UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1995
Commission file number 1-10254
Total System Services, Inc.
(Exact name of registrant as specified in its charter)
Georgia 58-1493818
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Sixth Avenue, Post Office Box 1755, Columbus, Georgia 31902
(Address of principal executive offices) (Zip Code)
(706) 649-2310
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF May 11, 1995
Common Stock, $.10 par value 64,631,294
<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets
(Unaudited)
<CAPTION>
March 31, December 31,
1995 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,793,034 14,684,674
Accounts receivable, net 38,449,245 36,102,888
Prepaid expenses and other current assets 7,481,920 7,850,804
----------- -----------
Total current assets 56,724,199 58,638,366
Property and equipment, less accumulated
depreciation of $53,714,357 and $51,468,537
at March 31, 1995 and December 31, 1994,
respectively 48,004,046 47,895,253
Computer software, less accumulated amortization
of $10,968,487 and $9,393,910 at March 31, 1995
and December 31, 1994, respectively 39,940,896 39,239,821
Other assets 21,415,127 19,268,890
----------- -----------
Total assets $ 166,084,268 165,042,330
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,335,533 5,496,449
Current portion of long-term debt and
obligations under capital leases 220,211 255,631
Dividends payable 1,454,204 1,454,205
Income taxes payable 4,604,379 1,716,798
Accrued profit sharing contribution 1,403,471 5,846,225
Other current liabilities 9,897,273 10,448,063
----------- -----------
Total current liabilities 24,915,071 25,217,371
Long-term debt and obligations under capital
leases, excluding current portion 877,292 906,567
Deferred income taxes 14,557,779 15,914,554
----------- -----------
Total liabilities 40,350,142 42,038,492
----------- -----------
Shareholders' equity:
Common stock - $.10 par value.
Authorized 100,000,000 shares;
issued 64,728,694 in 1995 and 1994;
64,631,294 outstanding in 1995 and 1994 6,472,869 6,472,869
Additional paid-in capital 11,986,379 11,986,379
Treasury stock, at cost (475,789) (475,789)
Restricted stock awards, net of amortization (1,519,861) (1,674,364)
Cumulative currency translation, net (753,530) --
Retained earnings 110,024,058 106,694,743
----------- -----------
Total shareholders' equity 125,734,126 123,003,838
----------- -----------
Total liabilities and
shareholders' equity $ 166,084,268 165,042,330
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Income
(Unaudited)
Three months ended
March 31,
<CAPTION>
1995 1994
<S> <C> <C>
Revenues:
Bankcard data processing services $ 46,466,751 36,022,240
Other services 6,913,658 4,954,556
----------- ----------
Total revenues 53,380,409 40,976,796
----------- ----------
Expenses:
Salaries and other personnel expense 22,375,038 15,723,199
Net occupancy and equipment expense 15,159,512 12,075,532
Other operating expenses 8,082,632 6,117,794
---------- ----------
Total expenses 45,617,182 33,916,525
---------- ----------
Operating income 7,763,227 7,060,271
---------- ----------
Other nonoperating income:
Gain on disposal of equipment, net 16,651 45,650
Interest, net 149,579 18,813
---------- ----------
Total other nonoperating income 166,230 64,463
---------- ----------
Income before income taxes and
equity in loss of foreign joint venture 7,929,457 7,124,734
Income taxes 2,944,349 2,776,214
---------- ----------
Income before equity in loss of foreign
joint venture 4,985,108 4,348,520
Equity in loss of foreign joint venture (201,589) --
---------- ----------
Net income $ 4,783,519 4,348,520
========== ==========
Net income per share $ .074 .067
========== ==========
Weighted average outstanding shares 64,631,294 64,624,272
========== ==========
Cash dividends per common share $ .0225 .0175
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three months ended
March 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,783,519 4,348,520
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in loss of foreign joint venture 201,589 --
Depreciation and amortization 4,679,387 3,799,530
Provision for doubtful accounts (2,264) (384,269)
Deferred income taxes (914,226) 1,434,134
Gain on disposal of equipment, net (16,651) (45,650)
(Increase) decrease in:
Accounts receivable (2,343,167) 3,195,133
Prepaid expenses and other assets (2,482,033) (3,866,459)
Increase (decrease) in:
Accounts payable 1,839,084 1,454,354
Income taxes 2,887,581 994,562
Accrued profit sharing and other liabilities (4,993,544) (3,369,700)
---------- ----------
Net cash provided by operating activities 3,639,275 7,560,155
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (2,444,747) (2,541,146)
Additions to computer software (2,627,493) (4,614,532)
Proceeds from disposal of equipment 21,525 53,090
Cash and cash equivalents acquired in
business acquisition -- 463,347
Investment in joint venture (950,077) --
---------- ----------
Net cash used in investing activities (6,000,792) (6,639,241)
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt (35,000) (306,458)
Payments under capital lease obligations (40,918) (54,071)
Dividends paid on common stock (1,454,205) (1,127,099)
---------- ----------
Net cash used in financing activities (1,530,123) (1,487,628)
---------- ----------
Net decrease in cash and cash equivalents (3,891,640) (566,714)
Cash and cash equivalents at beginning
of period 14,684,674 8,791,406
---------- ----------
Cash and cash equivalents at end of
period $ 10,793,034 8,224,692
========== ==========
Cash paid for interest $ 10,077 42,484
========== ==========
Cash paid for income taxes $ 978,495 415,018
========== ==========
<FN>
Supplemental disclosure of noncash investing and financing activities:
During the first quarter of 1994, 202,246 newly issued shares of common stock,
with a market value of $2,699,984, were issued to Columbus Bank and Trust
Company in exchange for all of the outstanding shares of Columbus Productions,
Inc. Also in the first quarter of 1994, 23,408 shares of common stock, with
a market value of $312,500, were issued to the former owners of Mailtek, Inc.,
a wholly owned subsidiary acquired in 1992, in accordance with the purchase
agreement.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
TOTAL SYSTEM SERVICES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements represent
the accounts of Total System Services, Inc.(service mark) (TSYS [registered
service mark]) and its wholly owned subsidiaries, Columbus Depot Equipment
Company (service mark) (CDEC [service mark]), Mailtek, Inc. (service mark)
(Mailtek), Lincoln Marketing, Inc. (service mark) (LMI) and Columbus Produc-
tions, Inc. (service mark) (CPI). The statements have been prepared in accor-
dance with the instructions to Form 10-Q and therefore do not include all
information and footnotes necessary for fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. All adjustments, consisting of normal recurring
accruals, which, in the opinion of management, are necessary for a fair
statement of financial position and results of operations for the periods
covered by this report, have been included.
<PAGE>
TOTAL SYSTEM SERVICES, INC.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following tables set forth certain revenue and expense items as a
percentage of total revenues and the percentage increases or decreases in
those items:
Percentage of Total Revenues
Three Months ended Percentage Change
March 31, in Dollar Amounts
-----------------------------------------------
1995 1994 1995 vs. 1994
Revenues:
Bankcard data processing services 87.0% 87.9% 29.0%
Other services 13.0 12.1 39.5
----- -----
Total revenues 100.0 100.0 30.3
----- -----
Expenses:
Salaries and other personnel expense 41.9 38.4 42.3
Net occupancy and equipment expense 28.4 29.5 25.5
Other operating expenses 15.1 14.9 32.1
----- -----
Total expenses 85.4 82.8 34.5
----- -----
Operating income 14.6 17.2 10.0
Other nonoperating income 0.3 0.2 157.9
----- -----
Income before income taxes and
equity in loss of foreign
joint venture 14.9 17.4 11.3
Income taxes 5.5 6.8 6.1
----- -----
Income before equity in loss
of foreign joint venture 9.4 10.6 14.6
Equity in loss of foreign joint
venture (0.4) -- nm
----- -----
Net income 9.0% 10.6% 10.0%
===== =====
nm = not meaningful
Total revenues increased $12.4 million, or 30.3%, during the first quarter
of 1995, compared to the same period in 1994.
Revenues from bankcard data processing services increased $10.4 million,
or 29.0%, in the first three months of 1995, compared to the same period in
1994. Increased revenues from bankcard data processing are primarily attribu-
table to growth in the card portfolios of existing customers and the related
increases in the volume of authorizations and transactions. Average cardholder
accounts on file for the first quarter of 1995 increased approximately 9.4
million, or 26.2%, over the same period in 1994. Cardholder accounts on file
at March 31, 1995, were 46.3 million, compared to 36.2 million at March 31,
1994. The addition of new customers to THE TOTAL SYSTEM (service mark) and the
deconversion of existing customers did not significantly impact the results of
operations for the first quarter of 1995 nor the first quarter of 1994.
<PAGE>
Results of Operations (continued)
Revenues from other services increased 39.5% for the three months ended
March 31, 1995, compared to the same period of 1994. Revenues from other
services consist primarily of revenues generated by TSYS' wholly owned sub-
sidiaries. LMI's revenues increased 71.5% in the first quarter of 1995,
compared to the first quarter of 1994, primarily due to the acquisition of new
customers as well as increased business from existing customers. A special
project for one customer was initiated by LMI in the first quarter and
accounted for approximately 11.2% of their total revenues for the first quarter
of 1995. Mailtek and CPI realized increased revenues of 28.3% and 33.1%,
respectively, in the first quarter of 1995, compared to 1994, resulting
primarily from increased volumes of business from existing customers.
AT&T continues to be a major customer of TSYS, accounting for 22.4% and
23.2% of total revenues for the first three months of 1995 and 1994, respec-
tively. Due to delays in software systems development, the conversion of AT&T's
cardholder accounts to a customized version of the new cardholder processing
system, TS2 (registered service mark), provided for in AT&T's 1993 agreement
with TSYS, will be delayed beyond the contractually specified May 31, 1995
conversion date. Alternative dates for conversion, additional services and
other changes in system requirements continue to be discussed between AT&T and
TSYS. If these discussions do not result in amendments to the present
arrangement, AT&T will be entitled to receive a discount of 5% on its monthly
fees for processing services from June 1995 until such time as conversion of
its accounts to TS2 occurs.
NationsBank accounted for 12.5% and 12.2% of total revenues for the
first quarter of 1995 and 1994, respectively. TSYS' existing agreement with
NationsBank expires in September of 1995, and TSYS and NationsBank continue
their negotiations to extend their processing relationship. Although failure to
extend this processing relationship would have a material impact on TSYS'
future revenues and results of operations, management believes these
negotiations will result in a new, extended processing agreement.
In March of 1994, TSYS announced the signing of a long-term credit card
processing agreement with Bank of America. Due to delays in software systems
development, on January 5, 1995, TSYS announced that it had reached an agree-
ment in principle with Bank of America regarding amendments to their credit
card processing agreement under which, among other things, the conversions of
Bank of America's credit card accounts will be deferred beyond their con-
tractually specified completion dates. On March 15, 1995, TSYS and Bank of
America executed a definitive amendment to the credit card processing agreement
reflecting the terms of the agreement in principle. The completion of the
conversions of Bank of America's credit card accounts, previously scheduled for
1995, is scheduled to be accomplished in 1996. The processing agreement with
Bank of America, including the definitive amendment and related payments by
TSYS, are not expected to be material to TSYS' 1995 results of operations.
TSYS' processing agreement with Bank of America will extend for 10 years,
subject to its terms and conditions, from the date of the complete conversion
of Bank of America's accounts to TS2.
<PAGE>
Results of Operations (continued)
Total operating expenses increased 34.5% for the first quarter of 1995,
compared to the same period in 1994. Increases in expenses are reflected in all
categories and can be primarily attributed to increased processing volumes and
preparation for the conversions of customers, including Bank of America and
AT&T, to TS2.
Employment expenses increased 42.3% in the first quarter of 1995,
compared to the first quarter of 1994. The average number of employees for the
first quarter of 1995 was 2,049, compared to 1,684 for the first quarter of
1994, an increase of 21.7%. In addition to the growth in the number of
employees, the increase in salaries and other personnel costs is attributable
to normal salary increases and related benefits. At April 30, 1995, TSYS had
2,055 full-time and 91 part-time employees.
Net occupancy and equipment expense was up 25.5% for the first quarter
of 1995 over the same period in 1994. A significant portion of this increase
can be attributed to amortization of TS2 which commenced in October 1994. TS2
amortization expense was $826,222 for the first quarter of 1995. Equipment and
software rentals, which represents the largest component of net occupancy and
equipment expense, increased 27.3% in the first quarter of 1995 over the same
period in 1994, primarily due to upgrades of certain mainframe computers and
acquisition of additional direct access storage devices.
Other operating expenses increased 32.1% for the three months ended
March 31, 1995, compared to the same period in 1994. The increases in other
operating expenses are primarily associated with increased processing volumes.
As a percentage of total revenue, other operating expenses have remained stable
- - 15.1% in the first quarter of 1995, compared to 14.9% in the first quarter of
1994.
Interest, net, includes interest expense of $18,763 and $50,181 and
interest income of $168,342 and $68,994 for the first quarters of 1995 and
1994, respectively. Interest expense has decreased due to normal repayment of
long-term debt coupled with no significant new borrowings. Interest income has
increased as more cash has been available for investment and short-term
interest rates have increased.
TSYS' effective income tax rate for the first quarter of 1995 was 37.1%,
compared to 39.0% for the same period in 1994. The decline in TSYS' effective
tax rate is attributable to the realization of certain income tax planning
strategies, including the recognition of research and experimentation credits
for ongoing development activities and a reduction in effective state income
tax rates. Deferred income taxes at March 31, 1995 primarily relate to the
differences in the tax and book treatment of costs associated with the
development of new software, principally TS2.
<PAGE>
Liquidity and Capital Resources
During the first quarter of 1995, TSYS purchased property and equipment
of $2.4 million. Additions to computer software included $1.3 million of
capitalized software development costs related to additional features to the
new cardholder processing system, TS2, as well as $1.3 million of purchased
software. These expenditures are necessary in order for TSYS to continue oper-
ating with the latest technology, enabling the Company to continue providing
quality service in an increasingly competitive environment, as well as
providing capacity for increasing volumes of business.
In 1993, TSYS reached an agreement to form a joint venture with a number
of Mexican banks. The new operation, called Total System Services de Mexico,
S.A. de C.V. ("TSM"), will provide credit card related processing for the mem-
ber banks, representing approximately 30% of the Mexican credit card market.
TSM's operating facility at Toluca, Mexico, near Mexico City, is now sub-
stanially complete, and staffing has begun. Management expects that conversion
of cardholder accounts of the Mexican banks will be completed by the end of the
second quarter. Card and statement production will be performed at the Mexican
facility, while data processing services will be performed at TSYS' facilities
in Columbus.
TSYS has invested $3.7 million in the Mexican joint venture company,
$950,000 of which was in the first quarter of 1995, maintaining its 49% equity
interest in the joint venture. At March 31, 1995, the cumulative currency
translation adjustment amounted to $753,530, net of deferred income taxes.
In light of the unanticipated downturn in the Mexican economy, including
the recent significant devaluation of the Mexican peso, TSYS now believes that
its revenues, in U.S. dollars, and share of pretax earnings from the joint
venture for 1995 will be less than amounts previously disclosed. Factors which
cannot be accurately predicted at this time include the general health of the
Mexican economy and the continued likelihood of Mexican citizens to acquire and
use credit cards.
TSYS may seek external sources of capital in the future. The form of
any such financing will vary depending upon prevailing market and other
conditions and may include short or long-term borrowings from financial
institutions, or the issuance of additional equity securities. However, there
can be no assurance that funds will be available on terms acceptable to TSYS.
Management expects that TSYS will continue to be able to fund a significant
portion of its capital expenditure needs through internally generated cash in
the future. At March 31, 1995, TSYS had working capital of $31.8 million
compared to $33.4 million at December 31, 1994.
<PAGE>
TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
(11) - Statement re Computation of Per Share Earnings
(27) - Financial Data Schedule (for SEC use only)
b) Form 8-K's filed during the three months ended March 31, 1995
1. The report dated January 5, 1995, included the following important
events:
On January 5, 1995, Total System Services, Inc. ("Registrant")
announced: (1) earnings for the year ended December 31, 1994; (2) an
agreement in principle with Bank of America regarding expected amend-
ments to Registrant's and Bank of America's credit card processing
agreement which will defer the completion of conversions of Bank of
America's credit card accounts from 1995 until 1996; and (3) the exec-
ution of a letter of intent to provide credit, debit and merchant
processing services for First Tennessee Bank, N.A.
2. The report dated March 15, 1995, included the following important
event:
On January 5, 1995, Total System Services, Inc. ("Registrant")
announced an agreement in principle with Bank of America regarding
expected amendments to Registrant's and Bank of America's credit card
processing agreement which would defer the completion of conversions of
Bank of America's credit card accounts from 1995 until 1996. On March
15, 1995, Registrant and Bank of America executed a definitive amendment
to the credit card processing agreement reflecting the terms of the
agreement in principle.
<PAGE>
TOTAL SYSTEM SERVICES, INC.
SIGNATURES
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 under-
signed thereunto duly authorized.
TOTAL SYSTEM SERVICES, INC.
Date: May 11, 1995 By: /s/ Richard W. Ussery
-----------------------
Richard W. Ussery
Chairman of the
Board and Chief
Executive Officer
Date: May 11, 1995 By: /s/ James B. Lipham
-----------------------
James B. Lipham
Chief Financial Officer
<PAGE>
TOTAL SYSTEM SERVICES, INC.
Index to Exhibits
Exhibit No.
- -----------
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule (for SEC use only)
<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Statement re Computation of Per Share Earnings
The following computations set forth the calculations of primary and fully
diluted earnings per share for the three months ended March 31, 1995 and 1994:
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
Fully Fully
Primary Diluted Primary Diluted
Earnings Earnings Earnings Earnings
Per Share Per Share Per Share Per Share
<S> <C> <C> <C> <C>
Net income $ 4,783,519 $ 4,783,519 $ 4,348,520 $ 4,348,520
========== ========== ========== ==========
Weighted average
number of common
shares 64,631,294 64,631,294 64,624,272 64,624,272
Net increase due
to assumed issuance
of shares related
to stock options
outstanding 63,682 63,682 -- --
Increase due to
contingently issuable
shares associated with
an acquisition 19,434 19,434 24,004 48,008
---------- ---------- ---------- ----------
Adjusted weighted
average number of common
and common equivalent
shares out-
standing 64,714,410 64,714,410 64,648,276 64,672,280
========== ========== ========== ==========
Net income per
common and common
equivalent
share $ 0.074 $ 0.074 $ 0.067 $ 0.067
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000721683
<NAME> TOTAL SYSTEM SERVICES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 10,793,034
<SECURITIES> 0
<RECEIVABLES> 38,449,245
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 56,724,199
<PP&E> 101,718,403
<DEPRECIATION> 53,714,357
<TOTAL-ASSETS> 166,084,268
<CURRENT-LIABILITIES> 24,915,071
<BONDS> 0
<COMMON> 6,472,869
0
0
<OTHER-SE> 119,261,257
<TOTAL-LIABILITY-AND-EQUITY> 166,084,268
<SALES> 53,380,409
<TOTAL-REVENUES> 53,380,409
<CGS> 0
<TOTAL-COSTS> 45,617,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,727,868
<INCOME-TAX> 2,944,349
<INCOME-CONTINUING> 4,783,519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,783,519
<EPS-PRIMARY> .074
<EPS-DILUTED> 0
</TABLE>
