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 March 31, 2000
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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.)
1600 First 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 May 11, 2000
- ---------------------------------- --------------------
Common Stock, $.10 par value 194,780,470
<PAGE>
TOTAL SYSTEM SERVICES, INC.
INDEX
Page
Number
----------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) - March 31, 2000
and December 31, 1999 ....................................... 3
Consolidated Statements of Income (unaudited) - Three months
ended March 31, 2000 and 1999 ................................ 4
Consolidated Statements of Cash Flows (unaudited) - Three
months ended March 31, 2000 and 1999 ......................... 5
Notes to Consolidated Financial Statements (unaudited) .......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .........................11
Part II. Other Information
Item 6. (a) Exhibits .................................................19
(b) Reports on Form 8-K .....................................19
Signatures ..............................................................20
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<PAGE>
TOTAL SYSTEM SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Unaudited)
<TABLE>
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March 31, December 31,
2000 1999
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (includes $63.4 million and $54.3 million
on deposit with a related party at 2000 and 1999, respectively) . $ 64,363,015 54,903,107
Accounts receivable, net of allowance for doubtful accounts of
$1.8 million and $1.3 million at 2000 and 1999, respectively .... 98,598,151 99,601,498
Prepaid expenses and other current assets ......................... 26,824,718 25,171,328
------------- ------------
Total current assets .......................................... 189,785,884 179,675,933
Property and equipment, less accumulated depreciation and
amortization of $86.7 million and $83.0 million at 2000 and
1999, respectively ................................................ 94,588,766 96,254,657
Computer software, less accumulated amortization of
$78.1 million and $72.3 million at 2000 and 1999, respectively .... 97,557,009 98,824,792
Deferred income tax assets .......................................... 9,788,414 9,422,203
Other assets ........................................................ 84,362,934 82,594,156
------------- ------------
Total assets .................................................. $ 476,083,007 466,771,741
============= ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .................................................. $ 11,484,705 15,267,979
Accrued salaries and employee benefits ............................ 19,203,421 36,421,238
Current portion of long-term debt and obligations under
capital leases .................................................. 204,286 44,520
Other current liabilities (includes $1.8 and $1.9 million payable
to related parties at 2000 and 1999, respectively) ............. 62,684,087 51,528,099
------------- ------------
Total current liabilities ..................................... 93,576,499 103,261,836
Long-term debt and obligations under capital leases,
excluding current portion ....................................... -- 159,766
Deferred income tax liabilities ..................................... 30,872,565 29,058,083
------------- ------------
Total liabilities ............................................. 124,449,064 132,479,685
------------- ------------
Shareholders' equity:
Common stock - $.10 par value. Authorized 300,000,000
shares; 195,079,087 issued at 2000 and 1999,
respectively; 194,780,470 and 194,861,620 outstanding
at 2000 and 1999, respectively ................................ 19,507,909 19,507,909
Additional paid-in capital ........................................ 6,446,200 6,442,300
Accumulated other comprehensive loss .............................. (1,514,038) (1,453,708)
Treasury stock .................................................... (2,840,085) (1,529,176)
Retained earnings ................................................. 330,033,957 311,324,731
------------- ------------
Total shareholders' equity .................................... 351,633,943 334,292,056
------------- ------------
Total liabilities and shareholders' equity .................... $ 476,083,007 466,771,741
============= ============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
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<PAGE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Income Statements
(Unaudited)
<TABLE>
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Three months ended
March 31,
-----------------------------
2000 1999
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<S> <C> <C>
Revenues:
Bankcard data processing services (includes $10.0 million and
$7.8 million from related parties for 2000 and 1999, respectively) $122,955,158 96,078,596
Other services (includes $1.4 million and $1.8 million from related
parties for 2000 and 1999, respectively) ......................... 22,904,121 19,231,916
------------ ------------
Total revenues ................................................. 145,859,279 115,310,512
------------ ------------
Expenses:
Salaries and other personnel expense ............................... 56,898,066 48,468,080
Net occupancy and equipment expense ................................ 38,994,177 32,721,086
Other operating expenses (includes $3.3 million and $3.1 million
to related parties for 2000 and 1999, respectively) .............. 22,409,782 16,992,962
------------ ------------
Total expenses ................................................. 118,302,025 98,182,128
------------ ------------
Equity in income of joint ventures ................................... 2,967,886 2,113,288
------------ ------------
Operating income .................................................... 30,525,140 19,241,672
------------ ------------
Nonoperating income:
Gain (loss) on disposal of equipment, net .......................... 19,836 (280,616)
Interest income, net (includes $778,000 and $253,000 from a related
party for 2000 and 1999, respectively) ........................... 937,605 369,867
------------ ------------
Total nonoperating income ...................................... 957,441 89,251
------------ ------------
Income before income taxes ..................................... 31,482,581 19,330,923
Income taxes ......................................................... 10,825,340 6,382,355
------------ ------------
Net income ..................................................... $ 20,657,241 12,948,568
============ ============
Basic earnings per share ....................................... $ .11 .07
============ ============
Diluted earnings per share ..................................... $ .11 .07
============ ============
Weighted average common shares outstanding ........................... 194,821,830 194,880,819
Increase due to assumed issuance of shares
related to stock options outstanding ............................. 409,347 763,914
------------ ------------
Weighted average common and common
equivalent shares outstanding .................................... 195,231,177 195,644,733
============ ============
Cash dividends per common share ...................................... $ .01 .01
============ ============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
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<PAGE>
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
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Three months ended
March 31,
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2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 20,657,241 12,948,568
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in income of joint ventures .............................. (2,967,886) (2,113,288)
Depreciation and amortization ................................... 12,574,858 11,478,884
Provision for doubtful accounts ................................. 547,513 54,500
Deferred income tax expense (benefit) ........................... 1,448,271 (583,382)
(Gain) loss on disposal of equipment, net ....................... (19,836) 280,616
(Increase) decrease in:
Accounts receivable ............................................. 455,834 (2,580,548)
Prepaid expenses and other assets ............................... (3,387,614) (821,508)
Increase (decrease) in:
Accounts payable ................................................ (3,783,274) 2,826,768
Accrued expenses and other current liabilities .................. (6,021,368) 2,844,253
----------- -----------
Net cash provided by operating activities ................... 19,503,739 24,334,863
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment .................................. (2,278,522) (4,202,366)
Additions to computer software ...................................... (4,527,054) (10,163,343)
Proceeds from disposal of equipment ................................. 18,305 7,794
Dividends received from joint ventures .............................. -- 1,164,307
Increase in contract acquisition costs .............................. -- (1,903,352)
------------ -----------
Net cash used in investing activities ....................... (6,787,271) (15,096,960)
------------ -----------
Cash flows from financing activities:
Purchase of common stock ............................................ (1,313,916) --
Principal payments on long-term debt and
capital lease obligations ......................................... -- (22,382)
Dividends paid on common stock ...................................... (1,949,088) (1,940,440)
Proceeds from exercise of stock options ............................. 6,444 33,200
------------ -----------
Net cash used in financing activities ....................... (3,256,560) (1,929,622)
------------ -----------
Net increase in cash and cash equivalents ................... 9,459,908 7,308,281
Cash and cash equivalents at beginning of year ........................ 54,903,107 9,555,760
------------ -----------
Cash and cash equivalents at end of year .............................. $ 64,363,015 16,864,041
============ ===========
Cash paid for interest (net of capitalized amounts) ................... $ 29,339 1,153
============ ===========
Cash paid for income taxes (net of refunds received) .................. $ 2,098,078 (2,695,277)
============ ===========
</TABLE>
Significant noncash transaction: In January 1999, the Company acquired
Partnership Card Services through the issuance of 854,042 shares of common stock
with a market value of $20,070,000.
See accompanying Notes to Unaudited Consolidated Financial Statements.
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<PAGE>
TOTAL SYSTEM SERVICES, INC.
Notes to Unaudited Consolidated Financial Statements
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(R), Inc.(TSI), Columbus Productions, Inc.SM (CPI) and TSYS Canada,
Inc.SM (TCI). These financial statements have been prepared in accordance with
the instructions to Form 10-Q and do not include all information and footnotes
necessary for a 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 1999 annual report previously filed on Form
10-K.
Certain reclassifications have been made to the 1999 financial statements
to conform to the presentation adopted in 2000.
Note 2 - Supplementary Balance Sheet Information
Significant components of prepaid expenses and other current assets are
summarized as follows:
March 31, 2000 December 31, 1999
----------------- -------------------
Contract acquisition costs, net $ 6,129,073 $ 7,861,069
Prepaid expenses 12,439,919 9,709,740
Other 8,255,726 7,600,519
----------------- -------------------
Total $ 26,824,718 $ 25,171,328
================= ===================
Significant components of other assets are summarized as follows:
March 31, 2000 December 31, 1999
----------------- ------------------
Contract acquisition costs, net $ 42,047,800 $ 43,001,304
Investments in joint ventures, net 38,027,535 35,101,217
Other 4,287,599 4,491,635
----------------- ------------------
Total $ 84,362,934 $ 82,594,156
================= ==================
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<PAGE>
Notes to Unaudited Consolidated Financial Statements (continued)
Significant components of other current liabilities are summarized as
follows:
March 31, 2000 December 31, 1999
----------------- -------------------
Customer postage deposits $ 16,255,098 $ 14,913,211
Transaction processing provisions 7,228,560 5,445,862
Income taxes payable 11,079,568 3,839,992
Other 28,120,861 27,329,034
----------------- -------------------
Total $ 62,684,087 $ 51,528,099
================= ===================
Note 3 - Comprehensive Income
Comprehensive income for TSYS consists of net income and foreign currency
translation adjustments recorded as a component of shareholders' equity. Total
comprehensive income for the three months ended March 31, 2000 and 1999, is as
follows:
March 31, 2000 March 31, 1999
----------------- -------------------
Net income $ 20,657,241 $ 12,948,568
Other comprehensive income (loss):
Foreign currency translation
adjustments, net of tax (60,330) (104,893)
----------------- -------------------
Comprehensive income $ 20,596,911 $ 12,843,675
================= ===================
The income tax effects allocated to and the cumulative balance of each
component of other comprehensive loss are as follows:
<TABLE>
Balance at December Pretax Balance at
31, 1999 amount Tax benefit March 31, 2000
------------------------ ----------------- ---------------- ---------------------------
<S> <C> <C> <C> <C>
Currency translation
adjustment ($ 1,453,708) (99,259) 38,929 ($1,514,038)
======================== ================= ================ ===========================
</TABLE>
Note 4 - Segment Reporting and Major Customers
The Company reports selected information about operating segments in
accordance with Statement of Financial Accounting Standard No. 131 (SFAS 131).
Through an online accounting and bankcard data processing system, Total System
Services, Inc. provides card processing services to card-issuing institutions in
the United States, Mexico, Canada, Honduras and the Caribbean. TSYS'
subsidiaries provide support services including correspondence processing,
commercial printing and equipment leasing. Segments are identified based on the
services provided. Transaction processing services account for approximately 85%
or more of financial activity in all the quantitative thresholds required to be
measured under SFAS 131 for the three months ended March 31, 2000 and 1999. One
subsidiary, whose sole business activity is to
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<PAGE>
Notes to Unaudited Consolidated Financial Statements (continued)
provide programming support services to the parent company, was aggregated into
transaction processing services. The remaining segments were aggregated into
support services.
<TABLE>
Transaction Support
Operating Segments processing services services Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At March 31, 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 454,790,792 49,203,312 $ 503,994,104
Intersegment eliminations (37,514,784) (184,727) (37,699,511)
------------------------- ----------------------- -----------------------
Total assets $ 417,276,008 49,018,585 $ 466,294,593
========================= ======================= =======================
- ------------------------------------------------------------------------- ----------------------------------------------------
At December 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 445,504,370 47,704,132 $ 493,208,502
Intersegment eliminations (35,704,897) (154,067) (35,858,964)
------------------------- ----------------------- -----------------------
Total assets $ 409,799,473 47,550,065 $ 457,349,538
========================= ======================= =======================
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 125,296,868 21,225,740 $ 146,522,608
Intersegment revenue (83,434) (579,895) (663,329)
------------------------- ----------------------- -----------------------
Revenue from external customers $ 125,213,434 20,645,845 $ 145,859,279
========================= ======================= =======================
Equity in income of joint ventures $ 2,967,886 - $ 2,967,886
========================= ======================= =======================
Segment operating income $ 27,637,452 2,887,688 $ 30,525,140
========================= ======================= =======================
Income tax expense $ 9,704,335 1,121,005 $ 10,825,340
========================= ======================= =======================
Net income $ 18,817,082 1,840,159 $ 20,657,241
========================= ======================= =======================
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 97,881,154 17,956,877 $ 115,838,031
Intersegment revenue (127,631) (399,888) (527,519)
------------------------- ----------------------- -----------------------
Revenue from external customers $ 97,753,523 17,556,989 $ 115,310,512
========================= ======================= =======================
Equity in income of joint ventures $ 2,113,288 - $ 2,113,288
========================= ======================= =======================
Segment operating income $ 15,421,119 3,820,553 $ 19,241,672
========================= ======================= =======================
Income tax expense $ 4,940,992 1,441,363 $ 6,382,355
========================= ======================= =======================
Net income $ 10,595,108 2,353,460 $ 12,948,568
========================= ======================= =======================
</TABLE>
The following geographic area data represent revenues for the three months
ended March 31, 2000 and 1999, respectively, based on the geographic locations
of customers. Substantially all property and equipment is located in the United
States.
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<PAGE>
Notes to Unaudited Consolidated Financial Statements (continued)
Three Months Ended March 31,
-------------------------------------------
2000 1999
------------------- ------------------
United States $ 133,726,335 109,430,788
Canada 7,684,557 1,631,574
Mexico 3,809,347 4,035,896
Other 639,040 212,254
------------------- ------------------
Totals $ 145,859,279 115,310,512
=================== ==================
For the three months ended March 31, 2000 and 1999, four major customers
accounted for approximately 48.1% and 44.4% of total revenues, respectively. One
of these customers provided 15.7%, or $22.9 million, of total revenues for the
three months ended March 31, 2000, and 18.8%, or $21.6 million, for the three
months ended March 31, 1999. Another major customer accounted for 12.0%, or
$17.5 million, of total revenues for the three months ended March 31, 2000, and
14.4%, or $16.6 million, of total revenues for the three months ended March 31,
1999. Two additional customers became major customers in 2000. The first new
major customer accounted for 10.4%, or $15.2 million, of total revenues for the
three months ended March 31, 2000, and 2.8%, or $3.2 million, for the three
months ended March 31, 1999. The other new major customer accounted for 10.0%,
or $14.6 million, of total revenues for the three months ended March 31, 2000,
and 8.4%, or $9.6 million, for the three months ended March 31, 1999. Revenues
from major customers for the periods reported are attributable to both reporting
segments.
Note 5 - Legal Proceedings
On November 10, 1998, a class action complaint was filed against
NationsBank of Delaware, N.A., in the United States District Court for the
Southern District of Mississippi. On March 23, 1999, the named plaintiff amended
the complaint and named the Company and certain credit bureaus as defendants in
the case. The named plaintiff alleges, among other things, that the defendants
failed to report properly the credit standing of each member of the putative
class. The named plaintiff has defined the class as all persons and entities
within the United States who obtained credit cards from NationsBank and whose
accounts were purchased by or transferred to U.S. BankCard and whose accounts
were reported to credit bureaus or credit agencies incorrectly in August 1998.
The amended complaint alleges negligence, violation of the Fair Credit Reporting
Act, breach of the duty of good faith and fair dealing, and seeks declaratory
relief, injunctive relief and the imposition of punitive damages. This lawsuit
seeks unspecified damages. Though settlement negotiations have occurred, these
negotiations have to date not resulted in a definitive settlement agreement
among the parties. TSYS is not in a position to determine its possible exposure,
if any, as a result of the litigation.
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<PAGE>
Notes to Unaudited Consolidated Financial Statements (continued)
Note 6 - Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the balance sheet at fair value. The accounting for
changes in the fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding it. If certain conditions are
met, entities may elect to designate a derivative instrument as a hedge of
exposures to changes in fair values, cash flows or foreign currencies. If the
hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately. If
the derivative instrument is not designated as a hedge, the gain or loss is
recognized in earnings in the period of change.
For TSYS, SFAS 133, as amended by SFAS 137, is effective January 1, 2001.
On adoption, the provisions of SFAS 133 must be applied prospectively. TSYS is
in the process of assessing the impact that SFAS 133 will have on its financial
statements.
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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 March 31:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
------------------------ ----------------------
2000 1999 2000 vs. 1999
-------- --------- ----------------------
Revenues:
Bankcard data
processing services 84.3% 83.3% 28.0%
Other services 15.7 16.7 19.1
------- -------
Total revenues 100.0 100.0 26.5
------- -------
Expenses:
Salaries and other
personnel expense 39.0 42.0 17.4
Net occupancy and
equipment expense 26.7 28.4 19.2
Other operating
expenses 15.4 14.7 31.9
------- -------
Total operating
expenses 81.1 85.1 20.5
------- -------
Equity in income
of joint ventures 2.0 1.8 40.4
------- -------
Operating
income 20.9 16.7 58.6
Nonoperating income 0.7 0.1 nm
------- -------
Income before
income taxes 21.6 16.8 62.9
Income taxes 7.4 5.6 69.6
------- -------
Net income 14.2% 11.2% 59.5%
======= =======
nm = not meaningful
Total revenues increased $30.5 million, or 26.5%, during the three months
ended March 31, 2000, compared to the same period in 1999.
- 11 -
<PAGE>
Results of Operations (continued)
Revenues from bankcard data processing services increased $26.9 million, or
28.0%, in the three months ended March 31, 2000, compared to the same period in
1999. Increased revenues from bankcard data processing services are attributable
to the growth in the card portfolios of existing customers, as well as
cardholder accounts of new customers converted to THE TOTAL SYSTEM(R). Increases
in the volumes of authorizations and transactions associated with the additional
cardholder accounts also contributed to the increased revenues. Processing
contracts with large customers, representing a significant portion of the
Company's total revenues, generally provide for discounts on certain services
based on the size and activity of customers' portfolios. As a result, bankcard
data processing revenues and the related margins are influenced by the customer
mix relative to the size of customer bankcard portfolios, as well as the number
and activity of individual cardholder accounts processed for each customer.
Average cardholder accounts on file for the three months ended March 31,
2000, were 209.4 million, which was an increase of approximately 59.8% over the
average of 131.0 million for the same period in 1999. Cardholder accounts on
file at March 31, 2000, were 209.5 million, a 36.4% increase over the 153.6
million accounts on file at March 31, 1999. The increase in cardholder accounts
on file from March 1999 to March 2000 included net internal growth of existing
customers of 5.1 million cardholder accounts and approximately 50.8 million
accounts of new customers.
The Company was processing 147.3 million accounts on TS2(R) at March 31,
2000, a 53.9% increase over the 95.7 million at March 31, 1999. The increase in
TS2 accounts on file from March 1999 to March 2000 included net internal growth
of existing customers of 1.4 million and approximately 50.2 million accounts of
new customers.
TSYS provides processing services to its clients to include processing
debit, commercial, retail, stored value and consumer cards. Commercial cards
include purchasing cards, corporate cards and fleet cards for employees. The
Company was processing 11.5 million commercial cards at the end of March 31,
2000, an increase of 23.1% compared to 9.3 million commercial cards at the end
of March 31, 1999.
The Company is the leading third-party processor of retail accounts. At
March 31, 2000, TSYS was processing 90.8 million retail accounts, an increase of
111.9% over the 42.9 million retail accounts at March 31, 1999. The significant
increase in the number of retail accounts is due to the completion of the
conversions of the account portfolios for Sears and Nordstrom, which occurred
during the second and third quarters of 1999.
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 ended March 31, 2000, four major customers accounted for approximately
48.1% of total revenues, compared to 44.4% for the three months ended March 31,
1999. The loss of one of the Company's major customers,
- 12 -
<PAGE>
Results of Operations (continued)
or other significant customers, could have a material adverse effect on the
Company's financial condition and results of operations.
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,
now a part of Citigroup after CITIBANK's merger with Travelers Group, Inc. On
February 26, 1999, CITIBANK notified TSYS of its decision to terminate UCS'
processing agreement with TSYS for consumer credit card accounts at the end of
its original term on August 1, 2000. The deconversion of the consumer credit
accounts occurred during May 2000; however, the Company will continue to receive
contractually obligated minimum processing fees from UCS until August 1, 2000.
TSYS' management believes that CITIBANK will not be a major customer for the
year 2000. TSYS' management further believes that the loss of revenues from UCS
for the months of August through December 2000, combined with decreased expenses
from the reduction in hardware and software and the redeployment of personnel,
should not have a material adverse effect on the Company's financial condition
or results of operations for the year ending December 31, 2000.
In March 2000, the Company announced its intention to launch a new, wholly
owned subsidiary, DotsConnect.com, Inc. (DotsConnect), to focus exclusively on
the electronic payments (e-payments) market. DotsConnect will deliver premier
e-payments software that allows buyers and sellers to conduct commerce
electronically. The business of DotsConnect will focus on four areas:
business-to-consumer financial services applications, Web hosting,
business-to-business financial services applications, and electronic bill
presentment and payment. DotsConnect will be headquartered in Columbus, Georgia,
with an office in Atlanta, Georgia. DotsConnect commenced operations on May 1,
2000, with approximately 30 team members comprising the initial DotsConnect
team.
Revenues from other services increased $3.7 million, or 19.1%, in the first
quarter of 2000, compared to the first quarter of 1999. Revenues from other
services consist primarily of revenues generated by TSYS' wholly owned
subsidiaries. For the first three months of 1999, revenues from other services
included a $1.4 million early termination fee.
Total operating expenses increased 20.5% for the three months ended March
31, 2000, compared to the same period in 1999. The increases in operating
expenses are attributable to increases in all expense categories as described
below.
Employment expenses increased $8.4 million, or 17.4%, for the three months
ended March 31, 2000, compared to the same period in 1999. The change in
employment expenses consists of increases of $11.4 million for the three months
ending March 31, 2000, associated with the growth in the number of employees,
normal salary increases and related benefits. This change was offset by $3.0
million invested in software development costs for the three months ending March
31, 2000. The majority of the software development costs were related to the
development of a commercial card system for TS2 which began in May 1998 and is
expected to be substantially completed in 2000. The average number of employees
in the first quarter of
- 13 -
<PAGE>
Results of Operations (continued)
2000 increased to 4,336, a 10.8% increase over the 3,915 in the same period of
1999. At April 30, 2000, TSYS had 4,296 full-time and 260 part-time employees.
Net occupancy and equipment expense increased $6.3 million, or 19.2% for
the three months ended March 31, 2000, over the same period in 1999. Computer
equipment and software rentals, which represent the largest component of net
occupancy and equipment expense, increased 19.5% to $19.9 million in the first
quarter of 2000, compared to $16.6 million in the same period of 1999. Due to
rapidly changing technology in computer equipment, TSYS' equipment needs are
achieved to a large extent through operating leases. During 1999 and the first
three months of 2000, the Company made investments in computer software licenses
and hardware to accommodate increased volumes due to the expected growth in the
number of accounts associated with new and existing customers.
During the third quarter of 1999, TSYS officially opened the first phase of
its Riverfront Campus and essentially completed moving the majority of its
downtown employees to the facility. TSYS did not renew several leases at the end
of September and sold two of its vacated buildings.
Other operating expenses increased 31.9% for the three months ended March
31, 2000, compared to the same period in 1999. The growth in other operating
expenses for 2000 is primarily due to increased business development costs
associated with exploring new business opportunities, both domestically and
internationally; the establishment of an international office in London;
increased transaction processing expenses associated with the increase in the
volume of accounts processed, and amortization of increased contract acquisition
costs. The conversions of Sears, Royal Bank and Canadian Tire Acceptance
Limited, begun in March 1999 and completed early in the second quarter of 1999,
contributed to the increase in amortization of contract acquisition costs.
TSYS' share of income from its equity in joint ventures was $3.0 million
and $2.1 million for the first quarters of 2000 and 1999, respectively. The
increase is the result of Vital Processing Services L.L.C.'s (Vital)
infrastructure costs impacting its operating results for the first quarter of
1999 and a decline in operating results from Total System Services de Mexico,
S.A. de C.V. (TSYS de Mexico). There remains uncertainty in the Mexican economy
which management continues to monitor.
Interest income, net, includes interest expense of $34,100 and $6,800 and
interest income of $971,700 and $376,700 for the first quarters of 2000 and
1999, respectively. The increase in interest income for the three months ending
March 31, 2000, as compared to the same period in 1999, was primarily the result
of improved levels of cash available as a result of decreased outlays related to
the purchase of equipment and software additions.
Operating income increased 58.6% for the three months ended March 31, 2000,
over the same period in 1999. The quarterly increase in operating income was
enhanced by the
- 14 -
<PAGE>
Results of Operations (continued)
achievement of the Company's commitment to contain the growth in operating
expenses below the growth rate in revenues.
TSYS' effective income tax rate for the first quarter of 2000 was 34.4%,
compared to 33.0% for the same period in 1999. Growth in pretax income at rates
greater than the growth in federal and state tax credits is the cause for the
increase in the Company's effective tax rate.
Net income for the three months ended March 31, 2000, increased 59.5% to
$20.7 million, or basic and diluted earnings per share of $.11, compared to
$12.9 million, or basic and diluted earnings per share of $.07, for the same
period in 1999. The Company expects its 2000 net income to exceed 1999 net
income by at least 20 percent.
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 three months of 2000 was $19.5 million, compared to $24.3 million in the
same period of 1999. The major uses of cash generated from operations have been
the internal development and purchase of computer software, the addition of
property and equipment, investment in contract acquisition costs, and the
payment of cash dividends.
During the first quarter of 2000, TSYS purchased property and equipment of
$2.3 million compared to $4.2 million for the same period in 1999. Additions to
computer software during the first quarter were $4.5 million compared to $10.2
million for the same period in 1999. Of the $4.5 million computer software
additions made during the first quarter, $1.5 million was for purchased software
and $3.0 million was for internally developed software compared to $6.8 million
and $3.4 million, respectively, in the same period of 1999.
In the first quarter of 2000, the Company did not make any investment in
contract acquisition costs compared to $1.9 million in the first quarter of
1999. In the fourth quarter of 1999, the Company made a payment representing a
contract acquisition investment of $10.0 million to a prospective client.
Subsequently, the prospective client announced its intention to exit the credit
card business through a sale of its accounts in 2000. Under the terms of the
arrangement, the prospective client agreed to repay the $10.0 million in the
event a processing agreement is not executed by July 1, 2000.
Dividends on common stock of $1.9 million were paid in the first quarters
of 2000 and 1999, respectively. On April 13, 2000, the Company announced a 25%
increase in its quarterly cash dividend from $0.01 to $0.0125. The cash dividend
is payable on July 1, 2000, to shareholders of record on June 22, 2000.
- 15 -
<PAGE>
Liquidity and Capital Resources (continued)
In October 1999, the Company announced a plan to repurchase up to 1.5
million shares of its common stock from time to time and at various prices over
the next 24 months. Shares repurchased could be utilized to fund TSYS' various
stock option and other compensation arrangements or used for other purposes,
including potential acquisitions. The maximum of 1.5 million shares represents
approximately five percent of the shares of TSYS common stock held by
shareholders other than TSYS' affiliates, including Synovus Financial Corp. The
Company will use internally generated cash to fund the purchases. During the
first quarter of 2000, the Company purchased 83,100 shares for $1.3 million.
Since the plan was announced, the Company purchased 160,200 shares for $2.6
million.
In 1997, construction was begun on a campus-type facility which now serves
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 purchased the land, paid for construction and development costs and
leased the property to the Company. The lease provides for a substantial
residual value guarantee, up to $81.4 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.
During the third quarter of 1999, TSYS officially opened the first phase of
its Riverfront Campus and essentially completed moving the majority of its
downtown employees to the facility. TSYS did not renew several leases at the end
of September 1999 and sold two of its vacated buildings.
In September 1999, Synovus Financial Corp. (Synovus) completed of the
acquisition of the debt collection and bankruptcy management business offered by
Wallace & de Mayo. The services provided by Wallace & de Mayo include recovery
collections work, bankruptcy process management, legal account management and
skip tracing. These services are being marketed under the name TSYS Total Debt
Management, Inc. through the Company and its wholly owned subsidiary, TSI, for
which the Company is compensated by Synovus through a management fee, beginning
in January 2000.
Although the impact of inflation on its operations cannot be precisely
determined, the Company believes that by controlling its operating expenses and
by taking advantage of more efficient computer hardware and software, it can
minimize the impact of inflation.
TSYS may seek additional 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
- 16 -
<PAGE>
Liquidity and Capital Resources (continued)
generated cash in the future, as evidenced by TSYS' current ratio of 2.0:1. At
March 31, 2000, TSYS had working capital of $96.2 million compared to $76.4
million at December 31, 1999.
Year 2000 Readiness Disclosure
Many computer programs were written with a two-digit date field. If these
programs were not made Year 2000 compliant, they would not be able to correctly
process date information for the year 2000 and beyond. Remediation efforts went
beyond the Company's internal computer systems and required coordination with
customers, vendors, government entities and other third parties to assure that
their systems and related interfaces were compliant. Failure to achieve timely
remediation of the Company's critical programs and computer systems for Year
2000 would have had a material adverse effect on the Company's financial
condition and results of operations.
TSYS experienced a smooth transition in passing the century date
changeover. TSYS did not experience any significant internal or external issues
concerning Y2K, and all TSYS companies, systems, facilities and clients
processed, and have continued to process, without incident since the date
changeover. TSYS will continue to monitor Y2K issues by overseeing critical
tasks during the year 2000. The TSYS Year 2000 Command Center and Command Posts
remained staffed during the first quarter of 2000, but have since been
disbanded. Heightened coverage of year-end 2000 processing is planned, and TSYS
intends to maintain its reporting methods to evaluate any problems.
TSYS' total cost for the Year 2000 Project amounted to approximately $17
million of direct costs. This amount consists primarily of the costs associated
with personnel dedicated to the Year 2000 Project and hardware/software costs
related to testing. During the first quarter of 2000, TSYS incurred $1.0 million
of direct costs associated with the Year 2000 Project.
Legal Proceedings
On November 10, 1998, a class action complaint was filed against
NationsBank of Delaware, N.A., in the United States District Court for the
Southern District of Mississippi. On March 23, 1999, the named plaintiff amended
the complaint and named the Company and certain credit bureaus as defendants in
the case. The named plaintiff alleges, among other things, that the defendants
failed to report properly the credit standing of each member of the putative
class. The named plaintiff has defined the class as all persons and entities
within the United States who obtained credit cards from NationsBank and whose
accounts were purchased by or transferred to U.S. BankCard and whose accounts
were reported to credit bureaus or credit agencies incorrectly in August 1998.
The amended complaint alleges negligence, violation of the Fair Credit Reporting
Act, breach of the duty of good faith and fair dealing, and seeks declaratory
relief, injunctive relief and the imposition of punitive damages. This lawsuit
seeks unspecified damages. Though settlement negotiations have occurred, these
negotiations have to date not resulted in a definitive settlement agreement
among the parties. TSYS is not in a position to determine its possible exposure,
if any, as a result of the litigation.
- 17 -
<PAGE>
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
- - and retention of - current and future processing agreements with customers;
(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, including a shift from credit to
debit cards; (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 redevelopment efforts; (x) the
effect of changes in accounting policies and practices as may be adopted by the
Financial Accounting Standards Board or the Securities and Exchange Commission;
(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; (xiv) lower than
anticipated internal growth rates for existing customers; and (xv) 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.
- 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 March 31, 2000.
1. The report dated January 11, 2000, included the following
important event:
On January 11, 2000, Total System Services, Inc.
("Registrant") announced earnings for the year ended
December 31, 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: May 11, 2000 by: /s/ Richard W. Ussery
------------------------
Richard W. Ussery
Chairman of the Board
and Chief Executive
Officer
Date: May 11, 2000 by: /s/ James B. Lipham
------------------------
James B. Lipham
Chief Financial Officer
- 20 -
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