UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
-------------------------------------------------
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: August 13, 2001
- ---------------------------------- -------------------------------------
Common Stock, $.10 par value 194,778,670
TOTAL SYSTEM SERVICES, INC.
INDEX
Page
Number
----------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) - June 30, 2001
and December 31, 2000 ............................................... 3
Consolidated Statements of Income (unaudited) - Three
months and Six months ended June 30, 2001 and 2000 .................. 4
Consolidated Statements of Cash Flows (unaudited) - Six
months ended June 30, 2001 and 2000 ................................. 6
Notes to Unaudited Consolidated Financial Statements ................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 26
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ....... 27
Item 6. Exhibits and Reports on Form 8-K ......................... 28
Signatures ................................................................ 29
- 2 -
TOTAL SYSTEM SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Unaudited)
- --------------------------------------------------------------------------------------------------------
June 30, December 31,
2001 2000
- --------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (includes $40.2 million and $74.6 million
on deposit with a related party at 2001 and 2000, respectively) . $ 46,130,878 80,071,895
Accounts receivable, net of allowance for doubtful accounts of
$3.2 million and $2.7 million at 2001 and 2000, respectively ..... 106,174,578 100,691,083
Prepaid expenses and other current assets ......................... 35,391,649 30,192,248
------------- -------------
Total current assets .......................................... 187,697,105 210,955,226
Property and equipment, less accumulated depreciation and
amortization of $102.2 million and $94.8 million at 2001 and
2000, respectively ................................................ 116,094,486 110,971,777
Computer software, less accumulated amortization of
$96.5 million and $97.7 million at 2001 and 2000, respectively .... 160,963,015 145,454,042
Deferred income tax assets .......................................... 10,567,586 11,104,254
Other assets ........................................................ 125,330,320 125,907,383
------------- -------------
Total assets .................................................. $ 600,652,512 604,392,682
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .................................................. $ 26,345,907 43,935,426
Accrued salaries and employee benefits ............................ 28,395,472 45,202,518
Other current liabilities (includes $2.4 million payable
to related parties at 2001 and 2000, respectively) ............. 57,685,059 58,162,646
------------- -------------
Total current liabilities ..................................... 112,426,438 147,300,590
Deferred income tax liabilities ..................................... 37,332,939 34,841,622
Other long-term liabilities ......................................... -- 10,652,600
------------- -------------
Total liabilities ............................................. 149,759,377 192,794,812
------------- -------------
Minority interest in consolidated subsidiary ........................ 2,242,787 2,583,682
------------- -------------
Shareholders' equity:
Common stock - $.10 par value. Authorized 300,000,000
shares; 195,079,087 issued at 2001 and 2000,
respectively; 194,778,070 and 194,738,870 outstanding
at 2001 and 2000, respectively ................................. 19,507,909 19,507,909
Additional paid-in capital ........................................ 7,240,068 6,998,100
Accumulated other comprehensive loss .............................. (4,407,895) (1,613,681)
Treasury stock .................................................... (3,534,250) (3,594,683)
Retained earnings ................................................. 429,844,516 387,716,543
------------- -------------
Total shareholders' equity .................................... 448,650,348 409,014,188
------------- -------------
Total liabilities and shareholders' equity .................... $ 600,652,512 604,392,682
============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 3 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Income
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
Three months ended,
June 30,
------------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services (includes $11.8 million and
$10.7 million from related parties for 2001 and 2000, respectively) $ 141,103,750 126,143,849
Other services (includes $1.7 million and $1.8 million from related
parties for 2001 and 2000, respectively) ............................ 21,367,958 24,345,902
------------- -------------
Total revenues .................................................. 162,471,708 150,489,751
------------- -------------
Expenses:
Salaries and other personnel expense ................................ 62,517,169 56,795,298
Net occupancy and equipment expense ................................. 43,862,313 40,835,124
Other operating expenses (includes $2.0 million and $1.7 million
to related parties for 2001 and 2000, respectively) ............... 21,107,667 21,344,156
------------- -------------
Total expenses .................................................. 127,487,149 118,974,578
------------- -------------
Equity in income of joint ventures .................................... 4,470,578 4,760,762
------------- -------------
Operating income .................................................... 39,455,137 36,275,935
------------- -------------
Nonoperating income (expense):
Gain (loss) on disposal of equipment, net ........................... (73,816) (1,255)
Interest income, net (includes $513,000 and $1,140,000 from a related
party for 2001 and 2000, respectively) ............................ 635,863 1,125,474
Minority interest in consolidated subsidiary's net income ........... (34,633) --
Other, net .......................................................... (41,126) --
------------- -------------
Total nonoperating income ....................................... 486,288 1,124,219
------------- -------------
Income before income taxes ...................................... 39,941,425 37,400,154
Income taxes .......................................................... 13,985,030 13,069,572
------------- -------------
Net income ...................................................... $ 25,956,395 24,330,582
============= =============
Basic earnings per share ........................................ $ .13 .12
============= =============
Diluted earnings per share ...................................... $ .13 .12
============= =============
Weighted average common shares outstanding ............................ 194,773,366 194,780,470
Increase due to assumed issuance of shares
related to stock options outstanding .............................. 909,068 565,377
------------- -------------
Weighted average common and common
equivalent shares outstanding ..................................... 195,682,434 195,345,847
============= =============
Cash dividends per common share ....................................... $ .015 .013
============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 4 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Income
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------
Six months ended,
June 30,
------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services (includes $22.0 million and
$20.7 million from related parties for 2001 and 2000, respectively) . $ 271,426,583 249,099,008
Other services (includes $3.4 million and $3.2 million from related
parties for 2001 and 2000, respectively) .............................. 45,178,706 47,250,023
------------- -------------
Total revenues .................................................... 316,605,289 296,349,031
------------- -------------
Expenses:
Salaries and other personnel expense .................................. 123,802,488 113,693,364
Net occupancy and equipment expense ................................... 84,919,642 79,829,301
Other operating expenses (includes $4.1 million and $5.0 million
to related parties for 2001 and 2000, respectively) ................. 43,659,434 43,753,938
------------- -------------
Total expenses .................................................... 252,381,564 237,276,603
------------- -------------
Equity in income of joint ventures ...................................... 7,707,192 7,728,646
------------- -------------
Operating income ..................................................... 71,930,917 66,801,074
------------- -------------
Nonoperating income (expense):
Gain (loss) on disposal of equipment, net ............................. (93,590) 18,581
Interest income, net (includes $1,431,000 and $1,918,000 from a related
party for 2001 and 2000, respectively) .............................. 1,644,398 2,063,080
Minority interest in consolidated subsidiary's net income ............. (9,431) --
Other, net ............................................................ (41,126) --
------------- -------------
Total nonoperating income ......................................... 1,500,251 2,081,661
------------- -------------
Income before income taxes ........................................ 73,431,168 68,882,735
Income taxes ............................................................ 25,460,152 23,894,914
------------- -------------
Net income ........................................................ $ 47,971,016 44,987,821
============= =============
Basic earnings per share .......................................... $ .25 .23
============= =============
Diluted earnings per share ........................................ $ .25 .23
============= =============
Weighted average common shares outstanding .............................. 194,766,817 194,801,150
Increase due to assumed issuance of shares
related to stock options outstanding ................................ 848,467 493,235
------------- -------------
Weighted average common and common
equivalent shares outstanding ....................................... 195,615,284 195,294,385
============= =============
Cash dividends per common share ......................................... $ .030 .023
============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 5 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
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Six months ended,
June 30,
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2001 2000
- ------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income .................................................. $ 47,971,016 44,987,821
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in consolidated subsidiary's net income 9,431 --
Equity in income of joint ventures ...................... (7,707,192) (7,728,646)
Depreciation and amortization ........................... 27,267,067 24,912,581
Provision for doubtful accounts ......................... 440,268 581,793
Deferred income tax expense (benefit) ................... 3,027,985 2,423,815
(Gain) loss on disposal of equipment, net ............... 93,590 (18,581)
(Increase) decrease in:
Accounts receivable ..................................... (5,923,763) 27,296
Prepaid expenses and other assets ....................... (3,479,728) (7,533,427)
Increase (decrease) in:
Accounts payable ........................................ (28,242,119) (4,611,256)
Accrued expenses and other current liabilities .......... (16,463,106) 2,097,958
------------ ------------
Net cash provided by operating activities ........... 16,993,449 55,139,354
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment .......................... (15,718,940) (5,366,351)
Additions to computer software .............................. (29,783,814) (20,782,440)
Proceeds from disposal of equipment ......................... 961,887 21,610
Dividends received from joint ventures ...................... 10,410,281 5,369,192
Repayment of contract acquisition costs ..................... -- 10,000,000
Increase in contract acquisition costs ...................... (11,711,435) (253,559)
------------ ------------
Net cash used in investing activities ............... (45,842,021) (11,011,548)
------------ ------------
Cash flows from financing activities:
Repurchase of common stock .................................. -- (1,313,916)
Principal payments on long-term debt and
capital lease obligations ................................. -- (204,286)
Dividends paid on common stock .............................. (5,355,609) (3,897,320)
Proceeds from exercise of stock options ..................... 263,164 6,444
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Net cash used in financing activities ............... (5,092,445) (5,409,078)
------------- ------------
Net increase (decrease) in cash and cash equivalents (33,941,017) 38,718,728
Cash and cash equivalents at beginning of year ................ 80,071,895 54,903,107
------------ ------------
Cash and cash equivalents at end of year ...................... $ 46,130,878 93,621,835
============ ============
Cash paid for interest (net of capitalized amounts) ........... $ 1,983 37,735
============ ============
Cash paid for income taxes (net of refunds received) .......... $ 22,538,128 21,348,993
============ ============
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 6 -
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:
June 30, 2001 December 31, 2000
----------------- --------------------
Contract acquisition costs, net $ 10,223,250 $ 9,644,657
Prepaid expenses 11,461,737 12,377,875
Other 13,706,662 8,169,716
----------------- ---------------
Total $ 35,391,649 $ 30,192,248
================= ===============
Significant components of other assets are summarized as follows:
June 30, 2001 December 31, 2000
------------------ ---------------------
Contract acquisition costs, net $ 67,758,495 $ 65,434,739
Equity investments, net 41,604,104 45,631,679
Other 15,967,721 14,840,965
------------------ -----------------
Total $ 125,330,320 $ 125,907,383
================== =================
Significant components of other current liabilities are summarized as
follows:
June 30, 2001 December 31, 2000
------------------- -----------------------
Customer postage deposits $ 20,546,742 $ 18,751,617
Transaction processing provisions 10,943,266 11,886,312
Other 26,195,051 27,524,717
------------------- -----------------------
Total $ 57,685,059 $ 58,162,646
=================== =======================
- 7 -
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.
Comprehensive income for the three months ended June 30 is as follows:
2001 2000
------------------ ------------------
Net income $ 25,956,395 $ 24,330,582
Other comprehensive income (loss):
Foreign currency translation
adjustments, net of tax (576,332) (106,221)
------------------- -------------------
Comprehensive income $ 25,380,063 $ 24,224,361
=================== ===================
Total comprehensive income for the six months ended June 30 is as follows:
2001 2000
------------------- -------------------
Net income $ 47,971,016 $ 44,987,821
Other comprehensive income (loss):
Foreign currency translation
adjustments, net of tax (2,794,214) (166,551)
-------------------- -------------------
Comprehensive income $ 45,176,802 $ 44,821,270
==================== ===================
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 June 30, 2001
------------ ----------- ------------ -----------------
Currency translation
adjustments ($1,613,681) (4,420,699) 1,626,485 $ (4,407,895)
============ =========== ============ =================
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 online accounting and bankcard data processing systems, Total System
Services, Inc. provides card processing and electronic commerce services to
card-issuing institutions in the United States, Mexico, Canada, Honduras, United
Kingdom, Ireland 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 84% or more of financial activity in all the
quantitative thresholds required to be measured under SFAS 131 for the three
months and six months ended June 30, 2001 and 2000.
- 8 -
Notes to Unaudited Consolidated Financial Statements (continued)
TSYS and three of its 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.
Transaction
processing Support
Operating Segments services services Consolidated
- ------------------------------------------------------------------------------------
At June 30, 2001
- ------------------------------------------------------------------------------------
Identifiable assets .............. $ 590,160,397 55,344,118 $ 645,504,515
Intersegment eliminations ........ (44,426,433) (425,570) (44,852,003)
------------- ------------- -------------
Total assets ..................... $ 545,733,964 54,918,548 $ 600,652,512
============= ============= =============
- ------------------------------------------------------------------------------------
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 June 30, 2001
- ------------------------------------------------------------------------------------
Total revenue .................... $ 143,434,775 20,267,951 $ 163,702,726
Intersegment revenue ............. (358,963) (872,055) (1,231,018)
------------- ------------- -------------
Revenue from external customers .. $ 143,075,812 19,395,896 $ 162,471,708
============= ============= =============
Equity in income of joint ventures $ 4,470,578 -- $ 4,470,578
============= ============= =============
Segment operating income ......... $ 37,159,965 2,295,172 $ 39,455,137
============= ============= =============
Income taxes ..................... $ 13,094,365 890,665 $ 13,985,030
============= ============= =============
Net income ....................... $ 24,424,252 1,532,143 $ 25,956,395
============= ============= =============
- ------------------------------------------------------------------------------------
Three Months Ended June 30, 2000
- ------------------------------------------------------------------------------------
Total revenue .................... $ 128,696,703 22,495,562 $ 151,192,265
Intersegment revenue ............. (175,888) (526,626) (702,514)
------------- ------------- -------------
Revenue from external customers .. $ 128,520,815 21,968,936 $ 150,489,751
============= ============= =============
Equity in income of joint ventures $ 4,760,762 -- $ 4,760,762
============= ============= =============
Segment operating income ......... $ 31,663,963 4,611,972 $ 36,275,935
============= ============= =============
Income taxes ..................... $ 11,294,493 1,775,079 $ 13,069,572
============= ============= =============
Net income ....................... $ 21,427,875 2,902,707 $ 24,330,582
============= ============= =============
- 9 -
Notes to Unaudited Consolidated Financial Statements (continued)
Transaction
processing Support
Operating Segments services services Consolidated
- ------------------------------------------------------------------------------------
Six Months Ended June 30, 2001
- ------------------------------------------------------------------------------------
Total revenue .................... $ 277,070,286 41,809,145 $ 318,879,431
Intersegment revenue ............. (827,593) (1,446,549) (2,274,142)
------------- ------------- -------------
Revenue from external customers .. $ 276,242,693 40,362,596 $ 316,605,289
============= ============= =============
Equity in income of joint ventures $ 7,707,192 -- $ 7,707,192
============= ============= =============
Segment operating income ......... $ 67,179,168 4,751,749 $ 71,930,917
============= ============= =============
Income taxes ..................... $ 23,602,299 1,857,853 $ 25,460,152
============= ============= =============
Net income ....................... $ 44,785,407 3,185,609 $ 47,971,016
============= ============= =============
- ------------------------------------------------------------------------------------
Six Months Ended June 30, 2000
- ------------------------------------------------------------------------------------
Total revenue .................... $ 253,993,573 43,721,300 $ 297,714,873
Intersegment revenue ............. (259,321) (1,106,521) (1,365,842)
------------- ------------- -------------
Revenue from external customers .. $ 253,734,252 42,614,779 $ 296,349,031
============= ============= =============
Equity in income of joint ventures $ 7,728,646 -- $ 7,728,646
============= ============= =============
Segment operating income ......... $ 59,301,417 7,499,657 $ 66,801,074
============= ============= =============
Income taxes ..................... $ 20,998,829 2,896,085 $ 23,894,914
============= ============= =============
Net income ....................... $ 40,244,960 4,742,861 $ 44,987,821
============= ============= =============
The following geographic area data represent revenues for the three and six
months ended June 30, 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.
Three Months Ended June 30, Six Months Ended June 30,
- -------------------------- -------------------------------- -----------------------------
(Dollars in millions) 2001 2000 2001 2000
- -------------------------- -------------- -------------- ------------ -----------
United States $ 142.9 138.0 282.1 271.7
Canada* 10.7 8.1 19.5 16.1
Mexico 3.9 4.0 7.2 7.8
United Kingdom 2.4 0.0 2.4 0.0
Japan 2.3 0.0 4.8 0.0
Other 0.3 0.4 0.6 0.7
- -------------------------- --------------- ------------ ------------- -----------
Totals $ 162.5 150.5 316.6 296.3
- -------------------------- =============== =========== ============= ============
*These revenues include those generated from the Caribbean accounts owned by the
Bank of Nova Scotia.
- 10 -
Notes to Unaudited Consolidated Financial Statements (continued)
Major Customers
Three Months Ended June 30,
- ---------------------------- -------------------------------------------------------------------------
2001 2000
- ---------------------------- ----------------------------- -----------------------------
Revenue % of Total % of Total
(Dollars in millions) Dollars Revenues Dollars Revenues
- ---------------------------- ------------ ---------------- ------------- ---------------
One $ 25.2 15.5% $ 23.0 15.3%
Two 21.5 13.2 16.1 10.7
Three na na 15.4 10.2
- ---------------------------- ------------ ---------------- ------------- ---------------
Totals $ 46.7 28.7% $ 54.5 36.2%
- ---------------------------- ============ ================ ============= ===============
na = not applicable. Client represented less than 10% of total revenues.
Six Months Ended June 30,
- -----------------------------------------------------------------------------------------------------
2001 2000
- --------------------------- ------------------------------ -------------------------------
Revenue % of Total % of Total
(Dollars in millions) Dollars Revenues Dollars Revenues
- ---------------------------- ------------ ---------------- ------------- ---------------
One $ 49.5 15.7% $ 45.8 15.5%
Two 40.5 12.8 30.7 10.4
Three na na 30.5 10.3
Four na na 32.3 10.9
- ---------------------------- ------------ ---------------- ------------- ---------------
Totals $ 90.0 28.5% $ 139.3 47.1%
- ---------------------------- ============ ================ ============= ===============
na = not applicable. Client represented less than 10% of total revenues.
For the three months ended June 30, 2001, the Company had two major
customers. The two major customers for the quarter ended June 30, 2001 accounted
for approximately 28.7%, or $46.7 million, of total revenues. For the three
months ended June 30, 2000, TSYS had three major customers that accounted for
36.2%, or $54.5 million, of total revenues. Revenues from major customers for
the periods reported are attributable to both reporting segments.
For the six months ended June 30, 2001, the Company had two major
customers. The two major customers for the six months ended June 30, 2001
accounted for approximately 28.5%, or $90.0 million, of total revenues. For the
six months ended June 30, 2000, TSYS had four major customers that accounted for
47.1%, or $139.3 million, of total revenues. Revenues from major customers for
the periods reported are attributable to both reporting segments.
- 11 -
Notes to Unaudited Consolidated Financial Statements (continued)
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. 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, was effective January 1, 2001.
On adoption, the provisions of SFAS 133 must be applied prospectively.
- 12 -
Notes to Unaudited Consolidated Financial Statements (continued)
The Company did not have any outstanding derivative instruments or hedging
transactions at June 30, 2001. The Company is assessing the impact of SFAS 133
and SFAS 138 on anticipated hedging instruments.
In July 2001, the FASB issued Statement No. 141 (SFAS 141), "Business
Combinations," and Statement No. 142 (SFAS 142), "Goodwill and Other Intangible
Assets." SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. SFAS 141 also
specifies criteria for intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. SFAS 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142. SFAS
142 will also require that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company has adopted the provisions of SFAS 141 immediately and expects
to adopt SFAS 142 effective January 1, 2002.
Furthermore, goodwill and intangible assets determined to have an
indefinite useful life acquired in a purchase business combination completed
after June 30, 2001, but before SFAS 142 is adopted in full will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized and tested for impairment in accordance with the
appropriate pre-SFAS 142 accounting requirements prior to the adoption of SFAS
142.
SFAS 141 will require upon adoption of SFAS 142, that the Company evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in SFAS 141 for recognition apart from
goodwill. Upon adoption of SFAS 142, the Company will be required to reassess
the useful lives and residual values of all intangible assets acquired, and make
any necessary amortization period adjustments by the end of the first interim
period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS 142 within the first interim period. Any impairment loss will be measured
as of the date of adoption and recognized as the cumulative effect of a change
in accounting principle in the first interim period.
- 13 -
Notes to Unaudited Consolidated Financial Statements (continued)
In connection with SFAS 142's transitional goodwill impairment evaluation,
the Statement will require the Company to perform an assessment of whether there
is an indication that goodwill [and equity-method goodwill] is impaired as of
the date of adoption. To accomplish this, the Company must identify its
reporting units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of the date of adoption. The
Company will then have up to six months from the date of adoption to determine
the fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds its
fair value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of it assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with SFAS 141, to its carrying amount, both of which would be measured as of the
date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of earnings.
And finally, any unamortized negative goodwill [and equity-method negative
goodwill] existing at the date SFAS 142 is adopted must be written off as the
cumulative effect of a change in accounting principle.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $3.6 million, which will be subject to the transition
provisions of SFAS 141 and SFAS 142. Amortization expense related to goodwill
was $528,000 and $428,000 for the year ended December 31, 2000 and the six
months ended June 30, 2001, respectively. Because of the extensive effort needed
to comply with adopting SFAS 141 and SFAS 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether it will be
required to recognize any transitional impairment losses as the cumulative
effect of a change in accounting principle.
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 June 30, 2001, all payments on the loan have been made
timely. The remaining balance at June 30, 2001 was $8.5 million. The Company
does not anticipate any negative consequences to its results of operations and
financial condition as a result of its loan guarantee.
- 14 -
TOTAL SYSTEM SERVICES, INC.
Item 2 - Management's Discussion and Analysis of Financial
Ccondition and Results of Operations
Results of Operations
The following table sets forth certain revenue and expense items as a
percentage of total revenues and the percentage increases or decreases in those
items for the three months ended June 30:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
------------------ ----------------
2001 2000 2001 vs. 2000
------ ------ ----------------
Revenues:
Bankcard data processing services ...... 86.8 % 83.8 % 11.9 %
Other services ......................... 13.2 16.2 (12.2)
------- ------
Total revenues ...................... 100.0 100.0 8.0
------- ------
Expenses:
Salaries and other personnel expense ... 38.5 37.7 10.1
Net occupancy and equipment expense .... 27.0 27.1 7.4
Other operating expenses ............... 13.0 14.3 (1.1)
------- ------
Total expenses ..................... 78.5 79.1 7.2
------- ------
Equity in income of joint ventures ....... 2.8 3.2 (6.1)
------- ------
Operating income ................... 24.3 24.1 8.8
Nonoperating income ...................... 0.3 0.8 (56.7)
------- ------
Income before income taxes ......... 24.6 24.9 6.8
Income taxes ............................. 8.6 8.7 7.0
------- ------
Net income ............................... 16.0 % 16.2 % 6.7 %
======= ======
- 15 -
Results of Operations (continued)
The following table sets forth certain revenue and expense items as a
percentage of total revenues and the percentage increases or decreases in those
items for the six months ended June 30:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
------------------ ----------------
2001 2000 2001 vs. 2000
------ ------ ----------------
Revenues:
Bankcard data processing services .. 85.7 % 84.1 % 9.0 %
Other services ..................... 14.3 15.9 (4.4)
------- ------
Total revenues .................. 100.0 100.0 6.8
------- ------
Expenses:
Salaries and other personnel expense 39.1 38.4 8.9
Net occupancy and equipment expense 26.8 26.9 6.4
Other operating expenses ........... 13.8 14.8 (0.2)
------- ------
Total expenses ................. 79.7 80.1 6.4
------- ------
Equity in income of joint ventures ... 2.4 2.6 (0.3)
------- ------
Operating income ............... 22.7 22.5 7.7
Nonoperating income .................. 0.5 0.7 (27.9)
------- ------
Income before income taxes ..... 23.2 23.2 6.6
Income taxes ......................... 8.0 8.0 6.6
------- ------
Net income ........................... 15.2 % 15.2 % 6.6 %
======= ======
Total revenues increased $12.0 million, or 8.0%, and $20.3, or 6.8%, during
the three and six months ended June 30, 2001, respectively, compared to the same
periods in 2000.
Revenues from bankcard data processing services increased $15.0 million, or
11.9%, in the three months ended June 30, 2001, compared to the same period in
2000. During the six months ended June 30, 2001, revenues from bankcard data
processing services increased $22.3 million, or 9.0%, 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 TSYS' processing systems.
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
- 16 -
Results of Operations (continued)
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 June 30, 2001 and 2000, value added products and services represented
12.9%, or $21.0 million, and 11.6%, or $17.4 million, of total revenues,
respectively. Revenues from value added products and services were up 20.6%, or
$3.6 million, for the three months ended June 30, 2001, compared to the same
period in 2000. For the six months ended June 30, 2001 and 2000, value added
products and services represented 13.5%, or $42.8 million, and 12.1%, or $35.7
million, of total revenues, respectively. Revenues from value added products and
services were up 19.8%, or $7.1 million, for the six months ended June 30, 2001,
compared to the same period in 2000. The Company changed 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 now can estimate its current monthly revenue with
some precision. During the six months ended June 30, 2001, the Company has
recognized, as a result of the change, seven months of revenue, or an additional
$1.4 million, for this one value added product and service.
Average cardholder accounts on file for the three months ended June 30,
2001, were 199.2 million, an increase of approximately 4.1% over the average of
191.3 million for the same period in 2000. For the first six months of 2001,
average cardholder accounts were 198.8 million, a 0.8% decrease over the 200.4
million average cardholder accounts on file for the same period last year.
Cardholder accounts on file at June 30, 2001, were 202.1 million, an 11.4%
increase compared to the 181.4 million accounts on file at June 30, 2000. The
change in cardholder accounts on file from June 2000 to June 2001 included the
deconversion of 3.7 million accounts, the addition of approximately 16.2 million
accounts attributable to the internal growth of existing clients, and
approximately 8.2 million accounts for new clients.
The Company provides services to its clients including processing
commercial, retail, and consumer cards. Consumer cards include Visa and
MasterCard bank and debit cards. Retail cards include private label and gift
cards. Commercial cards include purchasing cards, corporate cards and fleet
cards for employees. The following table summarizes TSYS' accounts on file by
portfolio type:
Accounts on File Types June 30, June 30,
(in millions) 2001 2000 % Change
- --------------------------- ------------- ------------ --------------
Consumer 109.4 78.7 38.8
Retail 76.3 90.5 (15.7)
Commercial 16.4 12.2 34.3
- --------------------------- ------------- ------------
Total 202.1 181.4 11.4
- --------------------------- ============= ============
- 17 -
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, new clients, international expansion
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 revenue from retail clients, on a per
account 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' major retail client has converted 10.2 million of its total portfolio
from traditional retail accounts to consumer accounts since June 2000. The same
retail client has purged approximately 8 million inactive accounts on file.
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 purchasing by businesses 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 June 30, June 30,
(in millions) 2001 2000 % Change
- --------------------------- ------------- ------------ --------------
Domestic 179.1 165.0 8.5
Foreign 23.0 16.4 39.7
- --------------------------- ------------- ------------
Total 202.1 181.4 11.4
- --------------------------- ============= ============
In 2000, the Company announced the signing of The Royal Bank of Scotland
Group plc (RBS) and Allied Irish Banks plc (AIB) to multiyear processing
agreements. The portfolios of both clients are expected to be fully converted by
the middle of the third quarter of 2001. With the completed conversions of RBS
and AIB, TSYS will be one of the leading third-party international processors.
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 June 30, 2001, the Company had two major customers. The two major
customers for the quarter ended June 30, 2001 accounted for approximately 28.7%,
or $46.7 million, of total revenues. For the three
- 18 -
Results of Operations (continued)
months ended June 30, 2000, TSYS had three major customers that accounted for
36.2%, or $54.5 million, of total revenues. For the six months ended June 30,
2001, the Company had two major customers. The two major customers for the six
months ended June 30, 2001 accounted for approximately 28.5%, or $90.0 million,
of total revenues. For the six months ended June 30, 2000, TSYS had four major
customers that accounted for 47.1%, or $139.3 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.
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 and hosts digital
solutions that enable financial services companies to reliably manage online
transaction-based processes. 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 decreased $3.0
million, or 12.2%, in the second quarter of 2001, compared to the second quarter
of 2000. Revenues from other services decreased $2.1 million, or 4.4%, for the
six months ended June 30, 2001, compared to the same period in 2000. The
majority of the revenues from other services are generated by TSYS Total
Solutions, Inc. (TSI). During the second quarter of 2001, one of TSI's major
clients stopped outsourcing certain functions as a result of the client's need
to reduce expenses. As a result, TSI's revenues were negatively impacted.
Total expenses increased 7.2% and 6.4% for the three and six months ended
June 30, 2001, respectively, compared to the same periods in 2000. The increases
in operating expenses are attributable to increases in a majority of expense
categories as described below.
Employment expenses increased $5.7 million, or 10.1%, for the three months
ended June 30, 2001, compared to the same period in 2000. For the six months
ended June 30, 2001, employment expenses increased $10.1 million, or 8.9%,
compared to the same period in 2000. The change in employment expenses consists
of increases of $8.1 million and $20.3 million for the three and six months
ended June 30, 2001, respectively, associated with the growth in the number of
employees, normal salary increases and related benefits. These increases were
partially
- 19 -
Results of Operations (continued)
offset by $2.4 million and $10.2 million invested in capitalized software
development costs and contract acquisition costs for the three and six months
ending June 30, 2001, respectively. Capitalized software development costs
relate to the continued development of a commercial card system for TS2(R),
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 second quarter of 2001 increased to
4,821, a 7.9% increase over 4,467 in the same period of 2000. For the first six
months of 2001, the average number of employees was 4,779, an 8.3% increase over
the first six months of 2000. At July 31, 2001, TSYS had 4,679 full-time and 213
part-time employees.
Net occupancy and equipment expense increased $3.0 million, or 7.4%, for
the three months ended June 30, 2001, over the same period in 2000. For the six
months ended June 30, 2001, net occupancy and equipment expense increased $5.1
million, or 6.4%, 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 second 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.
During 2000, the Company established a processing data center in Europe and
purchased a building to house client services personnel. Although it only began
processing accounts for its new European clients during the second quarter of
2001, the Company had to build the necessary infrastructure in order to begin
processing those accounts in 2001. Through the first six months of 2001, the
Company incurred $12.0 million of net operating expense related to the expansion
in Europe.
Other operating expenses decreased 1.1% and 0.2% for the three and six
months ended June 30, 2001, respectively, compared to the same periods in 2000.
As a result of its international expansion, professional consulting, travel and
business development related expenses have increased $0.8 million for the second
quarter of 2001 when compared to the same period in 2000. The same expenses
increased $4.3 million for the six months ended June 30, 2001 when compared to
the same period in 2000. These increased expenses were offset by 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 $4.5 million
and $4.8 million for the second quarters of 2001 and 2000, respectively. For
each of the six months ended June 30, 2001 and 2000, the Company's equity in
income of its joint ventures was $7.7 million.
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 all of the contracts being
executed, 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
- 20 -
Results of Operations (continued)
joint ventures while bankcard processing revenues should increase. The new
restructured arrangement is expected to take place during 2001.
There remains uncertainty in the Mexican economy which management continues
to monitor.
Interest income, net, includes interest income of $638,000 and $2,000 of
interest expense for the second quarter of 2001. During the second quarter of
2000, interest income, net, included interest income of $1.1 million and no
interest expense. For the six months ended June 30, 2001 and 2000, respectively,
interest expense was $2,000 and $34,000, and interest income was $1.6 million
and $2.1 million. The decrease in interest income for the six months ending June
30, 2001, as compared to the same period in 2000, was primarily the result of
decreased levels of cash available for investment and changes in interest rates.
Operating income increased 8.8% and 7.7% for the three and six months ended
June 30, 2001, respectively, over the same periods 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 second quarter of 2001 was 35.0%,
compared to 34.9% for the same period in 2000. For each of the six months ended
June 30, 2001 and 2000, the effective tax rate was 34.7%.
Net income for the three months ended June 30, 2001, increased 6.7% to
$26.0 million, or basic and diluted earnings per share of $.13, compared to
$24.3 million, or basic and diluted earnings per share of $.12, for the same
period in 2000. Net income for the first six months of 2001 increased 6.6% to
$48.0 million, up from $45.0 million for the same period last year. Basic and
diluted earnings per share for the first six months of 2001 increased to $.25,
up from $.23 for the same period of 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 213 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
- 21 -
Liquidity and Capital Resources (continued)
property and equipment, investment in contract acquisition costs, and the
payment of cash dividends.
During the second quarter of 2001, TSYS purchased property and equipment of
$9.6 million for total purchases of $15.7 million for the first six months of
2001. Additions to computer software during the second quarter were $12.7
million, bringing the total additions for 2001 to $29.8 million. Of the $12.7
million computer software additions made during the second quarter, $8.7 million
was for purchased software and $4.0 million was related to investments in
internally developed software, bringing the totals for the first six months of
2001 to $22.7 million for purchased software and $7.1 million for internally
developed software.
During the first half of 2001, the Company made investments in contract
acquisition costs of $11.7 million compared to $254,000 for the first six 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 June 30,
2001, all payments on the loan have been made timely. The remaining balance at
June 30, 2001 was $8.5 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 $3.0 million were paid in the second quarter
of 2001, bringing the total amount of dividends paid year to date to $5.4
million. 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.
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 six 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.
- 22 -
Liquidity and Capital Resources (continued)
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 was completed and opened in August 2001 at a cost of approximately $3.5
million. The Company will be able to recoup its building costs through future
state tax credits from the state of Georgia for setting up a company-sponsored
childcare facility.
In March 2001, the Company announced plans to move its printing subsidiary,
Columbus Productions, Inc. (CPI), and its materials management division into a
new building in east Columbus. The 61,000 square-foot building was completed in
August 2001 at a cost of approximately $3.7 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 is leasing 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 $375,000 and $749,000 for the three
and six months ended June 30, 2001, respectively, compared to $439,000 and
$877,000 for the same periods 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 and $152,000 by Synovus for the
three and six months ended June 30, 2001, respectively.
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 in the English language. With its entrance into the Asian
card processing market, TSYS began 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 approximately $2.3 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.
- 23 -
Liquidity and Capital Resources (continued)
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 1.7:1. At June 30, 2001, TSYS had working capital of $75.3
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 (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
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Forward-Looking Statements (continued)
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.
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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 $3.5 million (U.S.) at June 30,
2001, and the carrying value of the assets of its Canadian operation was
approximately $285,000 (U.S.) at June 30, 2001.
TSYS opened a branch office in Japan ("TSYS Japan") in an effort to expand
its business in the Asia Pacific region. At June 30, 2001, the carrying value of
the assets of TSYS Japan's operations was approximately $291,000 (U.S.)
TSYS acquired a controlling interest in an established electronic payments
company in Japan, GP Network Corporation (GP Net), for a total of $4.8 million.
The carrying value of the assets of GP Net was approximately $5.6 million (U.S.)
at June 30, 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 $70.4 million (U.S.) at June 30,
2001.
TSYS is also exposed to interest rate risk associated with the lease on its
campus facilities. The payments under the operating lease arrangement are tied
to the London Interbank Offered Rate ("LIBOR"), and TSYS evaluates the
hypothetical change in the lease obligation held at June 30, 2001 due to changes
in the LIBOR. The modeling technique used measured hypothetical changes in lease
obligations arising from selected hypothetical changes in the LIBOR. Market
changes reflected immediate hypothetical parallel shifts in the LIBOR curve of
plus or minus 50 basis points, 100 basis points and 150 basis points over a
12-month period.
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TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
The annual shareholders' meeting of Total System Services, Inc. was held
April 19, 2001. There were three proposals voted on at the meeting.
Proposal I voted on at the meeting was the election of seven directors.
Following is a tabulation of votes for each nominee:
WITHHELD
AUTHORITY
NOMINEE VOTES FOR TO VOTE
- ----------------------- ------------- -----------
Thomas G. Cousins 187,410,071 92,725
Sidney E. Harris 187,405,208 97,588
Alfred W. Jones III 187,383,508 119,288
Mason H. Lampton 187,257,966 244,830
William B. Turner 187,425,418 77,378
James D. Yancey 187,432,987 69,809
Rebecca K. Yarbrough 187,347,188 155,608
Proposal II voted on at the meeting was the proposal to approve the Synovus
Financial Corp. Executive Bonus Plan. Following is a tabulation of votes:
For 186,714,747
Against 583,585
Abstain 204,464
Proposal III voted on at the meeting was the proposal to approve the
DotsConnect, Inc. 2000 Long-Term Incentive Plan. Following is a tabulation of
votes:
For 186,463,223
Against 834,542
Abstain 205,031
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TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a) Forms 8-K filed since the previous Form 10-Q filing.
1. The report dated July 17, 2001 included the following important event:
On July 17, 2001, Total System Services, Inc.("Registrant") issued a
press release with respect to its second quarter 2001 earnings.
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TOTAL SYSTEM SERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOTAL SYSTEM SERVICES, INC.
Date: August 13, 2001 by: /s/ Richard W. Ussery
---------------------------
Richard W. Ussery
Chairman of the Board
and Chief Executive
Officer
Date: August 13, 2001 by: /s/ James B. Lipham
---------------------------
James B. Lipham
Chief Financial Officer
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