UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10254
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Total System Services, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-1493818
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Sixth Avenue, Post Office Box 1755, Columbus, Georgia 31902
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(Address of principal executive offices) (Zip Code)
(706) 649-2310
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] 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 August 13, 1998
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Common Stock, $.10 par value 194,024,348
<PAGE>
TOTAL SYSTEM SERVICES, INC.
INDEX
<TABLE>
Page
Number
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 and
December 31, 1997 ...................................... 3
Consolidated Statements of Income - Three months and
Six months ended June 30, 1998 and 1997 ................ 4
Consolidated Statements of Cash Flows - Six months
ended June 30, 1998 and 1997 ........................... 6
Notes to Consolidated Financial Statements ................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................... 9
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ....... 18
Item 5. Other Information ......................................... 18
Item 6. (a) Exhibits .............................................. 19
(b) Reports on Form 8-K ................................... 19
Signatures ................................................................ 20
</TABLE>
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<PAGE>
TOTAL SYSTEM SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<S> <C> <C>
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June 30, December 31,
1998 1997
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Assets
Current assets:
Cash and cash equivalents (includes $35.1 million and $40.6 million
on deposit with a related party at 1998 and 1997, respectively) . $ 35,460,316 43,335,922
Short-term investments with a related party ....................... -- 998,228
Accounts receivable, net of allowance for doubtful accounts of
$708,000 and $736,000 at 1998 and 1997, respectively ............ 70,598,147 69,450,919
Prepaid expenses and other current assets ......................... 23,039,469 18,620,638
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Total current assets .......................................... 129,097,932 132,405,707
Property and equipment, less accumulated depreciation and
amortization of $70.7 million and $65.1 million at 1998 and
1997, respectively ................................................ 76,017,829 68,968,574
Computer software, less accumulated amortization of
$41.4 million and $34.2 million at 1998 and 1997, respectively .... 55,310,551 43,133,137
Other assets ........................................................ 57,768,157 52,350,519
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Total assets .................................................. $ 318,194,469 296,857,937
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .................................................. $ 15,565,664 6,400,365
Accrued salaries and related liabilities .......................... 5,492,250 6,680,979
Accrued employee benefits ......................................... 10,244,324 13,870,969
Current portion of long-term debt and obligations under
capital leases .................................................. 126,682 132,416
Other current liabilities (includes $1.7 and $1.2 million payable
to related parties at 1998 and 1997, respectively) ............. 34,733,466 34,421,668
------------- -------------
Total current liabilities ..................................... 66,162,386 61,506,397
Long-term debt and obligations under capital leases,
excluding current portion ....................................... 297,249 342,096
Deferred income taxes ............................................... 11,541,303 13,754,688
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Total liabilities ............................................. 78,000,938 75,603,181
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Shareholders' equity:
Common stock - $.10 par value. Authorized 300,000,000
shares; 194,225,283 issued at 1998 and 1997,
respectively; 194,023,373 and 193,995,337 outstanding
at 1998 and 1997, respectively ................................. 19,422,528 19,422,528
Additional paid-in capital ........................................ 807,147 414,748
Treasury stock, at cost ........................................... (332,671) (377,701)
Accumulated other comprehensive income ............................ (1,181,971) (1,178,182)
Retained earnings ................................................. 221,478,498 202,973,363
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Total shareholders' equity .................................... 240,193,531 221,254,756
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Total liabilities and shareholders' equity .................... $ 318,194,469 296,857,937
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Income Statements
(Unaudited)
<TABLE>
<S> <C> <C>
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Three months ended
June 30,
---------------------------------
1998 1997
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Revenues:
Bankcard data processing services (includes $7.6 million
from related parties for 1998 and 1997) ....................................................... $ 80,640,135 80,910,810
Other services .................................................................................. 10,828,963 8,825,997
------------ -----------
Total revenues .............................................................................. 91,469,098 89,736,807
------------ -----------
Expenses:
Salaries and other personnel expense ............................................................ 38,244,393 37,833,800
Net occupancy and equipment expense ............................................................. 25,383,027 24,856,038
Other operating expenses (includes $2.7 million
to related parties for 1998 and 1997) ......................................................... 14,166,106 14,141,205
------------ -----------
Total expenses .............................................................................. 77,793,526 76,831,043
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Equity in income of joint ventures ................................................................ 2,756,424 2,164,957
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Operating income............................................................................ 16,431,996 15,070,721
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Nonoperating income:
Gain (loss) on disposal of equipment, net ....................................................... 1,810 (25,677)
Interest income, net (includes $649,000 and $381,000 from a related
party for 1998 and 1997, respectively) ........................................................ 824,699 490,599
------------ -----------
Total nonoperating income ................................................................... 826,509 464,922
------------ -----------
Income before income taxes .................................................................. 17,258,505 15,535,643
Income taxes ...................................................................................... 5,608,448 5,594,198
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Net income .................................................................................. $ 11,650,057 9,941,445
============ ===========
Basic earnings per share .................................................................... $ .06 .05
============ ===========
Diluted earnings per share .................................................................. $ .06 .05
============ ===========
Weighted average common shares outstanding ........................................................ 194,016,053 193,934,701
Increase due to assumed issuance of shares
related to stock options outstanding .......................................................... 731,389 250,070
------------ -----------
Weighted average common and common
equivalent shares outstanding ................................................................. 194,747,442 194,184,771
============ ===========
Cash dividends per common share ................................................................... $ .010 .008
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Income Statements
(Unaudited)
<S> <C> <C>
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Six months ended
June 30,
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1998 1997
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Revenues:
Bankcard data processing services (includes $15.0 million and
$14.3 million from related parties for 1998 and 1997, respectively) ............................. $165,745,666 155,417,111
Other services .................................................................................... 22,041,725 17,456,170
------------ -----------
Total revenues ................................................................................ 187,787,391 172,873,281
------------ -----------
Expenses:
Salaries and other personnel expense .............................................................. 81,454,853 74,771,814
Net occupancy and equipment expense ............................................................... 49,749,500 47,696,344
Other operating expenses (includes $5.3 million and $5.0 million
to related parties for 1998 and 1997, respectively) ............................................. 30,355,119 26,674,405
------------ -----------
Total expenses ................................................................................ 161,559,472 149,142,563
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Equity in income of joint ventures .................................................................. 4,784,896 3,934,408
------------ -----------
Operating income .............................................................................. 31,012,815 27,665,126
------------ -----------
Nonoperating income:
Gain (loss) on disposal of equipment, net ......................................................... 4,408 (10,930)
Interest income, net (includes $1.3 million and $802,000 from a related
party for 1998 and 1997, respectively) .......................................................... 1,580,942 927,292
------------ -----------
Total nonoperating income ..................................................................... 1,585,350 916,362
------------ -----------
Income before income taxes .................................................................... 32,598,165 28,581,488
Income taxes ........................................................................................ 10,697,747 10,123,336
------------ -----------
Net income .................................................................................... $ 21,900,418 18,458,152
============ ===========
Basic earnings per share ...................................................................... $ .11 .10
============ ===========
Diluted earnings per share .................................................................... $ .11 .10
============ ===========
Weighted average common shares outstanding .......................................................... 194,008,153 193,934,611
Increase due to assumed issuance of shares
related to stock options outstanding ............................................................ 661,153 236,221
------------ -----------
Weighted average common and common
equivalent shares outstanding ................................................................... 194,669,306 194,170,832
============ ===========
Cash dividends per common share ..................................................................... $ .018 .015
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<S> <C> <C>
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Six months ended
June 30,
-------------------------------
1998 1997
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Cash flows from operating activities:
Net income ................................................. $ 21,900,418 18,458,152
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in income of joint ventures ..................... (4,784,896) (3,934,408)
Depreciation and amortization .......................... 17,025,003 14,498,177
Provision for doubtful accounts ........................ 9,000 34,000
Deferred income tax benefit ............................ (2,213,385) (1,333,308)
(Gain) loss on disposal of equipment, net .............. (4,408) 10,930
(Increase) decrease in:
Accounts receivable .................................... (1,156,228) (3,739,035)
Prepaid expenses and other assets ...................... (2,708,485) 1,707,885
Increase (decrease) in:
Accounts payable ....................................... 9,165,299 3,263,411
Accrued expenses and other current liabilities ......... (4,650,978) 1,223,113
------------ ------------
Net cash provided by operating activities .......... 32,581,340 30,188,917
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ......................... (13,546,366) (9,163,208)
Additions to computer software ............................. (19,656,723) (9,451,271)
Proceeds from disposal of equipment ........................ 11,844 30,267
Dividends received from joint ventures ..................... 5,618,616 3,252,561
Increase in contract acquisition costs ..................... (10,979,771) (15,460,901)
Redemption of short-term investment ........................ 998,228 5,000,000
------------ ------------
Net cash used in investing activities .............. (37,554,172) (25,792,552)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of short-term debt .................. -- 959,741
Principal payments on long-term debt and
capital lease obligations ................................ (50,581) (85,795)
Dividends paid on common stock ............................. (2,910,008) (2,909,018)
Proceeds from exercise of stock options .................... 57,815 33,000
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Net cash used in financing activities .............. (2,902,774) (2,002,072)
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Net increase (decrease) in cash and cash equivalents (7,875,606) 2,394,293
Cash and cash equivalents at beginning of period ............. 43,335,922 27,496,057
------------ ------------
Cash and cash equivalents at end of period ................... 35,460,316 29,890,350
============ ============
Cash paid for interest ....................................... 1,984 10,300
============ ============
Cash paid for income taxes (net of tax refunds received) ..... 12,446,192 9,056,290
============ ============
</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.(R) (TSYS(R)) and its wholly owned
subsidiaries, Columbus Depot Equipment CompanySM (CDECSM), TSYS Total Solutions,
Inc.SM (TSI), Columbus Productions, Inc.SM (CPI) and TSYS Canada, Inc.SM (TCI).
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 1997 annual report previously filed on Form
10-K.
On April 16, 1998, TSYS declared a three-for-two stock split, which was
effected on May 8, 1998. All shareholder equity, share and per share amounts in
the accompanying consolidated financial statements have been retroactively
restated to give effect to the split.
Note 2 - Supplementary Balance Sheet Information
A significant component of other assets included in the consolidated
balance sheets at June 30, 1998 and December 31, 1997, is contract acquisition
costs, net, of $34,168,792 and $27,274,037, respectively. Also included in other
assets are investments in joint ventures of $20,319,520 and $21,338,446 at June
30, 1998 and December 31, 1997, respectively. Included in other current
liabilities at June 30, 1998 and at December 31, 1997, are reserves of
$4,001,860 and $4,051,285, respectively, to cover transaction processing
provisions. Also included in other current liabilities are customer postage
deposits of $13,361,491 and $13,579,370 at June 30, 1998 and December 31, 1997,
respectively.
Note 3 - Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected financial information about operating segments in
interim financial reports
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<PAGE>
Notes to Consolidated Financial Statements (continued)
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. SFAS No. 131 need not be applied to interim financial statements in the
initial year of its application, but comparative information for interim periods
in the initial year of application shall be reported in financial statements for
interim periods in the second year of application. TSYS does not expect that
SFAS No. 131 will significantly impact disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 requires all items that are required to be
recognized under accounting standards as components of comprehensive income to
be reported in an annual financial statement that is displayed in equal
prominence with other financial statements. For interim period financial
statements, enterprises are required to disclose a total for comprehensive
income in those financial statements. The term "comprehensive income" is used in
SFAS No. 130 to describe the total of all components of comprehensive income
including net income. "Other comprehensive income" refers to revenues, expenses,
gains and losses that are included in comprehensive income but excluded from
earnings under current accounting standards. Currently, "other comprehensive
income" for TSYS consists solely of items previously recorded as a component of
shareholders' equity under SFAS No. 52, "Foreign Currency Translation." TSYS has
adopted the interim period disclosure requirements of SFAS No. 130 effective
March 31, 1998, and will adopt the annual financial statement reporting and
disclosure requirements of SFAS No. 130 effective December 31, 1998.
Note 4 - Other Comprehensive Income
Total comprehensive income for the three months ended June 30, 1998, was
$11,640,779, compared to $9,941,445 for the three months ended June 30, 1997.
Comprehensive income for the six months ended June 30, 1998 and 1997, was
$21,896,629 and $18,458,152, respectively.
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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 three months ended June 30:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
-------------- -----------------
1998 1997 1998 vs 1997
----- ---- -----------------
Revenues:
Bankcard data processing services .. 88.2% 90.2% (0.3)%
Other services ..................... 11.8 9.8 22.7
----- -----
Total revenues ................. 100.0 100.0 1.9
----- -----
Expenses:
Salaries and other personnel expense 41.8 42.2 1.1
Net occupancy and equipment expense 27.8 27.7 2.1
Other operating expenses ........... 15.4 15.7 0.2
----- -----
Total operating expenses ....... 85.0 85.6 1.3
----- -----
Equity in income of joint ventures ... 3.0 2.4 27.3
----- -----
Operating income ................. 18.0 16.8 9.0
Nonoperating income .................. 0.9 0.5 77.8
----- -----
Income before income taxes ..... 18.9 17.3 11.1
Income taxes ......................... 6.2 6.2 0.3
----- -----
Net income ........................... 12.7% 11.1% 17.2%
===== =====
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<PAGE>
Results of Operations (continued)
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 six months ended June 30:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
-------------- -----------------
1998 1997 1998 vs 1997
---- ---- -----------------
Revenues:
Bankcard data processing services .. 88.3% 89.9% 6.6%
Other services ..................... 11.7 10.1 26.3
----- -----
Total revenues .................. 100.0 100.0 8.6
----- -----
Expenses:
Salaries and other personnel expense 43.4 43.3 8.9
Net occupancy and equipment expense 26.5 27.6 4.3
Other operating expenses ........... 16.1 15.4 13.8
----- -----
Total operating expenses ....... 86.0 86.3 8.3
----- -----
Equity in income of joint ventures ... 2.5 2.3 21.6
----- -----
Operating income ................. 16.5 16.0 12.1
Nonoperating income .................. 0.9 0.5 73.0
----- -----
Income before income taxes ..... 17.4 16.5 14.1
Income taxes ......................... 5.7 5.8 5.7
----- -----
Net income ........................... 11.7% 10.7% 18.6%
===== =====
Total revenues increased $1.7 million, or 1.9%, and $14.9 million, or 8.6%,
during the three months and six months ended June 30, 1998, respectively,
compared to the same periods in 1997.
Revenues from bankcard data processing services decreased $270,700, or
0.3%, in the three months ended June 30, 1998, compared to the same period in
1997. Revenues during the second quarter of 1998 were affected by the loss of
two customers who were deconverted near the end of the first quarter of 1998, as
well as competitive pricing pressures and a decrease in the usage of certain
optional services by some of the Company's clients. During the six months ended
June 30, 1998, revenues from bankcard data processing services increased $10.3
million, or 6.6%, compared to the same period in
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<PAGE>
Results of Operations (continued)
1997. Increased revenues from bankcard data processing during the six months
ended June 30, 1998, compared to the same period in 1997, are primarily
attributable to the growth in the card portfolios of existing customers.
Increases in the volumes of authorizations and transactions associated with the
additional cardholder accounts also contributed to the increased revenues.
Average cardholder accounts on file for the three months ended June 30,
1998, were 93.9 million, which was an increase of approximately 7.7% over the
average of 87.2 million for the same period in 1997. For the first six months of
1998, average cardholder accounts were 94.1 million, a 10.9% increase over the
84.8 million average cardholder accounts for the same period last year.
Cardholder accounts on file at June 30, 1998, were 96.8 million, a 9.3% increase
over the 88.5 million accounts on file at June 30, 1997. The increase in
cardholder accounts on file from June 1997 to June 1998 included net internal
growth of existing customers of 6.2 million additional cardholder accounts and
approximately 2.1 million new accounts.
During the first six months of 1998, TSYS converted approximately 20.9
million existing cardholder accounts to TS2(R), bringing the total number of
accounts on TS2 at June 30, 1998, to more than 41.9 million, compared to 11.0
million at June 30, 1997.
A significant amount of the Company's revenues is derived from long-term
contracts with large customers, including certain major customers. For the three
months and six months ended June 30, 1998, two customers accounted for
approximately 25% and 23% of total revenues, respectively, compared to 27% for
both the three and six months ended June 30, 1997. Near the end of the first
quarter of 1998, AT&T, a major customer of the Company, completed the sale of
its Universal Card Services (UCS) to Citibank. TSYS and AT&T-UCS (now Citibank)
have a processing contract with a term until August 2000, and, at the customer's
instruction, TSYS is proceeding with converting these accounts to TS2 during
1998. The long-term effect of the sale of AT&T's credit card business on TSYS'
financial condition and results of operations cannot be determined at this time.
In April 1998, two of the Company's customers, NationsBank and Bank of America,
announced their intent to merge. As a result, if the merger is completed, the
percentage of revenues derived from major customers will increase. The loss of
either one of the Company's major customers, or other significant customers,
could have a material adverse effect on the Company's financial condition and
results of operations.
During the second quarter of 1998, the Company announced the signing of a
long-term processing agreement with Sears, Roebuck and Co. to convert and
process its 60 million private label accounts. The conversion of these accounts
is anticipated to be completed in the second quarter of 1999.
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<PAGE>
Results of Operations (continued)
Total operating expenses increased 1.3% and 8.3% for the three months and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. The increase in operating expenses is primarily attributable to increases
in salaries and personnel expense and in other operating expenses.
Employment expenses increased 1.1% and 8.9% for the three months and six
months ended June 30, 1998, respectively, compared to the same periods in 1997.
In the second quarter of 1998, due to the increase in TS2 conversion activity,
the Company capitalized additional employment expenses. Further, employment
expenses capitalized in conjunction with software development increased
significantly in the second quarter of 1998. The majority of these expenditures
were related to the development of a commercial card system for TS2. The average
number of employees in the second quarter of 1998 increased to 3,297, a 16.3%
increase over the 2,836 in the same period of 1997. For the first six months of
1998, the average number of employees was 3,238, a 16.8% increase over the first
six months of 1997. At July 1, 1998, TSYS had 3,300 full-time and 151 part-time
employees.
In February, TSYS announced the formation of TSYS Canada, Inc. (TCI), a
wholly owned subsidiary headquartered in Columbus, Georgia. On February 1, 1998,
TCI opened an office in Welland, Ontario, Canada. TCI currently employs 18
programmers who are providing support and assistance with the conversion of card
portfolios to TS2.
Net occupancy and equipment expense was up 2.1% and 4.3% for the three
months and six months ended June 30, 1998, respectively, over the same periods
in 1997. Equipment and software rentals, the largest components of net occupancy
and equipment expense, decreased $324,000, or 2.5%, in the second quarter of
1998, compared to the same period in 1997. Due to rapidly changing technology in
computer equipment, TSYS' equipment needs are achieved substantially through
operating leases. Due to the price performance of new technology, the Company
decided against renewing certain expensive leases on older equipment, in favor
of more economical leases on newer, more efficient equipment. During the first
six months of 1998, equipment and software rentals increased $92,000 or 0.4%.
Computer software upgrade licenses were purchased for additional processors
subsequent to the second quarter of 1997 to accommodate increased volumes due to
the expected growth in the number of accounts associated with new customers.
Other operating expenses increased 0.2% and 13.8% for the three months and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. The growth in expenses for 1998 is primarily due to increased travel,
legal, telecommunication and other business development costs associated with
exploring new business opportunities.
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<PAGE>
Results of Operations (continued)
TSYS' share of income from its equity in joint ventures was $2.7 million
and $2.2 million for the second quarters of 1998 and 1997, respectively. For the
six months ended June 30, 1998 and 1997, the Company's equity in income of its
joint ventures was $4.8 million and $3.9 million, respectively. The increase is
associated with improved operating results from both of the Company's joint
ventures. Total System Services de Mexico, S.A. de C.V. (TSYS de Mexico)
improved due to a higher level of activity in production related services, while
Vital Processing Services, L.L.C. (Vital) continued to grow operating results in
line with expectations. With respect to TSYS de Mexico, the Mexican economy
continues to improve; however, there remains uncertainty in the Mexican economy
which management continues to monitor.
Interest income, net, includes interest expense of $7,375 and $35,317 and
interest income of $832,074 and $525,916 for the second quarters of 1998 and
1997, respectively. For the six months ended June 30, 1998 and 1997,
respectively, interest expense was $15,087 and $50,913, and interest income was
$1,596,029 and $978,205. The increase in interest income in 1998 as compared to
1997 is primarily the result of higher levels of cash available for investment.
Operating income increased 9.0% and 12.1% for the three and six months
ended June 30, 1998, respectively, over the same periods in 1997. The increase
is primarily due to growth in revenues combined with improved expense control.
TSYS' effective income tax rate for the second quarter of 1998 was 32.5%,
compared to 36.0% for the same period in 1997. For the six months ended June 30,
1998, the effective tax rate was 32.8%, compared to 35.4% for the same period in
1997. The decrease in TSYS' effective income tax rate is primarily due to
certain effective income tax planning strategies, including the identification
and recognition of research and experimentation credits for ongoing development
activities, foreign tax credits associated with the Mexican joint venture, and a
reduction in state income taxes due to favorable tax legislation.
Liquidity and Capital Resources
The Consolidated Statements of Cash Flows detail the Company's cash flows
from operating, investing and financing activities. TSYS' primary method of
funding its operations and growth has been cash generated from current
operations and the occasional use of borrowed funds to supplement financing of
capital expenditures. TSYS' net cash provided by operating activities in the
first six months of 1998 increased to $32.6 million from $30.2 million in the
same period of 1997. The major uses of cash generated from operations have been
the addition of property and equipment; internal development and purchase of
computer software; investment in contract acquisition costs; and the payment of
cash dividends.
- 13 -
<PAGE>
Liquidity and Capital Resources (continued)
During the second quarter of 1998, TSYS purchased property and equipment of
$10.0 million for total purchases of $13.5 million for the first six months of
1998. Computer software increased during the second quarter by $12.5 million,
bringing the total additions for 1998 to $19.7 million; additions primarily
consisted of purchased software. Also, in the second quarter of 1998, $5.5
million was invested in contract acquisition costs for a total of $11.0 million
invested in 1998, of which $7.8 million represents payments for processing
rights.
Dividends on common stock of $1.5 million were paid in the second quarter
of 1998, bringing the total amount of dividends paid to $2.9 million. At the
Annual Meeting of Shareholders in April 1998, the Company, in addition to
announcing a three-for-two stock split, also increased the quarterly dividend
33.3% to $.01 per share.
In 1997, construction was begun on a campus-type facility which will serve
as the Company's corporate headquarters. The Company entered into an operating
lease agreement relating to the new corporate campus. Under the agreement, the
lessor has purchased the land, is paying for construction and development costs
and has leased the property to the Company commencing upon its completion, which
is expected to be in 1999. The lease provides for a substantial residual value
guarantee, up to $87 million, and includes purchase options at the original cost
of the property. Real estate taxes, insurance, maintenance and operating
expenses applicable to the leased property are obligations of the Company. The
Company expects net occupancy and equipment expense to increase in 1999 as a
result of the lease.
In addition, TSYS began a $5 million expansion of its operations center in
north Columbus during 1997. This expansion includes space for the card
production services now located in downtown Columbus. TSYS will begin relocating
the card production services in the fourth quarter of 1998. This expansion will
further include additional space for mailing support functions. TSYS will begin
relocating the card production services in the fourth quarter of 1998. TSYS also
purchased 18 acres of land containing a 104,000 square-foot speculative building
in east Columbus which is being prepared for an additional data center and is
expected to be ready for use in the fourth quarter of 1998.
The core system of TS2 was designed to be Year 2000 compliant, and the
Company is continuing its ongoing project to ensure that all of the Company's
processing systems are Year 2000 compliant. Many computer programs were written
with a two digit date field, and, if these programs are not made Year 2000
compliant, they will be unable to correctly process date information for the
year 2000 and after. While these issues impact all of the Company's data
processing systems to some extent, they are most significant in connection with
certain mainframe computer programs. Moreover, remediation efforts go beyond the
Company's internal computer systems and require coordination with clients,
vendors, government entities and other third parties to assure that their
systems and related interfaces are compliant. Failure to achieve timely
- 14 -
<PAGE>
Liquidity and Capital Resources (continued)
remediation of the Company's critical programs and computer systems for Year
2000 would have a material adverse effect on the Company's financial condition
and results of operations.
The Company's Year 2000 plans called for all mission critical systems to be
renovated by the end of the second quarter of 1998 which has been accomplished.
Testing for clients and other third parties will begin in the third quarter of
1998. Completion of all third party interface testing is dependent upon those
third parties completing their own internal remediation. TSYS has made an
assessment of non-compliant suppliers and vendors and will schedule and
coordinate testing of incoming and outgoing interfaces with third-party vendors.
The Company could be adversely affected to the extent third parties with which
it interfaces have not properly addressed their Year 2000 issues.
TSYS is primarily utilizing existing internal resources to complete the
Year 2000 project. The Company incurred $1.5 million of direct costs related to
the Year 2000 remediation project during the second quarter of 1998, bringing
the total direct costs for 1998 to $2.9 million. The Company expects to incur an
additional $5.1 million of direct costs during the remainder of 1998 and
approximately $6.0 million in 1999. The Company is currently developing its Year
2000 contingency plan and expects it will be finalized by the end of the third
quarter of 1998. Based upon progress to date, TSYS does not expect the cost of
the Year 2000 project to significantly impact its financial condition and
results of operations.
The costs of the project and the dates on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions about future
events, including the continued availability of necessary technical resources.
However, there are no guarantees that these estimates will be achieved and
actual results could differ materially from those anticipated.
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 and/or debt securities such as 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
2.0:1. At June 30, 1998, TSYS had working capital of $62.9 million compared to
$70.9 million at December 31, 1997.
- 15 -
<PAGE>
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected financial information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 need not be applied to interim financial
statements in the initial year of its application, but comparative information
for interim periods in the initial year of application shall be reported in
financial statements for interim periods in the second year of application. TSYS
does not expect that SFAS No. 131 will significantly impact disclosures.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by TSYS with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of TSYS which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenue, income or loss, earnings or loss per share, the payment or nonpayment
of dividends, capital structure and other financial items; (ii) statements of
plans and objectives of TSYS or its management or Board of Directors, including
those relating to products or services; (iii) statements of future economic
performance; and (iv) statements of assumptions underlying such statements.
Words such as "believes," "anticipates," "expects," "intends," "targeted," and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (i) the strength of the U.S. economy
in general and relevant foreign economies; (ii) the Company's performance under
current and future contracts; (iii) inflation, interest rate and foreign
exchange rate fluctuations; (iv) timely and successful implementation of
processing systems to provide new products, improved functionality and increased
efficiencies; (v) changes in consumer spending, borrowing and saving habits;
(vi) technological changes; (vii) acquisitions; (viii) the ability to increase
market share and control expenses; (ix) changes in laws, regulations, credit
card association rules or other industry standards affecting TSYS' business
which require significant product
- 16 -
Forward-Looking Statements (continued)
redevelopment efforts; (x) the effect of changes in accounting policies and
practices as may be adopted by the Financial Accounting Standards Board; (xi)
changes in TSYS' organization, compensation and benefit plans; (xii) the costs
and effects of litigation and of unexpected or adverse outcomes in such
litigation; (xiii) failure to successfully implement the Company's Year 2000
modification plans substantially as scheduled and budgeted; and (xiv) the
success of TSYS at managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which
statements are made, and TSYS undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
- 17 -
<PAGE>
TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
The annual shareholders' meeting of Total System Services, Inc. was held
April 16, 1998. Voted on at the meeting was the election of Class III directors.
Following is a tabulation of votes for each nominee:
WITHHELD
AUTHORITY
NOMINEE VOTES FOR TO VOTE
Mason H. Lampton 188,962,659 87,462
William B. Turner 189,007,168 42,952
James D. Yancey 189,009,145 40,975
Item 5 - Other Information
Effective June 29, 1998, the Securities and Exchange Commission amended
Rule 14a-4(c) under the Securities Exchange Act of 1934 (the 1934 Act) which
governs a company's use of discretionary proxy voting authority with respect to
shareholder proposals that are not being included in the company's proxy
solicitation materials pursuant to Rule 14a-8 of the 1934 Act. New Rule
14a-4(c)(1) provides that if a proponent fails to notify the Company at least 45
days prior to the month and day of mailing of the prior year's proxy statement (
by an earlier or later date established by an overriding advance notice
provision contained in the company's charter or bylaws), then the management
proxies named in the form of proxy distributed in connection with the company's
proxy statement would be allowed to use their discretionary voting authority to
address the matter submitted by the proponent without discussion of the matter
in the proxy statement. The Company's bylaws contain an advance notice provision
which provides that a matter may not be brought before an annual meeting by a
proponent stockholder (Proponent) unless the Proponent has provided notice
thereof in writing to the Secretary of the Company (and such notice has been
received by the Secretary at the principal executive office of the Company) not
less than 60 days nor more than 120 days prior to the date of the annual
meeting. The Company's 1999 annual meeting is currently scheduled for April 15,
1999. Accordingly, for any business to be brought before the 1999 Annual Meeting
by a Proponent, written notice thereof must be provided to the Secretary by
February 15, 1999.
- 18 -
<PAGE>
TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
(27) - Financial Data Schedule (For SEC use only)
b) Forms 8-K filed during the quarter ended June 30, 1998, not included in
previous 10-Q filings
1. The report dated May 14, 1998, included the following important event:
On May 14, 1998, Total System Services, Inc. (Registrant) announced
that it has signed a ten year processing agreement with Sears, Roebuck
and Co. (Sears) to convert and process its private-label portfolio on
TSYS' TS2 Cardholder System. The ten year term will begin upon the
completion of the conversion of Sears accounts to TS2, which
conversion is anticipated to be completed in the second quarter of
1999.
- 19 -
<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: August 13, 1998 by: /s/ Richard W. Ussery
--------------------------
Richard W. Ussery
Chairman of the Board
and Chief Executive
Officer
Date: August 13, 1998 by: /s/ James B. Lipham
---------------------------
James B. Lipham
Chief Financial Officer
- 20 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000721683
<NAME> TOTAL SYSTEM SERVICES, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 35,460,316
<SECURITIES> 0
<RECEIVABLES> 71,305,907
<ALLOWANCES> 707,760
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<CURRENT-ASSETS> 129,097,932
<PP&E> 146,747,670
<DEPRECIATION> 70,729,841
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0
<COMMON> 19,422,528<F1>
<OTHER-SE> 220,771,003<F1>
<TOTAL-LIABILITY-AND-EQUITY> 318,194,469
<SALES> 187,787,391
<TOTAL-REVENUES> 187,787,391
<CGS> 0
<TOTAL-COSTS> 161,559,472
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<INCOME-TAX> 10,697,747
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<FN>
<F1>On April 16, 1998, TSYS announced a three-for-two stock split that was
issued on May 8, 1998, to shareholders of record as of April 27, 1998. Financial
data schedules have not been restated for prior periods for this
recapitalization.
</FN>
</TABLE>
