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, 2001
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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.)
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 14, 2001
------------------------------ -------------------------------
Common Stock, $.10 par value 194,761,020
TOTAL SYSTEM SERVICES, INC.
INDEX
Page
Number
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) - March 31, 2001
and December 31, 2000 ............................................. 3
Consolidated Statements of Income (unaudited) - Three
months ended March 31, 2001 and 2000 ............................... 4
Consolidated Statements of Cash Flows (unaudited) - Three
months ended March 31, 2001 and 2000 ............................... 5
Notes to Consolidated Financial Statements (unaudited) ............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 21
Part II. Other Information
Item 6. (a) Reports on Form 8-K ...................................... 22
Signatures .............................................................. 23
- 2 -
TOTAL SYSTEM SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2001 2000
- --------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (includes $46.6 million and $74.6 million
on deposit with a related party at 2001 and 2000, respectively) $ 53,670,085 80,071,895
Accounts receivable, net of allowance for doubtful accounts of
$2.7 million at 2001 and 2000 103,640,400 100,691,083
Prepaid expenses and other current assets 32,946,774 30,192,248
------------------- ------------------
Total current assets 190,257,259 210,955,226
Property and equipment, less accumulated depreciation and
amortization of $97.9 million and $94.8 million at 2001 and
2000, respectively 111,704,226 110,971,777
Computer software, less accumulated amortization of
$89.4 million and $97.7 million at 2001 and 2000, respectively 155,621,674 145,454,042
Deferred income tax assets 10,369,183 11,104,254
Other assets 126,884,242 125,907,383
------------------- ------------------
Total assets $ 594,836,584 604,392,682
=================== ==================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 26,634,167 43,935,426
Accrued salaries and employee benefits 28,974,908 45,202,518
Other current liabilities (includes $2.4 million payable
to related parties at 2001 and 2000) 71,618,328 58,162,646
------------------- ------------------
Total current liabilities 127,227,403 147,300,590
Deferred income tax liabilities 39,210,870 34,841,622
Other long-term liabilities - 10,652,600
------------------- ------------------
Total liabilities 166,438,273 192,794,812
------------------- ------------------
------------------- ------------------
Minority interest in consolidated subsidiary 2,245,562 2,583,682
------------------- ------------------
Shareholders' equity:
Common stock - $.10 par value. Authorized 300,000,000
shares; 195,079,087 issued at 2001 and 2000,
respectively; 194,761,020 and 194,738,870 outstanding
at 2001 and 2000, respectively 19,507,909 19,507,909
Additional paid-in capital 7,227,166 6,998,100
Accumulated other comprehensive loss (3,831,563) (1,613,681)
Treasury stock (3,560,535) (3,594,683)
Retained earnings 406,809,772 387,716,543
------------------- ------------------
Total shareholders' equity 426,152,749 409,014,188
------------------- ------------------
Total liabilities and shareholders' equity $ 594,836,584 604,392,682
=================== ==================
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 3 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Income
(Unaudited)
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Three months ended,
March 31,
---------------------------------------
2001 2000
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Revenues:
Bankcard data processing services (includes $10.2 million and
$10.0 million from related parties for 2001 and 2000, respectively) $ 130,322,833 122,955,158
Other services (includes $1.7 million and $1.4 million from related
parties for 2001 and 2000, respectively) 23,810,748 22,904,121
------------------- -------------------
Total revenues 154,133,581 145,859,279
------------------- -------------------
Expenses:
Salaries and other personnel expense 61,285,319 56,898,066
Net occupancy and equipment expense 41,057,329 38,994,177
Other operating expenses (includes $2.1 million and $3.3 million
to related parties for 2001 and 2000, respectively) 22,551,767 22,409,782
------------------- -------------------
Total expenses 124,894,415 118,302,025
------------------- -------------------
Equity in income of joint ventures 3,236,614 2,967,886
------------------- -------------------
Operating income 32,475,780 30,525,140
------------------- -------------------
Nonoperating income (expense):
Gain (loss) on disposal of equipment, net (19,774) 19,836
Interest income, net (includes $918,000 and $778,000 from a related
party for 2001 and 2000, respectively) 1,008,535 937,605
Minority interest in consolidated subsidiary's net loss 25,202 -
------------------- -------------------
Total nonoperating income 1,013,963 957,441
------------------- -------------------
Income before income taxes 33,489,743 31,482,581
Income taxes 11,475,122 10,825,340
------------------- -------------------
Net income $ 22,014,621 20,657,241
=================== ===================
Basic earnings per share $ .113 .106
=================== ===================
Diluted earnings per share $ .113 .106
=================== ===================
Weighted average common shares outstanding 194,760,194 194,821,830
Increase due to assumed issuance of shares
related to stock options outstanding 773,893 409,347
------------------- -------------------
Weighted average common and common
equivalent shares outstanding 195,534,087 195,231,177
=================== ===================
Cash dividends per common share $ .015 .010
=================== ===================
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 4 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows
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Three months ended,
March 31,
- ----------------------------------------------------------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 22,014,621 20,657,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in consolidated subsidiary's net loss (25,202) -
Equity in income of joint ventures (3,236,614) (2,967,886)
Depreciation and amortization 12,775,358 12,574,858
Provision for doubtful accounts 40,756 547,513
Deferred income tax expense (benefit) 5,104,319 1,448,271
(Gain) loss on disposal of equipment, net 19,774 (19,836)
(Increase) decrease in:
Accounts receivable (2,990,073) 455,834
Prepaid expenses and other assets (4,949,317) (3,387,614)
Increase (decrease) in:
Accounts payable (27,953,859) (3,783,274)
Accrued expenses and other current liabilities (1,515,525) (6,021,368)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (715,762) 19,503,739
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (6,131,337) (2,278,522)
Additions to computer software (17,136,400) (4,527,054)
Proceeds from disposal of equipment 960,500 18,305
Dividends received from joint ventures 3,335,440 -
Increase in contract acquisition costs (4,509,099) -
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,480,896) (6,787,271)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repurchase of common stock - (1,313,916)
Dividends paid on common stock (2,434,218) (1,949,088)
Proceeds from exercise of stock options 229,066 6,444
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,205,152) (3,256,560)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (26,401,810) 9,459,908
Cash and cash equivalents at beginning of year 80,071,895 54,903,107
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 53,670,085 64,363,015
================= ==============
Cash paid for interest (net of capitalized amounts) $ - 29,339
================= ==============
Cash paid for income taxes (net of refunds received) $ 422,657 2,098,078
================= ==============
See accompanying Notes to Unauditied Consolidated Financial Statements.
- 5 -
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)); its wholly owned
subsidiaries, Columbus Depot Equipment Company(SM) (CDEC(SM)), TSYS Total
Solutions(R), Inc.(TSI), Columbus Productions, Inc.(SM) (CPI), TSYS Canada,
Inc.(SM) (TCI) and DotsConnect, Inc.(DotsConnect); and its majority owned
foreign subsidiary, GP Network Corporation (GP Net). 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 2000 annual report previously filed on Form 10-K.
Note 2 - Supplementary Balance Sheet Information
Significant components of prepaid expenses and other current assets are
summarized as follows:
March 31, 2001 December 31, 2000
------------------------- ------------------------
Contract acquisition
costs, net $ 7,305,995 $ 9,644,657
Prepaid expenses 10,893,817 12,377,875
Other 14,746,962 8,169,716
------------------------- ------------------------
Total $ 32,946,774 $ 30,192,248
========================= ========================
Significant components of other assets are summarized as follows:
March 31, 2001 December 31, 2000
------------------------- ------------------------
Contract acquisition
costs, net $ 67,354,319 $ 65,434,739
Equity investments, net 44,089,594 45,631,679
Other 15,440,329 14,840,965
------------------------- ------------------------
Total $ 126,884,242 $ 125,907,383
========================= ========================
Significant components of other current liabilities are summarized as
follows:
March 31, 2001 December 31, 2000
------------------------- ------------------------
Customer postage
deposits $ 20,921,494 $ 18,751,617
Transaction processing
provisions 11,270,908 11,886,312
Other 39,425,926 27,524,717
------------------------- -------------------------
Total $ 71,618,328 $ 58,162,646
========================= =========================
- 6 -
Notes to Unaudited Consolidated Financial Statements (continued)
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 is as follows:
2001 2000
------------------------- ------------------------
Net income $ 22,014,621 $ 20,657,241
Other comprehensive
income (loss):
Foreign currency
translation adjustments,
net of tax (2,217,882) (60,330)
------------------------- -----------------------
Comprehensive income $ 19,796,739 $ 20,596,911
========================= =======================
The income tax effects allocated to and the cumulative balance of
accumulated other comprehensive loss are as follows:
Balance at December Pretax Balance at
31, 2000 amount Tax benefit March 31, 2001
-------------------- ------------- ------------- ------------------
Currency
translation
adjustments ($1,613,681) (3,509,050) 1,291,168 ($3,831,563)
================== ============ =========== =============
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 and electronic commerce services to
card-issuing institutions in the United States, Mexico, Canada, Honduras, United
Kingdom 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 83% or more of financial activity in all the
quantitative thresholds required to be measured under SFAS 131 for the three
months ended March 31, 2001 and 2000. Three subsidiaries were aggregated into
transaction processing services. One of these subsidiaries' sole business
activity is to provide programming support services to the parent company.
Another subsidiary provides electronic commerce activities previously performed
by TSYS for its clients. The other transaction processing subsidiary serves as a
payment gateway for more than 100,000 merchants in Japan. The remaining segments
were aggregated into support services.
- 7-
Notes to Unaudited Consolidated Financial Statements (continued)
Transaction Support
Operating Segments processing services services Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
At March 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 580,544,201 59,173,196 $ 639,717,397
Intersegment eliminations (44,882,678) 1,865 (44,880,813)
------------------------- ----------------------- -----------------------
Total assets $ 535,661,523 59,175,061 $ 594,836,584
========================= ======================= =======================
- ---------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 590,065,183 57,738,614 $ 647,803,797
Intersegment eliminations (43,264,302) (146,813) (43,411,115)
------------------------- ----------------------- -----------------------
Total assets $ 546,800,881 57,591,801 $ 604,392,682
========================= ======================= =======================
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 133,635,510 21,541,194 $ 155,176,704
Intersegment revenue (468,629) (574,494) (1,043,123)
------------------------- ----------------------- -----------------------
Revenue from external customers $ 133,166,881 20,966,700 $ 154,133,581
========================= ======================= =======================
Equity in income of joint ventures $ 3,236,614 - $ 3,236,614
========================= ======================= =======================
Segment operating income $ 30,019,202 2,456,578 $ 32,475,780
========================= ======================= =======================
Income taxes $ 10,507,933 967,189 $ 11,475,122
========================= ======================= =======================
Net income $ 20,361,154 1,653,467 $ 22,014,621
========================= ======================= =======================
- ---------------------------------------------------------------------------------------------------------------------------------
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 taxes $ 9,704,335 1,121,005 $ 10,825,340
========================= ======================= =======================
Net income $ 18,817,082 1,840,159 $ 20,657,241
========================= ======================= =======================
The following geographic area data represent revenues for the three months
ended March 31, 2001 and 2000, respectively, based on the geographic locations
of customers. The Company maintains property and equipment in Europe, Canada and
Japan; however, substantially all property and equipment is located in the
United States.
- 8 -
Notes to Unaudited Consolidated Financial Statements (continued)
Three Months Ended March 31,
- --------------------------------- ---------------------------------------------
2001 2000
- --------------------------------- ------------------- -----------------
United States $ 139,135,035 133,726,335
Canada* 8,825,791 7,976,124
Mexico 3,324,255 3,809,347
Japan 2,446,724 0
Other 401,776 347,473
- --------------------------------- ------------------- -----------------
Totals $ 154,133,581 145,859,279
- --------------------------------- =================== =================
*These revenues include those generated from the Caribbean accounts owned by the
Bank of Nova Scotia.
Major Customers
Three Months Ended March 31,
- ---------------------------- ----------------------------------------------------------------------------
Revenue 2001 2000
- ---------------------------- ----------------------------------- --------------------------------
(Dollars in millions) % of Total % of Total
Dollars Revenues Dollars Revenues
- ---------------------------- ------------ -------------------- ------------- -------------------
One $ 24.4 15.8% $ 22.9 15.7%
Two 19.0 12.3 14.6 10.0
Three na na 17.5 12.0
Four na na 15.2 10.4
------------ -------------------- --------------- ---------------
Totals $ 43.4 28.1% $ 70.2 48.1%
- ---------------------------- ============ ================ ============= ===============
na = not applicable. Client represented less than 10% of total revenues.
For the three months ended March 31, 2001, the Company had two major
customers. The two major customers for the quarter ended March 31, 2001
accounted for approximately 28.1%, or $43.4 million, of total revenues. For the
three months ended March 31, 2000, TSYS had four major customers that accounted
for 48.1%, or $70.2 million, of total revenues. 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
- 9 -
Notes to Unaudited Consolidated Financial Statements (continued)
Reporting Act, breach of the duty of good faith and fair dealing, and seeks
declaratory relief, injunctive relief and the imposition of punitive damages.
The parties have reached a settlement of this litigation, which settlement is
subject to court approval under Rule 23(e) of the Federal Rules of Civil
Procedure. The United States District Court for the Southern District of
Mississippi preliminarily approved the settlement on May 10, 2001. Payments by
TSYS to settle the litigation are not expected to be material to TSYS' financial
condition or results of operations, and management expects the settlement to be
substantially covered by insurance.
Note 6 - Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138 (SFAS 138), "Accounting for
Certain Derivative Instruments and Hedging Activities, an amendment of SFAS
133." SFAS 133 and SFAS 138 require that all derivative instruments be recorded
on the balance sheet at their respective fair values. 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, 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 138, is effective January 1, 2001.
On adoption, the provisions of SFAS 133 must be applied prospectively.
The Company did not have any outstanding derivative instruments or hedging
transactions at March 31, 2001. The Company is assessing the impact of SFAS 133
and SFAS 138 on anticipated hedging instruments.
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", was issued. SFAS No. 140
is effective for all transfers and servicing of financial assets and
extinguishments of liabilities after March 31, 2001. The Statement is effective
for recognition and reclassification of collateral and disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. Due to the nature of its activities, TSYS does not expect a
material change to its results of operations as a result of adopting SFAS No.
140.
- 10 -
Notes to Unaudited Consolidated Financial Statements (continued)
Note 7 - Commitments and Contingencies
In the fourth quarter of 1999, the Company made a payment representing a
contract acquisition cost of $10.0 million to a prospective client. Under the
terms of the arrangement, the prospective client agreed to repay the $10.0
million in the event a processing agreement was not executed by July 1, 2000.
Subsequently, the prospective client announced its intention to exit the credit
card business through a sale of its accounts in 2000. The parent of the
prospective client repaid the $10.0 million advance in June 2000 by obtaining a
five-year loan from Columbus Bank and Trust Company (CB&T). TSYS has agreed to
guarantee the loan. As of March 31, 2001, all payments on the loan have been
made timely. The remaining balance at March 31, 2001 was $9.0 million. The
Company does not anticipate any negative consequences to its results of
operations and financial condition as a result of its loan guarantee.
- 11 -
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
------------------------
----------------------------
2001 2000 2001 vs. 2000
------------ --------- ------------------------
Revenues:
Bankcard data processing services 84.6 % 83.3 % 6.0 %
Other services 15.4 16.7 4.0
--------- ---------
Total revenues 100.0 100.0 5.7
--------- ---------
Expenses:
Salaries and other personnel expense 39.8 39.0 7.7
Net occupancy and equipment expense 26.6 26.7 5.3
Other operating expenses 14.6 15.4 0.6
--------- ---------
Total expenses 81.0 81.1 5.6
--------- ---------
Equity in income of joint ventures 2.1 2.0 9.1
--------- ---------
Operating income 21.1 20.9 6.4
Nonoperating income 0.6 0.7 5.9
--------- ---------
Income before income taxes 21.7 21.6 6.4
Income taxes 7.4 7.4 6.0
--------- --------
Net income 14.3 % 14.2 % 6.6 %
========= ========
Total revenues increased $8.3 million, or 5.7% during the three months
ended March 31, 2001, compared to the same period in 2000.
Revenues from bankcard data processing services increased $7.4 million, or
6.0%, in the three months ended March 31, 2001, compared to the same period in
2000. 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).
Processing contracts with large customers, representing a significant portion of
the
- 12 -
Results of Operations (continued)
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.
The Company's revenues are also impacted by the use of value added products
and services of TSYS' processing systems by clients. Value added products and
services are optional features each client can choose to subscribe to in order
to increase the financial performance of its portfolio. For the three months
ended March 31, 2001 and 2000, value added products and services represented
14.1%, or $21.8 million, and 12.5%, or $18.3 million, of total revenues,
respectively. Revenues from value added products and services were up 19.0%, or
$3.5 million, for the three months ended March 31, 2001, compared to the same
period in 2000. The Company did change its accounting policy for recognizing
revenue for one of its value added products and services it offers clients. The
Company was recognizing revenue one month in arrears. Due to historical data the
Company has accumulated over a set amount of time, the Company determined that
it can estimate its current monthly revenue with some precision. During the
quarter ended March 31, 2001, the Company has recognized, as a result of the
change, four months of revenue for this one value added product and service.
Average cardholder accounts on file for the three months ended March 31,
2001, were 198.3 million, a decrease of approximately 5.3% over the average of
209.4 million for the same period in 2000. Cardholder accounts on file at March
31, 2001, were 199.2 million, a 4.9% decrease compared to the 209.5 million
accounts on file at March 31, 2000. The change in cardholder accounts on file
from March 2000 to March 2001 included the deconversion and of 35.0 million
accounts of Universal Card Services (UCS) and others, the addition of
approximately 21.7 million accounts attributable to the internal growth of
existing clients, and approximately 3.0 million accounts for new clients.
The Company provides services to its clients including processing
commercial, retail, and consumer cards. Commercial cards include purchasing
cards, corporate cards and fleet cards for employees. Retail cards include
private label and gift cards. Consumer cards include Visa and MasterCard bank
and debit cards. The following table summarizes TSYS' accounts on file by
portfolio type:
Accounts on File Types Mar 31, Mar 31,
(in millions) 2001 2000 % Change
- -------------------------------- ----------- ----------- ------------
Consumer 99.0 107.2 (7.7)
Retail 85.0 90.8 (6.4)
Commercial 15.2 11.5 32.3
- -------------------------------- ----------- ----------
Total 199.2 209.5 (4.9)
- -------------------------------- =========== ===========
- 13 -
Results of Operations (continued)
TSYS expects to expand its position in the consumer card, retail card and
commercial card arenas. The Company's future growth in the consumer card arena
is dependent upon increased card activity - primarily debit cards - and
continued internal growth in clients' portfolios.
TSYS is positioned as a major third-party processor of retail cards.
Traditional retail card operations are beginning to increase the activity of
their portfolios by converting inactive accounts to Visa/MasterCard consumer
cards. TSYS is able to provide its extensive bankcard processing tools and
techniques, as well as value-added functionality, to traditional retail card
operations allowing better segmentation and potentially increased profitability
for clients. TSYS does not receive as much, on an account per basis, as it does
for a consumer card because it does not perform as many services for a retail
portfolio as it does for a traditional consumer portfolio.
TSYS has a dominant market share position in the domestic Visa and
MasterCard commercial card processing arena. Future growth in this area is
dependent upon increased card activity with more business purchasing being
transacted electronically and additional firms realizing the benefits of
converting their paper-based purchasing systems to electronic transactions.
TSYS provides processing services to its clients worldwide. TSYS plans to
continue to expand its service offerings to other countries in the future. The
following table summarizes TSYS accounts on file by region:
Accounts on File by Region Mar 31, Mar 31,
(in millions) 2001 2000 % Change
- --------------------------------- --------- ------- --------------
Domestic 181.9 193.1 (5.8)
Foreign 17.3 16.4 5.3
- --------------------------------- ------- -------
Total 199.2 209.5 (4.9)
- --------------------------------- ======= =======
In 2000, the Company announced the signing of The Royal Bank of Scotland
Group plc and Allied Irish Banks plc to multiyear processing agreements. The
portfolios of both clients are expected to be fully converted by the middle of
the third quarter of 2001.
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, 2001 and 2000, the Company had two major customers. The
two major customers for the quarter ended March 31, 2001 accounted for
approximately 28.1%, or $43.4 million, of total revenues. For the three months
ended March 31, 2000, TSYS had four major customers that accounted for 48.1%, or
$70.2 million, of total revenues. The loss of 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.
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;
- 14 -
Results of Operations (continued)
however, the Company continued to receive contractually obligated minimum
processing fees from UCS until August 1, 2000.
In March 2000, the Company announced its intention to launch a new, wholly
owned subsidiary, DotsConnect, Inc. (DotsConnect), to focus exclusively on the
electronic payments (e-payments) market. DotsConnect delivers premier e-payments
software that allows buyers and sellers to conduct commerce electronically.
DotsConnect is headquartered in Columbus, Georgia, with an office in Atlanta,
Georgia. DotsConnect commenced operations on May 1, 2000.
In August 2000, the Company announced that it had entered the Asian card
market by purchasing a controlling equity interest in GP Network Corporation (GP
Net), an established electronics payment company for more than 100,000 merchants
in Japan. GP Net's revenues are included in bankcard processing revenues. TSYS
also announced the opening of an office in Japan to facilitate its marketing of
processing services for card-issuing financial institutions and retailers.
Revenues from other services consist primarily of revenues generated by
TSYS' wholly owned subsidiaries. Revenues from other services increased $0.9
million, or 4.0%, in the first quarter of 2001, compared to the first quarter of
2000. The majority of the revenues from other services are generated by TSYS
Total Solutions, Inc. (TSI).
Total expenses increased 5.6% for the three months ended March 31, 2001
compared to the same period in 2000. The increases in operating expenses are
attributable to increases in a majority of expense categories as described
below.
Employment expenses increased $4.4 million, or 7.7%, for the three months
ended March 31, 2001, compared to the same period in 2000. The change in
employment expenses consists of increases of $9.4 million for the three months
ended March 31, 2001, associated with the growth in the number of employees,
normal salary increases and related benefits. This change was offset by $5.0
million invested in capitalized software development costs and contract
acquisition costs for the three months ending March 31, 2001. Capitalized
software development costs relate to the continued development of a commercial
card system for TS2 which began in May 1998 and is expected to be substantially
complete in the third quarter of 2001, and enhancements to expand international
functionality. The average number of employees in the first quarter of 2001
increased to 4,741, a 9.3% increase over 4,336 in the same period of 2000. At
April 30, 2001, TSYS had 4,709 full-time and 221 part-time employees.
Net occupancy and equipment expense increased $2.1 million, or 5.3%, for
the three months ended March 31, 2001, over the same period in 2000. Computer
equipment and software rentals, which represent the largest component of net
occupancy and equipment expense, remained the same in the first quarter of 2001,
compared to the same period of 2000. Due to rapidly changing technology in
computer equipment, TSYS' equipment needs are achieved to a large extent through
operating leases.
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Results of Operations (continued)
During 2000, the Company established a processing data center in Europe and
purchased a building to house client service personnel. Although it has yet to
process an account for its new European clients, the Company had to build the
necessary infrastructure in order to begin processing accounts in 2001.
Other operating expenses increased 0.6% for the three months ended March
31, 2001 compared to the same period in 2000. As a result of its international
expansion, professional consulting, travel and business development related
expenses have increased $4.5 million for the first quarter of 2001 when compared
to the same period in 2000. These increased expenses were offset as a result of
cost saving initiatives that resulted in the Company reducing expenses related
to rework and errors.
TSYS' share of income from its equity in joint ventures was $3.2 million
for the first quarter of 2001 compared to $3.0 million for the first quarter of
2000. The increase is the result of improved operating results of both Vital
Processing Services L.L.C. (Vital) and 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.
The Company has completed negotiations with its Mexican partners to
restructure its Mexican joint venture agreement whereby TSYS will process for
the member banks directly instead of processing through the joint venture. The
joint venture will continue to print statements and provide card-issuing
services to the joint venture clients. The Company is now in the process of
executing contracts with each member bank. Prior to the contracts being
consummated, the Company will continue to provide services to its clients under
the prior arrangement. The net effect of the restructuring will be minimal and
should result in a decrease in equity in income of joint ventures while bankcard
processing revenues should increase. The new restructured arrangement is
expected to take place during 2001 once the contracts are finalized.
Interest income, net, includes interest income of $1.0 million and no
interest expense for the first quarter of 2001. During the first quarter of
2000, interest income, net, included interest income of $971,700 and interest
expense of $34,100. The increase in interest income for the three months ending
March 31, 2001, as compared to the same period in 2000, was primarily the result
of improved levels of cash available for investment as a result of increased
revenues as well as decreased outlays related to the purchase of equipment and
software additions.
Operating income increased 6.4% for the three months ended March 31, 2001
over the same period in 2000. The increase in operating income was the result 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 2001 was 34.3%,
compared to 34.4% for the same period in 2000.
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Results of Operations (continued)
Net income for the three months ended March 31, 2001, increased 6.6% to
$22.0 million, or basic and diluted earnings per share of $.113, compared to
$20.7 million, or basic and diluted earnings per share of $.106, for the same
period in 2000. The Company expects its 2001 net income to exceed 2000 net
income by approximately 20 percent. This anticipated increase in net income is
based in part upon the following assumptions: a 10-12% internal growth rate for
existing clients; an approximately 50% increase in international revenues on an
annualized basis; an aggressive focus on expense control and productivity
improvement; the successful implementation and market acceptance of new product
offerings, including stored value and e-commerce; and increasing the total
cardholder base to approximately 220 million accounts. The Company also expects
to grow its net income by 20-25% each year for the years 2002 and 2003.
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. 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 2001, TSYS purchased property and equipment of
$6.1 million. Additions to computer software during the first quarter were $17.1
million. Of the $17.1 million computer software additions made during the first
quarter, $14.0 million was for purchased software and $3.1 million was related
to investments in internally developed software.
In the first three months of 2001, the Company made investments in contract
acquisition costs of $4.5 million compared to none in the first three months of
2000. In the fourth quarter of 1999, the Company made a payment representing a
contract acquisition cost of $10.0 million to a prospective client. Under the
terms of the arrangement, the prospective client agreed to repay the $10.0
million in the event a processing agreement was not executed by July 1, 2000.
Subsequently, the prospective client announced its intention to exit the credit
card business through a sale of its accounts in 2000. In June 2000, the parent
of the prospective client repaid the $10.0 million advance by obtaining a
five-year loan from CB&T. TSYS has agreed to guarantee the loan. As of March 31,
2001, all payments on the loan have been made timely. The remaining balance at
March 31, 2001 was $9.0 million. The Company does not anticipate any negative
consequences to its results of operations and financial condition as a result of
its loan guarantee.
Dividends on common stock of $2.4 million were paid in the first quarter of
2001. On February 26, 2001, the Company announced a 20% increase in its
quarterly cash dividend from $0.0125 to $0.0150 per share. On April 13, 2000,
the Company announced a 25% increase in its quarterly cash dividend from $0.01
to $0.0125 per share.
- 17 -
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 CB&T. The Company will use
internally generated cash to fund the purchases. During the first three months
of 2001, the Company did not purchase any shares under this plan. Since the plan
was announced, the Company has purchased 207,500 shares for $3.4 million.
The Company entered into an operating lease agreement relating to the
corporate campus. The lease provides for a substantial residual value guarantee,
up to $81.3 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.
In July 2000, TSYS broke ground on a 32,000 square foot childcare facility
which will be located on the northeast corner of the campus. The new facility
offers the Company's employees an alternative option for childcare needs. The
facility is expected to cost approximately $5.0 million and is scheduled to open
during the third quarter of 2001.
In March, the Company announced plans to move its printing subsidiary, CPI,
and its materials management division into a new building in east Columbus. The
61,000 square-foot building is anticipated to be completed by August 2001 at a
cost of approximately $3.5 million. In conjunction with the move, CPI sold its
existing location for $960,000. While waiting on construction of the new
building to be completed, CPI will lease the existing facility from the new
owner.
In September 1999, Synovus Financial Corp. (Synovus) completed 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 Synovus paid TSYS a management fee of $374,000 for the three months ended
March 31, 2001, compared to $438,000 for the same period last year.
In May 2000, Synovus completed the acquisition of ProCard, Inc. (ProCard),
a leading provider of software and Internet tools designed to assist
organizations with the management of purchasing, travel and fleet card programs.
ProCard's software solutions have been integrated into TSYS' processing
solutions and offer TSYS the opportunity to further expand its services to
ProCard's clients. The Company assists in managing ProCard, for which the
Company was paid a management fee of $76,000 by Synovus for the three months
ended March 31, 2001.
Due to the complexity of the differences between the English language and
Asian languages, computer systems require two bytes to store an Asian character
compared to one byte
- 18 -
Liquidity and Capital Resources (continued)
in the English language. With its entrance into the Asian card processing
market, TSYS will begin modifying its current TS2 system to be able to
accommodate language and currency differences with Asia, commonly referred to as
the "double byte project." TSYS is in the planning stages of the double byte
project. Management expects to spend $10-15 million on the project. To date, the
Company has expensed a total of less than $1 million. The Company expects to
complete the project by the end of the second quarter of 2002.
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 generated cash in the future, as evidenced by TSYS'
current ratio of 1.5:1. At March 31, 2001, TSYS had working capital of $63.0
million compared to $63.7 million at December 31, 2000.
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. The parties
have reached a settlement of this litigation, which settlement is subject to
court approval under Rule 23(e) of the Federal Rules of Civil Procedure. The
United States District Court for the Southern District of Mississippi
preliminarily approved the settlement on May 10, 2001. Payments by TSYS to
settle the litigation are not expected to be material to TSYS' financial
condition or results of operations, and management expects the settlement to be
substantially covered by insurance.
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
- 19 -
Forward-Looking Statements (continued)
(the Act). These forward-looking statements include, among others, statements
regarding TSYS' expected expansion of its position in the consumer card, retail
card and commercial card arenas, expected growth in net income for 2001 over
2000, the expected increase in net income for 2002 and 2003, TSYS' expected
expenditures on its double byte project and the assumptions underlying such
statements. 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.
Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. A number of important factors
could cause actual results to differ materially from those contemplated by the
forward-looking statements in this filing. Many of these factors are beyond
TSYS' ability to control or predict. The factors include, but are not limited
to: (i) lower than anticipated internal growth rates for TSYS' existing
customers; (ii) TSYS' inability to control expenses and increase market share;
(iii) TSYS' inability to successfully bring new products to market, including,
but not limited to stored value and e-commerce products; (iv) the inability of
TSYS to grow its business through acquisitions; (v) TSYS' inability to increase
the revenues derived from international sources; (vi) adverse developments with
respect to entering into contracts with new clients and retaining current
clients; (vii) the merger of TSYS clients with entities that are not TSYS
clients; (viii) TSYS' inability to anticipate and respond to technological
changes, particularly with respect to e-commerce; (ix) adverse developments with
respect to the successful conversion of clients; (x) the absence of significant
changes in foreign exchange spreads between the United States and the countries
TSYS transacts business in, to include Mexico, United Kingdom, Japan, Canada and
the European Union; (xi) changes in consumer spending, borrowing and saving
habits, including a shift from credit to debit cards; (xii) changes in laws,
regulations, credit card association rules or other industry standards affecting
TSYS' business which require significant product redevelopment efforts; (xiii)
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; (xiv) the costs and effects of litigation; (xv) adverse developments
with respect to the credit card industry in general; and (xvi) overall market
conditions.
Such forward-looking statements speak only as of the date on which such
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.
- 20 -
TOTAL SYSTEM SERVICES, INC.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
The foreign currency financial statements of TSYS' foreign operations in
Mexico, Canada and Japan are translated into U.S. dollars at current exchange
rates, except for revenues, costs and expenses, and net income which are
translated at the average exchange rate for each reporting period. Net exchange
gains or losses resulting from the translation of assets and liabilities of
TSYS' foreign operations, net of tax, are accumulated in a separate section of
shareholders' equity titled accumulated other comprehensive loss. Currently,
TSYS does not use financial instruments to hedge its exposure to exchange rate
changes in Mexico, Canada or Japan because TSYS believes that the use of such
instruments would not be cost effective. TSYS' carrying value of its investment
in its Mexican joint venture was approximately $4.9 million (U.S.) at March 31,
2001, and the carrying value of the assets of its Canadian operation was
approximately $225,000 (U.S.) at March 31, 2001.
TSYS opened a branch office in Japan ("TSYS Japan") in an effort to expand
its business in the Asia Pacific region. At March 31, 2001, the carrying value
of TSYS' operations in Japan was approximately $206,000 (U.S.)
TSYS acquired a controlling interest in an established electronic payments
company in Japan, GP Network Corporation, for a total of $4.8 million. The
carrying value of the assets of TSYS' operation in Japan was approximately $5.3
million (U.S.) at March 31, 2001.
TSYS opened an office in the United Kingdom in 1999, which serves as the
headquarters for its European operations. During 2000, TSYS purchased a building
and machinery for approximately $13.0 million. TSYS also signed The Royal Bank
of Scotland Group plc and Allied Irish Banks plc to process their respective
portfolios beginning in 2001. Currently, TSYS does not use instruments to hedge
its foreign exposure in the United Kingdom. The carrying value of the assets of
TSYS' operation in Europe was approximately $64.8 million (U.S.) at March 31,
2001.
- 21 -
TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a) Forms 8-K filed during 2001.
1. The report dated April 17, 2001 included the following important event:
On April 17, 2001, Total System Services, Inc. ("Registrant")
issued a press release with respect to its first quarter 2001
earnings.
- 22 -
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 14, 2001 by: /s/ Richard W. Ussery
---------------------------
Richard W. Ussery
Chairman of the Board
and Chief Executive
Officer
Date: May 14, 2001 by: /s/ James B. Lipham
---------------------------
James B. Lipham
Chief Financial Officer
- 23 -