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, 1997
---------------------------------------------
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 Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
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 13, 1997
- ----- ---------------------------------------------
Common Stock, $.10 par value 129,289,680
<PAGE>
TOTAL SYSTEM SERVICES, INC.
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Income - Quarters ended
March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows - Quarters ended
March 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II. Other Information
Item 6. (a) Exhibits 11
(b) Reports on Form 8-K 11
Signatures 12
- 2 -
<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Unaudited)
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (includes
$21.2 million and $25.1 million
on deposit with a related party at
1997 and 1996, respectively) $ 23,806,186 27,496,057
Short-term investments with a related
party -- 5,000,000
Accounts receivable, net of allowance
for doubtful accounts of $704,000 at
1997 and 1996 55,110,579 59,202,399
Prepaid expenses and other current assets 13,751,138 6,624,482
----------- -----------
Total current assets 92,667,903 98,322,938
Property and equipment, less accumulated
depreciation and amortization of $61.3
million and $58.4 million at 1997 and
1996, respectively 63,902,284 62,955,926
Computer software, less accumulated
amortization of $27.4 million and $24.7
million at 1997 and 1996, respectively 43,461,418 39,720,484
Other assets 50,423,334 45,759,735
----------- -----------
Total assets $ 250,454,939 246,759,083
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 7,115,825 4,695,970
Accrued salaries and related liabilities 4,366,465 6,422,199
Accrued employee benefits 5,900,305 14,590,362
Current portion of long-term debt and
obligations under capital leases 183,918 201,274
Other current liabilities (includes $1.4
million and $1.5 million payable to
related parties at 1997 and 1996,
respectively) 31,592,216 26,195,540
----------- -----------
Total current liabilities 49,158,729 52,105,345
Long-term debt and obligations under
capital leases, excluding current portion 446,070 474,513
Deferred income taxes 14,660,357 15,301,478
----------- -----------
Total liabilities 64,265,156 67,881,336
----------- -----------
Shareholders' equity:
Common stock - $.10 par value. Authorized
300,000,000 shares; issued 129,483,522 at
1997 and 1996, respectively; 129,289,680
outstanding at 1997 and 1996, respectively 12,948,352 12,948,352
Additional paid-in capital 5,603,810 5,353,972
Treasury stock, at cost (473,544) (473,544)
Cumulative currency translation adjustments (1,178,182) (1,178,182)
Retained earnings 169,289,347 162,227,149
----------- -----------
Total shareholders' equity 186,189,783 178,877,747
----------- -----------
Total liabilities and
shareholders' equity $ 250,454,939 246,759,083
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Quarters ended
March 31,
------------------------
1997 1996
--------- --------
<S> <C> <C>
Revenues:
Bankcard data processing services
(includes $6.5 million and $5.0
million from related parties for
1997 and 1996, respectively) $ 74,506,301 62,749,742
Other services 8,630,173 8,352,237
----------- -----------
Total revenues 83,136,474 71,101,979
----------- -----------
Expenses:
Salaries and other personnel expense 36,938,014 29,093,087
Net occupancy and equipment expense 22,840,306 18,945,948
Other operating expenses (includes
$2.3 million and $2.4 million to
related parties for 1997 and 1996,
respectively) 12,533,200 15,193,649
----------- -----------
Total operating expenses 72,311,520 63,232,684
----------- -----------
Equity in income of joint ventures 1,769,451 710,433
----------- -----------
Operating income 12,594,405 8,579,728
----------- -----------
Nonoperating income:
Gain on disposal of equipment, net 14,747 142,204
Interest income, net (includes
$421,000 and $268,000 from a related
party for 1997 and 1996, respectively) 436,693 281,724
----------- -----------
Total nonoperating income 451,440 423,928
----------- -----------
Income before income taxes 13,045,845 9,003,656
Income taxes 4,529,138 3,034,442
----------- -----------
Net income $ 8,516,707 5,969,214
=========== ===========
Net income per share $ .07 .05
=========== ===========
Weighted average shares outstanding 129,289,680 129,281,960
=========== ===========
Cash dividends per common share $ .011 .011
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Quarters ended
March 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,516,707 5,969,214
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in income of joint ventures (1,769,451) (710,433)
Depreciation and amortization 6,984,491 5,492,362
Provision for doubtful accounts 10,500 25,000
Deferred income tax expense (benefit) (641,121) 482,865
Gain on disposal of equipment, net (14,747) (142,204)
(Increase) decrease in:
Accounts receivable 4,081,320 864,409
Prepaid expenses and other assets 742,281 (576,323)
Increase (decrease) in:
Accounts payable 2,419,855 1,495,455
Accrued expenses and other current
liabilities (4,213,432) (1,866,832)
----------- -----------
Net cash provided by operating
activities 16,116,403 11,033,513
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (3,989,745) (6,197,985)
Additions to computer software (6,472,290) (1,612,242)
Proceeds from disposal of equipment 17,450 237,257
Dividends received from joint ventures 1,752,561 --
Additions to contract acquisition costs (14,613,942) (1,189,027)
Redemption of short-term investment 5,000,000 --
----------- -----------
Net cash used in investing activities (18,305,966) (8,761,997)
----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt and
capital lease obligations (45,799) (53,941)
Dividends paid on common stock (1,454,509) (1,454,251)
----------- -----------
Net cash used in financing activities (1,500,308) (1,508,192)
----------- -----------
Net increase (decrease) in cash and
cash equivalents (3,689,871) 763,324
Cash and cash equivalents at beginning of
period 27,496,057 18,849,623
----------- -----------
Cash and cash equivalents at end of
period $ 23,806,186 19,612,947
=========== ===========
Cash paid for interest $ 8,291 7,349
=========== ===========
Cash paid (refunded) for income taxes $ (268,213) (190,382)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<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
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 Productions, Inc.
[service mark] (CPI). The statements have been prepared in accordance with
the instructions to Form 10-Q and 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. The accompanying unaudited consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and related notes appearing in the Company's 1996 annual
report previously filed on Form 10-K.
Note 2 - Supplementary Balance Sheet Information
A significant component of other assets included in the consolidated
balance sheets at March 31, 1997, and December 31, 1996, is contract
acquisition costs, net, of $30,832,000 and $21,077,140, respectively. Also
included in other assets are investments in joint ventures of $15,364,766 and
$15,347,876 at March 31, 1997, and December 31, 1996, respectively. Included
in other current liabilities at March 31, 1997, and December 31, 1996, are
reserves of $4,076,011 and $3,576,011, respectively, to cover transaction
processing provisions.
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<PAGE>
TOTAL SYSTEM SERVICES, INC.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth certain revenue and expense items as a
percentage of total revenues and the percentage increases or decreases in
those items for the quarters ended March 31:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
-------------- -----------------
1997 1996 1997 vs 1996
---- ---- ------------
Revenues:
Bankcard data processing
services 89.6% 88.3% 18.7%
Other services 10.4 11.7 3.3
----- -----
Total revenues 100.0 100.0 16.9
----- -----
Expenses:
Salaries and other
personnel expense 44.4 40.9 27.0
Net occupancy and
equipment expense 27.5 26.6 20.6
Other operating expenses 15.1 21.4 (17.5)
----- -----
Total operating expenses 87.0 88.9 14.4
----- -----
Equity in income of joint
ventures 2.1 1.0 nm
----- -----
Operating income 15.1 12.1 46.8
Nonoperating income 0.6 0.6 6.5
----- -----
Income before income taxes 15.7 12.7 44.9
Income taxes 5.5 4.3 49.3
----- -----
Net income 10.2% 8.4% 42.7%
===== =====
nm - not meaningful
Total revenues increased $12.0 million, or 16.9%, during the three months
ended March 31, 1997, compared to the same period in 1996.
Revenues from bankcard data processing services increased $11.8 million,
or 18.7% in the three months ended March 31, 1997, compared to the same period
in 1996. Increased revenues from bankcard data processing are attributable to
the conversion of cardholder accounts of new customers and growth in the card
portfolios of existing
- 7 -
<PAGE>
Results of Operations (continued)
customers. During the first quarter of 1997, TSYS converted approximately 3.5
million new cardholder accounts to TS2. Net internal growth of existing
customers accounted for approximately 1.6 million additional cardholder
accounts. Increases in the volume of authorizations and transactions
associated with the additional cardholder accounts, as well as growth in new
services offered, also contributed to the increased revenues.
Average cardholder accounts on file for the three months ended March 31,
1997, were 81.0 million, an increase of approximately 26% over the average of
64.3 million for the same period in 1996. Cardholder accounts on file at
March 31, 1997, were 84.5 million, a 29.9% increase over the 65.1 million
accounts on file at March 31, 1996.
During the first quarter of 1997, TSYS successfully completed the
conversions of all of Bank of America's cardholder accounts to TS2. Near the
end of the first quarter of 1997, TSYS announced an extension of its long-term
processing contract with NationsBank, a major customer, to the year 2005.
The joint venture between TSYS and Visa U.S.A., known as Vital Processing
Services L.L.C. ("Vital"), became operational on May 1, 1996. Vital merged
TSYS' back-office merchant processing and Visa's Merchant Bank Services'
point-of-sale processing operations. On TSYS' consolidated income statement,
the results of operations of the joint venture subsequent to April 30, 1996,
are included in equity in the income of joint ventures. The change in
classification of the Company's revenues and expenses from its merchant
operations to an equity interest in the Vital joint venture, effective May 1,
1996, affects the comparability between periods presented in the Company's
income statements.
A significant amount of the Company's revenues is derived from certain
major customers who are processed under long-term contracts. For the three
months ended March 31, 1997 and 1996, two customers accounted for
approximately 27% and 32% of total revenues, respectively. As a result, the
loss of one of the Company's major customers could have a material adverse
effect on the Company's financial condition and results of operations.
Total operating expenses increased 14.4% for the three months ended March
31, 1997, compared to the same period in 1996. Increases in expenses are
primarily reflected in salaries and personnel expense and in occupancy and
equipment expense.
Employment expenses increased 27.0% for the three months ended March 31,
1997, compared to the same period in 1996. The average number of employees in
the first quarter of 1997 increased to 2,711, a 16.3% increase over the 2,332
in the same period in
- 8 -
<PAGE>
Results of Operations (continued)
1996. In March 1997, the first class in the Intellectual Capital Partnership
Program completed the accelerated applied computer science course that is
designed to help educate sufficient numbers of professionals to accommodate
a need in the mainframe computing industry. All 80 members of this class
became full-time employees of TSYS. In addition to the growth in number of
employees, the increase in employment expenses is attributable to normal
salary increases and related employee benefits. Nonemployee compensation,
primarily temporary help and contract programmers, increased $448,000, or
23.8%, for the three months ended March 31, 1997, compared to the same period
in 1996; nonemployee compensation is included in employment expenses. At
April 30, 1997, TSYS had 2,785 full-time and 70 part-time employees.
Net occupancy and equipment expense was up 20.6% for the first quarter
of 1997, over the same period in 1996. Equipment and software rentals, the
largest components of occupancy and equipment expense, increased $2.3 million,
or 23.5%, in the first quarter of 1997, compared to the same period in 1996.
Due to rapidly changing technology in computer equipment, TSYS fills a
substantial portion of its equipment needs through operating leases. Computer
upgrades and other additional equipment were leased subsequent to the first
quarter of 1996 to accomodate increased volumes due to growth in the number of
accounts being processed.
Other operating expenses decreased 17.5% for the three months ended
March 31, 1997, compared to the same period in 1996. Management fees totaling
$2.3 million were paid to affiliated companies for various services in the
three months ended March 31, 1997, compared to $2.4 million for the same
period in 1996. Factors contributing to the decrease in other expenses in the
first quarter of 1997 were a significant reduction in the use of outside
professional services as well as a decrease in provisions for processing
commitments, compared to the first quarter of 1996.
TSYS' share of income from its equity in joint ventures was $1.8 million
and $710,000 for the first quarter of 1997 and 1996, respectively. TSYS has a
49% and 50% interest, respectively, in Total System Services de Mexico, S.A.
de C.V. and Vital Processing Services L.L.C. Vital became operational May 1,
1996.
The Mexican economy continues to stabilize relative to 1996; however,
there remains uncertainty in the Mexican economy which management continues to
monitor.
Interest income, net, includes interest expense of $15,596 and $15,373
and interest income of $452,289 and $297,097 for the first quarters of 1997
and 1996, respectively. Although the Company has not yet finalized the
financing of its new real estate development projects, financing costs will
likely increase in 1997. The increase in interest income is the result of
fluctuations in cash available for investment and short-term
- 9 -
<PAGE>
Results of Operations (continued)
interest rates. Additionally, in the third quarter of 1996, $5.0 million
was invested in a six-month certificate of deposit at a higher rate of
interest; the certificate of deposit was redeemed at maturity in March 1997.
TSYS' effective income tax rate for the first quarter of 1997 was 34.7%,
compared to 33.7% for the same period in 1996. The increase in TSYS' effective
tax rate is primarily due to increases in the Company's effective state income
tax rates.
Liquidity and Capital Resources
During the first quarter of 1997, TSYS purchased property and equipment
of $4.0 million. Computer software increased during the first quarter
by $6.5 million; additions primarily consisted of purchased software.
Dividends on common stock of $1.5 million were paid in the first quarter of
1997. Also, in the first quarter of 1997, $14.6 million was invested in
contract acquisition costs.
TSYS formally unveiled the design plan for its proposed corporate campus
at a press conference following a preview of the design at its annual
shareholder meeting on April 14, 1997. The campus will serve as the Company's
corporate headquarters and will house administrative, client contact and
programming team members and will allow for significant growth. Construction
of the first phase is scheduled to begin July 1, 1997, or at such time as the
land is available. Also, TSYS plans to expand its operations center in 1997.
This expansion will include space for the card production services now
located in downtown Columbus, as well as additional space for statement
printing and data processing functions. Preliminary cost estimates for these
construction projects, while not finalized, are expected to be $50-100 million.
In addition, a building will be constructed on the north Columbus site to
serve as LMI's headquarters. Financing for these projects is expected to be
through the internal generation of funds and the use of funds from external
sources, possibly through the issuance of industrial revenue bonds.
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-term or long-term borrowings from financial institutions,
or the issuance of additional equity securities and/or industrial revenue
bonds. 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, as evidenced by TSYS' current ratio of
1.9:1. At March 31, 1997, TSYS had working capital of $43.5 million compared
to $46.2 million at December 31, 1996.
- 10 -
<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) Forms 8-K filed since year-end 1996
1. The report dated April 20, 1997, included the following important event:
On April 2, 1997, Total System Services, Inc. ("Registrant")
announced an extension to the long-term contract with
Charlotte, North Carolina-based NationsBank to continue
processing its credit card portfolio until 2005.
- 11 -
<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
undersigned thereunto duly authorized.
TOTAL SYSTEM SERVICES, INC.
Date: May 13, 1997 by: /s/ Richard W. Ussery
---------------------------
Richard W. Ussery
Chairman of the Board and
Chief Executive Officer
Date: May 13, 1997 by: /s/ James B. Lipham
---------------------------
James B. Lipham
Chief Financial Officer
- 12 -
<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 quarters ended March 31, 1997 and
1996:
Quarter ended Quarter ended
March 31, 1997 March 31, 1996
-------------------- --------------------
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 $ 8,516,707 $ 8,516,707 $ 5,969,214 $ 5,969,214
=========== =========== =========== ==========
Weighted average number
of common shares
outstanding 129,289,680 129,289,680 129,281,960 129,281,960
Net increase due to assumed
issuance of shares related
to stock options outstanding
computed using the treasury
stock method 171,204 171,204 152,178 162,616
----------- ----------- ----------- -----------
Adjusted weighted average
number of common and common
equivalent shares
outstanding 129,460,884 129,460,884 129,434,138 129,444,576
=========== =========== =========== ===========
Net income per common
and common equivalent
share outstanding $ .07 $ .07 $ .05 $ .05
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000721683
<NAME> TOTAL SYSTEM SERVICES, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 23,806,186
<SECURITIES> 0
<RECEIVABLES> 55,814,268
<ALLOWANCES> 703,689
<INVENTORY> 0
<CURRENT-ASSETS> 92,667,903
<PP&E> 125,249,859
<DEPRECIATION> 61,347,575
<TOTAL-ASSETS> 250,454,939
<CURRENT-LIABILITIES> 49,158,729
<BONDS> 0
0
0
<COMMON> 12,948,352
<OTHER-SE> 173,241,431
<TOTAL-LIABILITY-AND-EQUITY> 250,454,939
<SALES> 83,136,474
<TOTAL-REVENUES> 83,136,474
<CGS> 0
<TOTAL-COSTS> 72,311,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,045,845
<INCOME-TAX> 4,529,138
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,516,707
<EPS-PRIMARY> .07
<EPS-DILUTED> 0
</TABLE>
