... 10,995 16.8 11,591 15.5
Cost of maintenance and services.................. 15,768 24.1 18,711 25.1
Research and development.......................... 9,049 13.9 10,069 13.5
Selling and marketing............................. 16,622 25.5 19,695 26.4
General and administrative........................ 13,637 20.9 16,127 21.6
Amortization of goodwill.......................... - 0.0 2,367 3.2
---------- --------- ---------- ---------
Total expenses................................. 66,071 101.2 78,560 105.3
---------- --------- ---------- ---------
Operating loss....................................... (761) (1.2) (3,924) (5.3)
---------- --------- ---------- ---------
Other income (expense):
Interest income, net.............................. 920 1.4 205 0.3
Other............................................. (4,006) (6.1) (14,038) (18.8)
---------- --------- ---------- ---------
Total other.................................... (3,086) (4.7) (13,833) (18.5)
---------- --------- ---------- ---------
Loss before income taxes............................. (3,847) (5.9) (17,757) (23.8)
Income tax benefit................................... 1,047 1.6 3,405 4.6
---------- --------- ---------- ---------
Loss from continuing operations before
cumulative effect of accounting change............ (2,800) (4.3) (14,352) (19.2)
Cumulative effect of accounting change............... (25,704) (39.3) - 0.0
---------- --------- ---------- ---------
Net loss............................................. $ (28,504) (43.6)% $ (14,352) (19.2)%
========== ========= ========== =========
Revenues. Total revenues for the first quarter of fiscal 2002 decreased
$9.3 million, or 12.5%, from the comparable period in fiscal 2001. The decrease
is the result of a $8.1 million, or 19.2%, decrease in software license fees
revenue and a decrease of $4.7 million, or 29.0%, decrease in services revenue
offset by a $3.5 million, or 22.0%, increase in maintenance fees revenue.
The decrease in software license fee revenues for the first quarter fiscal
2002 is primarily the result of a decreased demand for the Company's ACI
Worldwide products, offset by a slight increase in demand for Insession
Technologies' and IntraNet, Inc.'s products. The decrease in demand for ACI
Worldwide's products is due to fewer transaction volume upgrades received during
the first quarter of fiscal 2002 as compared to the first quarter of fiscal
2001. This decrease is due to current global economic conditions that have
caused many of the Company's customers to forecast a slowing of electronic
transaction volume growth. As a result, these customers have reduced their
information technology budgets and spending commitments. For ACI Worldwide, the
first quarter of fiscal 2001 included a $6.2 million transaction volume upgrade
that resulted from a merger of two banks in the EMEA region. Revenue from the
first quarter of fiscal 2002 does not include any transactions of this size.
In fiscal 2001, the Company changed its sales compensation plans for its ACI
Worldwide and Insession Technologies sales forces to emphasize PUF contracts for
both customer renewals and new customers rather than emphasizing ILF/MLF
contracts. Over time, the impact of this change is to increase the amount of PUF
revenue and reduce the amount of MLF revenue.
The increase in maintenance fee revenues is due to the growth in the
installed base of the Company's software products in all three of its business
units.
The decrease in services revenue for the first quarter of fiscal 2002
resulted from lower demand for technical and project management services, which
was primarily caused by decreased sales of the Company's ACI Worldwide products.
Offsetting this decrease was an increase is services revenues in the Company's
IntraNet, Inc. business unit related to services performed while migrating
customers to its new RS6000-based wire transfer product.
Expenses. Total operating expenses for the first quarter of fiscal 2002
decreased $10.1 million, or 13.3%, as compared to the first quarter of fiscal
2001 (excluding $2.4 million of goodwill amortization charges in the first
quarter of fiscal 2001). During the third quarter of fiscal 2001, the Company
implemented a restructuring plan whereby it closed or significantly reduced the
size of certain product development organizations and geographic sales offices,
made executive management changes and transferred ownership in HHPC to the
minority shareholder. These actions have caused the Company's overall operating
expenses to decline.
Cost of software license fees for the first quarter of fiscal 2002
decreased $0.6 million, or 5.1%, as compared to the first quarter of fiscal
2001. This decrease was due primarily to a decrease in royalties owed to the
owners of third-party products resulting from decreases in third-party product
sales volumes and a decrease in the royalty rate for one third-party product.
Cost of maintenance and services for the first quarter of fiscal 2002
decreased $2.9 million, or 15.7%, as compared to the first quarter of fiscal
2001. This decrease was the result of fewer staff needed to support the
Company's services-related business.
Research and development ("R&D") costs for the first quarter of fiscal 2002
decreased $1.0 million, or 10.1%, as compared to the first quarter of fiscal
2001. The Company terminated further development of certain products as part of
the fiscal 2001 corporate restructuring, causing this decrease. R&D costs as a
percentage of total revenues for the first quarter of fiscal 2002 were 13.9% as
compared to 13.5% for the first quarter of fiscal 2001. The Company capitalizes
costs related to certain internally-developed software when the resulting
products reach technological feasibility. Software development costs capitalized
in the first three months of fiscal 2002 and 2001 totaled approximately $0.3
million and $1.5 million, respectively.
Selling and marketing costs for the first quarter of fiscal 2002 decreased
$3.1 million, or 15.6%, as compared to the first quarter of fiscal 2001. Selling
and marketing costs as a percentage of total revenues for the first quarter of
fiscal 2002 were 25.5% as compared to 26.4% for the first quarter of fiscal
2001. The decrease for the first quarter of fiscal 2002 is due to a decrease in
variable sales compensation expense resulting from less than expected sales and
profitability, as well as reduced costs resulting from the fiscal 2001 corporate
restructuring.
General and administrative costs for the first quarter of fiscal 2002
decreased $2.5 million, or 15.4%, as compared to the first quarter of fiscal
2001. The decrease for the first quarter of fiscal 2002 as compared to the same
period in fiscal 2001 is attributable to reductions in personnel and occupancy
costs resulting from the fiscal 2001 corporate restructuring, as well as a
decrease in bad debts expense.
Other Income and Expenses. The increase in net interest income in fiscal
2002 is primarily due to a decrease in borrowings on the Company's line of
credit facilities, resulting in decreased interest expense, as well as an
increase in interest income which resulted from an increase in the Company's
cash balance.
The Company continually evaluates its investment holdings for evidence of
impairment. 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 charges to
earnings for the declines in market value were required. Therefore, the Company
recorded non-cash charges of $2.9 million and $12.4 million during the three
months ended December 31, 2001 and 2000, respectively. In addition, the Company
expensed costs of $1.9 million associated with the cancelled initial public
offering of its wholly-owned subsidiary, Insession Technologies, Inc. in the
three months ended December 31, 2000. Also included in other expenses are
foreign currency translation gains and losses recognized by the Company.
Income Taxes. The effective tax rate for the first quarter of fiscal 2002
was approximately 20% as compared to 19% for the first quarter of fiscal 2001.
The Company adopted SFAS No. 142 (see Footnote 5 for further details) as of
October 1, 2001. As a result of adopting SFAS No. 142, the Company recognized an
impairment loss on the carrying value of recorded goodwill and realized an
income tax benefit resulting from this impairment loss. The effective tax rate
for the first quarter of fiscal 2002 is lower than would be expected as the
Company recorded a valuation reserve against a portion of this tax benefit.
As of December 31, 2001, the Company has deferred tax assets of $58.4
million and deferred tax liabilities of $2.0 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
resulted in a valuation allowance of $26.4 million being recorded as of December
31, 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 has changed and, therefore, the
valuation reserve may be adjusted accordingly.
Liquidity and Capital Resources
As of December 31, 2001, the Company's principal sources of liquidity
consisted of $36.8 million in cash and cash equivalents, and available bank
lines of credit. The Company has a $25.0 million bank line of credit agreement
with a large United States bank secured by certain trade receivables of TSA.
This credit agreement provides that the Company must satisfy certain specified
earnings, 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 also has a line of credit agreement with
a large foreign bank in the amount of 3.0 million British Sterling, which
translates to approximately $4.4 million as of December 31, 2001. The foreign
credit agreement requires the Company to maintain minimum tangible net worth
within the Company's wholly-owned subsidiary, ACI Worldwide (EMEA) Ltd. Line of
credit borrowings outstanding totaled $5.0 million as of December 31, 2001. The
remaining $24.4 million is available to the Company for future borrowings. The
Company is in compliance with all debt covenants as of December 31, 2001.
The Company's net cash flows provided by operating activities for the first
quarter of fiscal 2002 amounted to $14.2 million. Net cash used in operating
activities during the first quarter of fiscal 2001 was $9.0 million. In an
effort to enhance upfront software license fee payments, the Company adopted an
initiative in fiscal 2001 to pursue PUF payment options for its software
licensing rather than ILF/MLF payment options. Under the PUF payment option, the
licensee pays the license fee at the beginning of the software term whereas
under the ILF/MLF payment option, the licensee pays a portion of the software
license fees at the beginning of the software term and the remaining portion
over the software license term. The improvement in operating cash flows in the
first quarter of fiscal 2002 as compared to the first quarter of fiscal 2001 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.
An important contributor to the cash management program is the Company's
factoring of accrued receivables, whereby an interest in its accrued receivables
is transferred on a non-recourse basis to third-party financial institutions in
exchange for cash. During the first quarter of fiscal 2002 and 2001, the Company
generated operating cash flows from the factoring of accrued receivables of $5.8
million and $3.1 million, respectively.
The Company's net cash flows used in investing activities totaled $3.4
million and $5.0 million during the first quarter of fiscal 2002 and 2001,
respectively. The decrease in cash used in investing activities was due to
decreased additions of investments, notes receivable and software, offset by
increased purchases of property and equipment.
The Company's net cash flows used in financing activities was $5.9 million
for the first quarter of fiscal 2002. Net cash provided by financing activities
was $11.1 million in the first quarter of fiscal 2001. During the first quarter
of fiscal 2002, the Company had net payments on its bank line of credit
facilities of $7.0 million as compared to net borrowings of $10.8 million during
the comparable period of fiscal 2001.
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 credit facilities, will satisfy the
Company's projected working capital and other cash requirements for the
foreseeable future.
Forward-Looking Statements
This report contains forward-looking statements based on current
expectations that involve a number of risks and uncertainties. Generally,
forward-looking statements include words or phrases such as "management
anticipates," "the Company believe," "the Company anticipates," "the Company
expects," "the Company plans," "the Company will," and words and phrases of
similar impact, and include but are not limited to statements regarding
operations, business strategy and business environment. The forward-looking
statements are made pursuant to safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially. Factors
that could cause actual results to differ include, but are not limited to, the
following:
o The Company will continue to derive a majority of its total revenue
from international operations and is subject to risks of conducting
international operations including: difficulties in staffing and
management, reliance on independent distributors, longer payment
cycles, volatilities of 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 substantial majority of its total
revenue 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 will continue to derive a substantial portion of its
revenues from licensing of software products that operate on Compaq
computers. 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 the Company's financial condition and results of
operations. Compaq has announced that it is planning to consolidate
its high-end performance enterprise servers on the Intel Corp.
Itanium microprocessor by 2004. Also, Compaq is contemplating a
merger with Hewlett-Packard Co. The Company has not determined
whether the consolidation of the high-end servers, if it occurs as
announced, or the merger, if consummated, would materially affect the
Company's business, financial position or results of operations.
o The Company's business is concentrated in the banking industry, making
it susceptible to a downturn in that industry. Further, banks are
continuing to consolidate, decreasing the overall number of potential
buyers of TSA's products and services.
o New accounting standards, or additional interpretations or guidance
regarding existing standards, could be issued in the future, which
could lead to unanticipated changes in the Company's current financial
accounting policies. These changes could affect the timing of revenue
or expense recognition and cause fluctuations in operating results.
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 Company has expanded and may seek to continue to expand its
operations through the acquisition of additional businesses.
Acquisitions involve many risks that could have a material adverse
effect on the Company's business, financial condition and results of
operations. Management's negotiations of potential acquisitions and
the integration of acquired businesses or technologies could divert
their time and resources. Further, the Company may not be able to
properly integrate acquired businesses or technology with its
existing operations, train and motivate personnel from the acquired
business, or combine potentially different corporate cultures.
For a detailed discussion of these and other risk factors, interested
parties should review the Company's filings with the Securities and Exchange
Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to the Company's market risk for the
three months ended December 31, 2001. See the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2001 for additional discussions
regarding quantitative and qualitative disclosures about market risk.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10.37 Employment Agreement between Transaction Systems Architects, Inc. and
Gregory D. Derkacht
(b) Reports on Form 8-K:
None.
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: February 12, 2002 By: /s/ EDWARD C. FUXA
---------------------------------------------
Edward C. Fuxa
Chief Accounting Officer, Vice President
and Controller
EXHIBIT 10.37
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of this
3rd day of December, 2001, by and between Transaction Systems Architects, Inc.,
a Delaware corporation, ("Employer") and Gregory D. Derkacht ("Employee").
WITNESSETH:
WHEREAS, Employee and Employer desire to enter into this Agreement
pertaining to the terms of the employment of Employee by Employer;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties agree as follows:
1. Employment. Employer hereby agrees to employ Employee as President
and Chief Executive Officer ("CEO"), and Employee hereby accepts such employment
by Employer upon the terms and conditions and with such duties as determined by
the Board of Directors of Employer from time to time and which shall be related
or appropriate to the position.
2. Term. The term of employment under this Agreement shall commence on
January 2, 2002, and shall continue for a period of three years thereafter,
unless sooner terminated as hereinafter set forth in Section 6, subject to
certain provisions surviving termination as set forth below. Thereafter this
Agreement and the term of employment pursuant hereto will be automatically
extended for successive one-year terms, unless either party elects to terminate
this Agreement by giving the other party written notice thereof not less than 90
days prior to the end of the then-current term.
3. Duties. Employee shall, during the term hereof:
(a) Execute Duties. Execute the duties attendant to
his position as determined and directed by the Board of
Directors from time to time;
(b) Board Service. Serve as a member of the Employer's Board of
Directors.
(c) Full Efforts and Time. Consistent with the foregoing, Employee
shall devote full business time, energy, and skill to the
businesses of Employer, and to the promotion of Employer's
best interests; provided, however, that this Agreement shall
not preclude Employee from participating in the affairs of any
governmental, educational or other charitable institution,
from engaging in professional speaking and writing activities,
and from serving as a member of the board of directors of
other corporations or entities (subject to the approval by the
Chairman of the Board of Directors of Employer) so long as
such activities do not unreasonably interfere with the
businesses of Employer or conflict with Employee's obligations
under this Agreement.
4. Compensation.
(a) Base. Subject to Section 3(d) above, Employer shall pay
Employee for all services to be performed by Employee during
the term of this Agreement a base salary (the "Base Salary")
at the minimum rate of $300,000 per year, payable in
substantially equal semi-monthly payments in accordance with
Employer's customary practice for other employees, as such
practice may be determined from time to time. The Board of
Directors may increase such Base Salary but not decrease such
Base Salary unless, as a result of a reasonable business
judgment by the Board of Directors of Employer, there is a
prorata across-the-board salary reduction for all executive
level management employees of Employer.
(b) Management Incentive Compensation. In addition to the Base
Salary, Employee shall be entitled to participate in the
Employer's Management Incentive Compensation Program
("MICP"). Employee's "on target" incentive compensation will
be $150,000 per fiscal year prorated quarterly in the
amount of $37,500. The amount of incentive compensation
payable to Employee with respect to a fiscal quarter will
depend on the achievement of certain financial results
achieved by Employer in such fiscal quarter. The Board of
Directors may increase the incentive compensation paid or
payable to Employee pursuant to the MICP, but not decrease
such incentive compensation unless, as a result of a
reasonable business judgment by the Board of Directors of
Employer, there is a prorata across-the-board decrease for
all executive level management employees of Employer. The
terms and conditions of the MICP applicable to Employee
are attached hereto as Exhibit A.
(c) Business Expenses. In addition to the Base Salary set forth
above, Employer agrees that during the term of this Agreement
Employee shall be entitled to reimbursement by Employer for
all reasonable and documented business expenses incurred by
him on Employer's behalf in the course of his employment
hereunder in accordance with Employer's policy concerning the
same.
(d) Board Service. No separate or additional compensation will
be paid to Employee with respect to service on the Board of
Directors.
(e) Stock Options. Employee will receive three stock option grants
from the Employer's existing stock option plans. The first
grant will be in the amount of 100,000 shares and will be made
January 2, 2002. Subject to shareholder approval, the second
and third grants will be in the amount of 200,000 shares each
and will be made February 19, 2002. The terms and conditions
for each of the grants are set forth in separate stock option
agreements. The stock option agreements for each of the grants
are attached hereto as Exhibits B, C and D, respectively.
5. Additional Benefits. Employee and his dependents shall be entitled
to participate in and receive health insurance and other benefits ("Benefit
Plans") under the Employer's Benefit Plans, whether qualified or non-qualified,
subject to and on a basis consistent with the terms, conditions, and overall
administration of such Benefit Plans as provided to similarly situated employees
of Employer, as changed from time to time. Employee shall be entitled to paid
vacation and holidays in accordance with Employer's policies in effect from
time-to-time for its employees.
6. Termination.
(a) Types of Termination.
(i) For Cause by Employer.
The Board of Directors of Employer, upon
written notice to Employee setting forth the
reason for such action, may terminate the
employment of Employee with Employer at any
time for "Cause." For purposes of the
preceding sentence, "Cause" shall be deemed
to exist if the Board of Directors of
Employer, in good faith, determines that the
Employee has engaged in gross and flagrant
non-performance, misconduct or negligence of
his duties or gross and flagrant dishonesty
relating to the business of Employer.
(ii) By Employee Voluntarily. Employee may
terminate his employment voluntarily
hereunder thirty (30) days after providing
Employer written notice setting forth his
intention to do so.
(iii) Death or Disability
of Employee. If Employee's employment is
terminated during the term of this Agreement
due to the death or disability of Employee,
then an amount equal to Employee's Base
Salary (at the rate most recently in effect)
shall be paid through the date of his death
or disability, plus an amount in respect of
any accrued but unused vacation days.
Employee's beneficiaries shall also receive
any insurance benefits under the Benefit
Plans to which Employee or his beneficiaries
are entitled on the date of his death or
disability.
As used in this Agreement, the term
"Disability" shall mean, first, the
definition as set forth in the current
long-term disability policy covering the
Employee, but if no such disability policy
exists, then "Disability" shall mean the
inability of Employee, due to a physical or
mental disability, for a period of sixty
(60) days, whether or not consecutive,
during any one hundred eighty (180) day
period, to perform the services contemplated
under this Agreement .
In the case of the disability or death of
Employee, the Noncompetition and
Confidentiality and other provisions of
Sections 7 and 8 hereof shall remain in
effect.
(iv) Without Cause by Employer. Employer
may terminate the employment of Employee
at any time without cause after providing
Employee with 30 days written notice setting
forth its intention to do so.
(iv) Expiration of Term. The expiration of
this Agreement is by its own term, as set
forth in Section 2.
(b) Compensation on Termination. If Employee is terminated for
cause, death or disability, or voluntarily terminates his employment,
or if this Agreement terminates by its own term, he shall not be
entitled to any compensation following the date of termination as
defined below (the "Termination Date"):
(i) for cause by Employer - immediately upon
notice by Employer;
(ii) for death or disability - upon the date
of such occurrence;
(iii) for voluntary termination - the thirtieth
(30th) day following notice by Employee to
Employer; and
(iv) by its own term - upon the date set forth in
Section 2.
(c) Compensation for Termination Without Cause. In the event
Employee is terminated by Employer without cause, Employer shall pay to
Employee $150,000.
(d) Change in Control Compensation. Employee shall be entitled
to compensation if (i) there is a Change in Control of the Employer
while Employee is still an employee of Employer and (ii) Employee's
employment with Employer is terminated by Employer or by Employee for
Good Reason within two years after the Change in Control as a direct or
indirect result of the Change in Control, but not as a result of (A)
Employee's death or disability, (B) Employee's Retirement, (C)
Employee's termination for Cause by Employer, or (D) Employee's
decision to terminate employment other than for Good Reason ("Change in
Control Compensation"). "Change in Control" is defined in Exhibit E
("Definitions"). The Change in Control Compensation to be paid to
Employee in the event of a Change in Control will be equal to one times
the Base Salary set forth in Section 4 above. The Change in Control
Compensation will be paid within five (5) business days of the Change
in Control.
(e) Other Compensation and Benefits. Other than as provided in
Section 6(a)(iii) hereof, upon termination for any reason, Employee
shall be entitled to receive only that compensation and other benefits
that have vested and that are due and earned as of the Termination
Date, and such payment shall be made to Employee within sixty (60)
days.
(f) Full Satisfaction. The payments to Employee pursuant to
this Agreement shall be in full satisfaction of Employee's
rights to compensation hereunder.
7. Noncompetition, Noninducement, Nonsolicitation.
(a) Employee hereby agrees that commencing on the date of this
Agreement and continuing through 180 days after the termination date
(the "Non-Compete Period"), he shall not singly, jointly, or as a
member, employee, or agent of any partnership or as an officer, agent,
employee, director or stockholder, or investor of any other corporation
or entity, or in any other capacity, which is engaged in a similar
business to that of Employer during the period of non-competition:
(i) solicit, contact and/or service any person,
firm, corporation, partnership, or entity of
any kind whatsoever for purposes which are
competitive to that of Employer, and for
purposes similar to those performed by
Employee for Employer, a client of Employer
for which Employee performed service or had
personal contact with on behalf of Employer
during the last one (1) year of Employee's
employment with Employer; provided, that
Employee shall be able to acquire and hold
up to 1% of the outstanding shares of any
publicly traded stock of any company, and an
unlimited percentage of outstanding shares
in the Employer, its parent, affiliates, or
subsidiaries; and
(ii) directly or indirectly induce or attempt to
induce any person who, during the term of
Employee's employment hereunder, was an
employee, representative or agent of
Employer or any of its affiliates to
terminate his employment with Employer or
any of its affiliates, or to violate the
terms of any agreement between said
employee, representative or agent and
Employer or any of its affiliates.
(b) It is understood and agreed by Employer and Employee that
the time periods of the restrictions set forth in Section 7(a) of this
Agreement are intended by Employer and Employee to be extended by any
time period during which Employee violates the terms and conditions of
Section 7(a). Notwithstanding anything which could be construed to the
contrary, this Section 7(b) is not intended to and shall not be deemed
to permit Employee to violate any term or condition of Section 7(a).
(c) In the event any of the provisions of this Agreement shall
be held to be invalid or unenforceable, the remaining portions thereof
shall nevertheless continue to be valid and enforceable as though the
invalid or unenforceable parts had not been included herein.
(d) Employer and Employee specifically agree that the
provisions of Sections 7, 8, 9, and 10 shall survive the termination of
this Agreement.
(e) Employer and Employee agree that the provisions of this
Section 7 may be waived in whole or in part by mutual agreement in
writing by Employer and Employee.
8. Confidentiality. Without the consent of Employer, Employee will not,
during his Employment or after termination of this Agreement, (a) disclose any
trade secret or proprietary or confidential knowledge or information of Employer
or any affiliate of Employer to any person or entity (other than to Employer or
shareholders, directors, officers or employees of Employer or representatives
thereof), or (b) otherwise make use of any such secret, knowledge or information
for other than Employer's purposes, unless in the case of (a) or (b) above such
secret, knowledge or information is readily ascertainable from publicly
available information. Employee will hold confidential, on behalf of Employer as
the property of Employer, all memoranda, manuals, books, papers, letters,
documents, computer software and other similar property obtained during the
course of performing duties under this Agreement, and will return such property
to Employer at any time upon demand by Employer and, in any event, within three
(3) calendar days after termination of his employment under this Agreement or
after the end of the term of this Agreement.
9. Developments.
(a) As used in this Agreement, the term "Employee
Developments" shall mean all technological, financial, operating and
training ideas, processes, methods and materials, specifically
including, but not limited to, all inventions, discoveries,
improvements, devices, apparatus, designs, practices, processes,
methods, formulas, know-how, products, enhancements and all software,
computer programs (including source code, object code, documentation
and programmer's notes) and other works of authorship, whether or not
patentable or copyrightable, developed, written, conceived or reduced
to practice during Employee's employment by the Company or within a
period of 90 days thereafter (i) which result from any work performed
by Employee for the Employer, or (ii) which relate to the Employer's
business or research or development of the Employer at the time
Employee develops, writes, conceives or reduces to practice any of the
foregoing, alone or with others.
(b) Employee shall promptly disclose all Employee Developments
to the Employer and make available to the Employer any work papers,
drawings, designs, schematics, specifications, descriptions, models,
diskettes, computer tapes, source codes or other tangible incidents of
Employee Developments. Employee agrees that all Employee Developments
shall be considered work made by Employee for the Employer and prepared
within the scope of Employee's employment and that all right, title and
ownership interest in and to the Employee Developments, including,
without limitation, copyright, trade secret, patent or other
intellectual property rights, shall exclusively vest in and be retained
by the Employer, both during and following the term of employment.
Employee agrees to perform upon request of the Employer any acts that
may be necessary or convenient during his term of employment or
thereafter to establish, perfect, evidence, register, transfer, assign
or convey ownership of Employee Developments in or to the Employer, to
the fullest extent possible, including without limitation, assignment
to the Employer of all ownership, copyright, trade secret, patent and
other intellectual property rights without any further consideration.
10. Remedies.
(a) Employer shall be entitled, if it elects, to enjoin any
breach or threatened breach of, or enforce the specific performance of,
the obligations of Employee under Sections 7 and 8, without showing any
actual damage or that monetary damages would be inadequate. Any such
equitable remedy will not be the sole and exclusive remedy for any such
breach, and Employer may pursue other remedies for such a breach.
(b) Any court proceeding to enforce the specific performance
provisions of this Agreement may be commenced in the federal courts
located in the State of Nebraska, or in the absence of federal
jurisdiction, the state courts of Nebraska having jurisdiction.
Employer and Employee submit to the jurisdiction of such courts and
waive any objection which they may have to the pursuit of any such
proceeding in any such court for purposes of specific performance only.
11. Employer Assignment. Employer may assign this Agreement, provided,
however, that in the event of such assignment by the Employer, Employer's
obligations hereunder shall be binding legal obligations and shall inure to the
benefit of any successor.
12. Relocation. Employee agrees to relocate to Omaha, Nebraska, for the
term of this Agreement. Employer will pay for movement of Employee's household
and personal belongings. Employer will pay for real estate commission and other
customary and reasonable closing costs associated with the sale of Employee's
current home in Chicago. Employer will not pay for any fees or costs associated
with the purchase of a home in Omaha. Employer will pay for two house-hunting
trips in Omaha for Employee and spouse. No tax gross-up or equalization
allowances will be provided. Temporary housing in Omaha and related travel to
and from Chicago will be provided and paid for by the Employer while Employees
attempts to sell home in Chicago. Payment by Employer for such expenses will
cease at the earlier of (1) Employee moving into a new residence in Omaha; (2)
closing the sale of Employee's Chicago house; or (3) March 31, 2002.
13. Benefits Unfunded. All rights of Employee and his spouse or other
beneficiary under this Agreement shall at all times be entirely unfunded and no
provision shall at any time be made with respect to segregating any assets of
Employer for payment of any amounts due hereunder. Neither Employee nor his
spouse or other beneficiary shall have any interest in or rights against any
specific assets of Employer.
14. Waiver. No waiver by any party at any time of any breach by any
other party of, or compliance with, any condition or provision of this Agreement
to be performed by any other party shall be deemed a waiver of any other
provisions or conditions at the same time or at any prior or subsequent time.
15. Applicable Law. This Agreement shall be construed and interpreted
pursuant to the laws of the State of Nebraska without giving effect to the
conflict of laws provisions thereof.
16. Entire Agreement. This Agreement contains the entire Agreement
between Employer and Employee and supersedes any and all previous agreements,
written or oral, between the parties relating to the subject matter hereof. No
amendment or modification of the terms of this Agreement shall be binding upon
the parties hereto unless reduced to writing and signed by Employer and
Employee.
17. Counterparts. This Agreement may be executed in counterparts and by
facsimile signatures, each of which shall be deemed an original, and all of
which taken together shall constitute one instrument.
18. Severability. In the event any provision of this Agreement is
held illegal or invalid, the remaining provisions of this Agreement shall not be
affected thereby.
19. Notice. Notices under this Agreement shall be in writing and sent
by registered mail, return receipt requested, to the following addresses or to
such other addresses as the party being notified may have previously furnished
to the others by written notice.
If to Employer or its Board of Directors:
Transaction Systems Architects, Inc.
Attn: Chairman of the Board of Directors
224 South 108th Avenue
Omaha, NE 68154
with a copy to:
Transaction Systems Architects, Inc.
Attn: General Counsel
224 South 108th Avenue
Omaha, Nebraska 68154
If to Employee:
______________________
______________________
______________________
Such notices shall be deemed received three (3) business days after they are so
sent.
IN WITNESS WHEREOF, the parties have executed this Agreement, on the
day and year first above written.
Transaction Systems Architects, Inc.
("Employer")
By: ______________________________
Name: ______________________________
Title: ______________________________
Gregory D. Derkacht
("Employee")
_______________________________________
Attachments:
Exhibit A: Management Incentive Compensation Program
Exhibit B: First Stock Option Grant
Exhibit C: Second Stock Option Grant
Exhibit D: Third Stock Option Grant
Exhibit E: Definitions