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 September 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10254
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Total System Services, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-1493818
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Sixth Avenue, Post Office Box 1755, Columbus, Georgia 31902
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(Address of principal executive offices) (Zip Code)
(706) 649-2310
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
CLASS OUTSTANDING AS OF November 13, 1997
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Common Stock, $.10 par value 129,326,275
TOTAL SYSTEM SERVICES, INC.
INDEX
Page
Number
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996 ....................................... 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 1997 and 1996 ........... 4
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1997 and 1996 ....................... 6
Notes to Consolidated Financial Statements .................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 9
Part II. Other Information
Item 6.(a) Exhibits ................................................ 15
(b) Reports on Form 8-K ..................................... 15
Signatures ................................................................ 16
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TOTAL SYSTEM SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Unaudited)
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September 30, December 31,
1997 1996
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Assets
Current assets:
Cash and cash equivalents (includes $36.8 million and $25.1 million
on deposit with a related party at 1997 and 1996, respectively) . $ 39,998,737 27,496,057
Short-term investments with a related party ....................... -- 5,000,000
Accounts receivable, net of allowance for doubtful accounts of
$738,000 and $704,000 at 1997 and 1996, respectively ............ 66,402,321 59,044,530
Prepaid expenses and other current assets ......................... 18,992,493 6,839,231
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Total current assets .......................................... 125,393,551 98,379,818
Property and equipment, less accumulated depreciation and
amortization of $66.6 million and $58.4 million at 1997 and
1996, respectively ................................................ 66,825,159 62,899,046
Computer software, less accumulated amortization of
$31.2 million and $24.7 million at 1997 and 1996, respectively .... 41,118,617 39,720,484
Other assets ........................................................ 50,926,137 45,759,735
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Total assets .................................................. $ 284,263,464 246,759,083
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .................................................. $ 9,679,616 4,688,469
Accrued salaries and related liabilities .......................... 5,317,173 6,422,199
Accrued employee benefits ......................................... 13,193,815 14,590,362
Current portion of long-term debt and obligations under
capital leases (includes $3.1 million and $0 payable to a
related party at 1997 and 1996, respectively) .................. 3,258,789 201,274
Other current liabilities (includes $1.2 million payable
to related parties at 1997 and 1996) ........................... 32,320,667 26,203,041
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Total current liabilities ..................................... 63,770,060 52,105,345
Long-term debt and obligations under capital leases,
excluding current portion ....................................... 401,712 474,513
Deferred income taxes ............................................... 13,319,462 15,301,478
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Total liabilities ............................................. 77,491,234 67,881,336
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Shareholders' equity:
Common stock - $.10 par value. Authorized 300,000,000
shares; 129,483,522 issued at 1997 and 1996,
respectively; 129,316,480 and 129,289,680 outstanding
at 1997 and 1996, respectively ................................. 12,948,352 12,948,352
Additional paid-in capital ........................................ 5,865,912 5,353,972
Treasury stock, at cost ........................................... (410,731) (473,544)
Cumulative currency translation adjustments ....................... (1,178,182) (1,178,182)
Retained earnings ................................................. 189,546,879 162,227,149
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Total shareholders' equity .................................... 206,772,230 178,877,747
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Total liabilities and shareholders' equity .................... $ 284,263,464 246,759,083
============= =============
See accompanying notes to consolidated financial statements.
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TOTAL SYSTEM SERVICES, INC.
Consolidated Income Statements
(Unaudited)
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Three months ended
September 30,
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1997 1996
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Revenues
Bankcard data processing services (includes $7.7 million and
$6.8 million from related parties for 1997 and 1996, respectively) $ 82,705,215 72,197,557
Other services ..................................................... 9,429,762 7,981,097
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Total revenues ................................................. 92,134,977 80,178,654
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Expenses
Salaries and other personnel expense ............................... 36,505,667 31,385,770
Net occupancy and equipment expense ................................ 24,373,829 22,049,463
Other operating expenses (includes $2.7 million and $2.5 million
to related parties for 1997 and 1996, respectively) .............. 14,568,649 12,137,859
------------ ------------
Total expenses ................................................. 75,448,145 65,573,092
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Equity in income of joint ventures ................................... 2,226,190 2,663,249
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Operating income ............................................... 18,913,022 17,268,811
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Nonoperating income:
Gain (loss) on disposal of equipment, net .......................... 12,533 (181,193)
Interest income, net (includes $577,000 and $338,000 from a related
party for 1997 and 1996, respectively) ........................... 615,390 346,759
------------ ------------
Total nonoperating income ...................................... 627,923 165,566
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Income before income taxes ..................................... 19,540,945 17,434,377
Income taxes ......................................................... 6,315,550 6,087,467
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Net income ..................................................... $ 13,225,395 11,346,910
============ ============
Net income per share ........................................... $ .10 .09
============ ============
Weighted average shares outstanding .................................. 129,311,520 129,289,565
============ ============
Cash dividends per common share ...................................... $ .011 .011
============ ============
See accompanying notes to consolidated financial statements.
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TOTAL SYSTEM SERVICES, INC.
Consolidated Income Statements
(Unaudited)
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Nine months ended
September 30,
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1997 1996
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Revenues:
Bankcard data processing services (includes $21.4 million and
$17.8 million from related parties for 1997 and 1996, respectively) . $238,122,326 200,918,610
Other services ........................................................ 26,885,932 24,851,410
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Total revenues .................................................... 265,008,258 225,770,020
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Expenses:
Salaries and other personnel expense .................................. 111,277,481 91,865,416
Net occupancy and equipment expense ................................... 72,070,173 61,160,947
Other operating expenses (includes $7.7 million and $7.3 million
to related parties for 1997 and 1996, respectively) ................. 41,243,054 40,278,912
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Total expenses .................................................... 224,590,708 193,305,275
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Equity in income of joint ventures ...................................... 6,160,598 5,037,075
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Operating income .................................................. 46,578,148 37,501,820
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Nonoperating income:
Gain on disposal of equipment, net .................................... 1,603 58,159
Interest income, net (includes $1.4 million and $893,000 from a related
party for 1997 and 1996, respectively) .............................. 1,542,682 918,056
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Total nonoperating income ......................................... 1,544,285 976,215
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Income before income taxes ........................................ 48,122,433 38,478,035
Income taxes ............................................................ 16,438,886 13,261,794
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Net income ........................................................ $ 31,683,547 25,216,241
============ ============
Net income per share .............................................. $ .25 .20
============ ============
Weighted average shares outstanding ..................................... 129,297,080 129,285,759
============ ============
Cash dividends per common share ......................................... $ .034 .034
============ ============
See accompanying notes to consolidated financial statements.
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TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows
Unaudited)
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Nine months ended
September 30,
---------------------------------
1997 1996
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Cash flows from operating activities:
Net income ....................................... $ 31,683,547 25,216,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in income of joint ventures ........... (6,160,598) (5,037,075)
Depreciation and amortization ................ 21,658,738 17,102,354
Provision for doubtful accounts .............. 67,500 62,500
Deferred income tax expense (benefit) ........ (1,982,016) 16,550
Gain on disposal of equipment, net ........... (1,603) (58,159)
(Increase) decrease in:
Accounts receivable .......................... (7,425,291) (6,339,274)
Prepaid expenses and other assets ............ (2,751,758) (2,664,634)
Increase (decrease) in:
Accounts payable ............................. 4,983,646 1,914,256
Accrued expenses and other current liabilities 4,812,369 13,891,972
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Net cash provided by operating activities 44,884,534 44,104,731
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Cash flows from investing activities:
Purchase of property and equipment ............... (12,933,436) (15,095,204)
Additions to computer software ................... (10,079,409) (5,601,218)
Proceeds from disposal of equipment .............. 52,457 649,314
Investment in joint ventures ..................... -- (2,295,283)
Dividends received from joint ventures ........... 3,252,561 --
Increase in contract acquisition costs ........... (16,377,924) (6,095,211)
(Purchase) redemption of short-term investment ... 5,000,000 (5,000,000)
------------ ------------
Net cash used in investing activities .... (31,085,751) (33,437,602)
------------ ------------
Cash flows from financing activities:
Proceeds from short-term debt .................... 3,110,944 --
Principal payments on long-term debt and
capital lease obligations ...................... (126,232) (166,256)
Dividends paid on common stock ................... (4,363,527) (4,363,247)
Proceeds from exercise of stock options .......... 82,712 2,560
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Net cash used in financing activities .... (1,296,103) (4,526,943)
------------ ------------
Net increase in cash and cash equivalents 12,502,680 6,140,186
Cash and cash equivalents at beginning of period ... 27,496,057 18,849,623
------------ ------------
Cash and cash equivalents at end of period ......... $ 39,998,737 24,989,809
============ ============
Cash paid for interest ............................. $ 12,290 16,872
============ ============
Cash paid for income taxes ......................... $ 15,932,646 13,011,752
============ ============
See accompanying notes to consolidated financial statements.
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TOTAL SYSTEM SERVICES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements represent the
accounts of Total System Services, Inc [registered mark] (TSYS [registered
mark]) and its wholly owned subsidiaries, Columbus Depot Equipment CompanySM
(CDECSM), Mailtek, Inc.SM (Mailtek), TSYS Total Solutions, Inc.SM (TSI) and
Columbus Productions, Inc.SM (CPI). The statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all information
and footnotes necessary for fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. All adjustments, consisting of normal recurring accruals, which, in
the opinion of management, are necessary for a fair statement of financial
position and results of operations for the periods covered by this report have
been included. The accompanying unaudited consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and related notes appearing in the Company's 1996 annual report
previously filed on Form 10-K.
Certain reclassifications have been made to the 1996 financial statements
to conform to the presentation adopted in 1997.
Note 2 - Supplementary Balance Sheet Information
A significant component of other assets included in the consolidated
balance sheets at September 30, 1997, and December 31, 1996, is contract
acquisition costs, net, of $28,815,729 and $21,077,140, respectively. Also
included in other assets are investments in joint ventures of $18,255,913 and
$15,347,876 at September 30, 1997, and December 31, 1996, respectively. Included
in other current liabilities at September 30, 1997, and December 31, 1996, are
reserves of $4,301,285 and $3,576,011, respectively, to cover transaction
processing provisions.
Subsequent to December 31, 1996, one of TSYS' subsidiaries entered into a
loan agreement with Columbus Bank and Trust Company for the construction period
financing of its new headquarters. At September 30, 1997, the principal balance
on this loan was $3.1 million. At the maturity of the construction loan on
December 31, 1997, permanent long-term financing will be arranged, probably in
the form of Columbus Development Authority industrial revenue bonds.
Note 3 - Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share."
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Notes to Consolidated Financial Statements (continued)
SFAS No. 128 requires companies that have publicly held common stock or
common stock equivalents to present both basic and diluted earnings per share
(EPS) on the face of the income statement. Basic EPS is calculated as income
available to common stockholders divided by the weighted average number of
common shares outstanding during the period. Diluted EPS is calculated to
reflect the potential dilution that would occur if stock options or other
contracts to issue common stock were exercised and resulted in additional common
stock that would share in the earnings of the Company. This statement is
effective for financial statements issued for interim and annual periods ending
after December 15, 1997. TSYS does not believe the adoption of SFAS No. 128 will
have a significant impact on the Company's reported EPS.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." SFAS No. 129 is effective for financial statements for
periods ending after December 15, 1997. TSYS does not expect that SFAS No. 129
will require significant revision of prior disclosures since SFAS No. 129 lists
required disclosures that had been included in a number of previously existing
separate statements or opinions.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires companies to display, with the same prominence as
other financial statements, the components of comprehensive income. SFAS No. 130
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. TSYS' financial statements will include the
disclosure of comprehensive income in accordance with the provisions of SFAS No.
130 beginning in the first quarter of 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected financial information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company expects to determine the impact of SFAS No. 131
on its financial position and results of operations in early 1998.
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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 September 30:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
-------------- -----------------
1997 1996 1997 vs 1996
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Revenues:
Bankcard data processing services .. 89.8% 90.0% 14.6%
Other services ..................... 10.2 10.0 18.2
----- -----
Total revenues .................. 100.0 100.0 14.9
----- -----
Expenses:
Salaries and other personnel expense 39.6 39.2 16.3
Net occupancy and equipment expense 26.5 27.5 10.5
Other operating expenses ........... 15.8 15.1 20.0
----- -----
Total operating expenses ....... 81.9 81.8 15.1
----- -----
Equity in income of joint ventures ... 2.4 3.3 (16.4)
----- -----
Operating income ................. 20.5 21.5 9.5
Nonoperating income .................. 0.7 0.3 279.3
----- -----
Income before income taxes ..... 21.2 21.8 12.1
Income taxes ......................... 6.8 7.6 3.7
----- -----
Net income ........................... 14.4% 14.2% 16.6%
===== =====
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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 nine months ended September 30:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
--------------- -----------------
1997 1996 1997 vs 1996
------ ------ -----------------
Revenues:
Bankcard data processing services .. 89.9% 89.0% 18.5%
Other services ..................... 10.1 11.0 8.2
----- -----
Total revenues ................. 100.0 100.0 17.4
----- -----
Expenses:
Salaries and other personnel expense 42.0 40.7 21.1
Net occupancy and equipment expense 27.2 27.1 17.8
Other operating expenses ........... 15.5 17.8 2.4
----- -----
Total operating expenses ....... 84.7 85.6 16.2
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Equity in income of joint ventures ... 2.3 2.2 22.3
----- -----
Operating income ................. 17.6 16.6 24.2
Nonoperating income .................. 0.6 0.4 58.2
----- -----
Income before income taxes ..... 18.2 17.0 25.1
Income taxes ......................... 6.2 5.8 24.0
----- -----
Net income ........................... 12.0% 11.2% 25.6%
===== =====
Total revenues increased $12.0 million, or 14.9%, and $39.2 million, or
17.4%, during the three months and nine months ended September 30, 1997,
respectively, compared to the same periods in 1996.
Revenues from bankcard data processing services increased $10.5 million or
14.6%, and $37.2 million, or 18.5%, in the three and nine months ended September
30, 1997, respectively, compared to the same periods in 1996. Increased revenues
from bankcard data processing are attributable to the conversion of cardholder
accounts of new customers and growth in the card portfolios of existing
customers. During the first nine months of 1997, TSYS converted approximately
4.5 million new cardholder accounts to TS2 [registered mark], bringing the total
number of accounts on TS2 to more than 14.4 million. Internal growth of existing
customers accounted for approximately 6.2 million additional
- 10 -
Results of Operations (continued)
cardholder accounts in the first nine months of 1997. Increases in the volume of
authorizations and transactions associated with the additional cardholder
accounts, as well as growth in new services offered, also contributed to the
increased revenues.
Average cardholder accounts on file for the three months ended September
30, 1997, were 89.0 million, an increase of approximately 17.5% over the average
of 75.8 million for the same period in 1996. For the first nine months of 1997,
average cardholder accounts were 85.7 million, a 22.8% increase over the 69.8
million average cardholder accounts for the same period last year. Cardholder
accounts on file at September 30, 1997, were 90.1 million, a 16.7% increase over
the 77.2 million accounts on file at September 30, 1996.
During the first quarter of 1997, TSYS successfully completed the
conversion of Bank of America's remaining cardholder accounts to TS2. Near the
end of the first quarter of 1997, TSYS announced an extension of its long-term
processing contract with NationsBank, a major customer, to the year 2005.
The joint venture between TSYS and Visa U.S.A., known as Vital Processing
Services L.L.C. (Vital), became operational on May 1, 1996. Vital merged TSYS'
back-office merchant processing and Visa's Merchant Bank Services' point-of-sale
processing operations. On TSYS' consolidated statements of income, the results
of operations of the joint venture subsequent to April 30, 1996, are included in
equity in the income of joint ventures. The change in classification of the
Company's revenues and expenses from its merchant operations to an equity
interest in the Vital joint venture, effective May 1, 1996, affects the
comparability between periods presented in the Company's consolidated statements
of income.
A significant amount of the Company's revenues is derived from certain
major customers who are processed under long-term contracts. For the three
months and nine months ended September 30, 1997, two customers combined
accounted for approximately 25% and 26% of total revenues, respectively,
compared to 29% and 30% for the same periods in 1996. Recently, one of these
major customer of the Company announced its intention to sell its credit card
business by mid 1998. TSYS and the major customer have a contract that runs
until August 2000, and at the customer's instruction, the Company is proceeding
with converting the customer's accounts to TS2 in 1998. TSYS' management remains
optimistic that it will be successful in retaining the processing of this credit
card business after its sale and the expiration of the current contract.
However, the loss of either of the Company's major customers could have a
material adverse effect on the Company's financial condition and results of
operations.
During the third quarter of 1997, the Company announced that one of its
subsidiaries, Lincoln Marketing, Inc.SM, had changed its name to TSYS Total
Solutions, Inc.SM The new name reflects the full range of solutions that TSYS
offers in the
- 11 -
Results of Operations (continued)
marketplace. TSYS Total Solutions, Inc. has been a wholly owned subsidiary of
TSYS since 1992.
Total operating expenses increased 15.1% and 16.2% for the three and nine
months ended September 30, 1997, respectively, compared to the same periods in
1996. The increase in operating expenses is primarily attributable to increases
in salaries and personnel expense and in net occupancy and equipment expense.
Employment expenses increased 16.3% and 21.1% for the three and nine months
ended September 30, 1997, respectively, compared to the same periods in 1996.
The average number of employees in the third quarter of 1997 increased to 2,987,
a 13.4% increase over the 2,633 in the same period in 1996. For the first nine
months of 1997, the average number of employees was 2,834, a 15.4% increase over
the 2,456 for the same period last year. In addition to the growth in number of
employees, the increase in employment expenses is attributable to normal salary
increases and related employee benefits. At October 31, 1997, TSYS had 3,018
full-time and 116 part-time employees.
In March 1997, the first class in the Intellectual Capital Partnership
Program (ICAPP) completed the accelerated applied computer science course that
is designed to help educate sufficient numbers of professionals to accommodate a
need for programmers in the mainframe computing industry. Additional classes
completed the six-month ICAPP course in June 1997 and in September 1997.
Approximately 195 graduates of these classes are now full-time employees of
TSYS. Currently, a new ICAPP class is beginning each quarter. Additionally, a
similar course for nonprogrammers, called Business Technical Program, has been
instituted to train business analysts, project analysts and other technical
personnel. The 47 students enrolled in this class are scheduled to graduate in
December and will be offered full-time employment with TSYS as of January 1,
1998.
Net occupancy and equipment expense was up 10.5% and 17.8% for the three
and nine months ended September 30, 1997, respectively, over the same periods in
1996. Equipment and software rentals, the largest components of occupancy and
equipment expense, net, increased $1.7 million, or 14.9%, in the third quarter
of 1997, compared to the same period in 1996. For the first nine months of 1997,
equipment and software rentals increased $6.6 million, or 20.8%, over the same
period in 1996. Due to rapidly changing technology in computer equipment, TSYS
fills a substantial portion of its equipment needs through operating leases.
Computer upgrades and other additional equipment were leased subsequent to the
third quarter of 1996 to accommodate increased volumes due to growth in the
number of accounts being processed. Repairs and maintenance, another component
of net occupancy and equipment expense, increased $199,700 and $1.4 million for
the three and nine months ended September 30, 1997, respectively, compared to
the same periods in 1996. These increases can be attributed to the expiration of
warranties on major computer equipment.
- 12 -
Results of Operations (continued)
Other operating expenses increased 20.0% and 2.4% for the three months and
nine months ended September 30, 1997, respectively, compared to the same periods
in 1996. The growth in expenses for the third quarter of 1997 are primarily due
to increased travel and other business development costs associated with
exploring new business opportunities.
TSYS' share of income from its equity in joint ventures was $2.2 million
and $2.7 million for the third quarters of 1997 and 1996, respectively. The
decrease is associated with the expense related to the development of Vital's
management infrastructure that was not present in 1996 due to the start-up
nature of the company. Vital became operational May 1, 1996. For the nine months
ended September 30, 1997 and 1996, the Company's equity in income of its joint
ventures was $6.2 million and $5.0 million, respectively. TSYS has a 49% and 50%
interest, respectively, in Total System Services de Mexico, S.A. de C.V. ("TSYS
de Mexico") and Vital Processing Services L.L.C. With respect to TSYS de Mexico,
the Mexican economy continues to stabilize relative to 1996; however, there
remains uncertainty in the Mexican economy which management continues to
monitor.
Interest income, net, includes interest expense of $9,294 and $12,264 and
interest income of $624,684 and $359,023 for the third quarters of 1997 and
1996, respectively. For the nine months ended September 30, 1997 and 1996,
respectively, interest expense was $60,207 and $41,921, and interest income was
$1,602,889 and $959,977. The increase in interest income is the result of
fluctuations in cash available for investment and short-term interest rates.
Additionally, in the third quarter of 1996, $5.0 million was invested in a
six-month certificate of deposit at a higher rate of interest; the certificate
of deposit was redeemed at maturity in March 1997.
Operating income increased 9.5% and 24.2% for the three and nine months
ended September 30, 1997, respectively, over the same periods in 1996. These
increases are primarily due to growth in revenues combined with lower expenses
attributable to improved expense control.
TSYS' effective income tax rate for the third quarter of 1997 was 32.3%,
compared to 34.9% for the same period in 1996. For the nine months ended
September 30, 1997, the effective tax rate was 34.2%, compared to 34.5% for the
same period in 1996. The decrease in TSYS' effective tax rate is primarily due
to recently enacted tax legislation that creates a more favorable income tax
environment.
Liquidity and Capital Resources
During the third quarter of 1997, TSYS purchased property and equipment of
$3.8 million for total purchases of $12.9 million for the first nine months of
1997. Computer
- 13 -
Liquidity and Capital Resources (continued)
software increased during the third quarter by $628,000, bringing the total
additions or 1997 to $10.1 million; additions primarily consisted of purchased
software. Dividends on common stock of $1.5 million were paid in the third
quarter of 1997, bringing the total dividends paid to $4.4 million. Also, in the
third quarter of 1997, $917,000 was invested in contract acquisition costs for a
total of $16.4 million invested in 1997.
TSYS formally unveiled the design plan for its corporate campus at a press
conference following a preview of the design at its annual shareholders' meeting
on April 14, 1997. The campus will serve as the Company's corporate headquarters
and will house administrative, client contact and programming team members and
will allow for significant growth. Ground was broken on the project in September
and development of the campus is underway. The Company expects to enter into an
operating lease agreement for the purpose of financing construction costs for
the new corporate campus. Under the agreement, the lessor would purchase the
properties, pay for the construction costs and thereafter lease the facilities
to the Company. The initial lease term would be three years. The lease would
provide for substantial residual value guarantees and would include purchase
options at original cost of the property. Real estate taxes, insurance,
maintenance and operating expenses applicable to the leased property would be
obligations of the Company.
Also, TSYS began expansion of its operations center in 1997. This expansion
will include space for the card production services now located in downtown
Columbus. In addition, a building is nearing completion on the north Columbus
site to serve as TSI's headquarters. These two construction projects are
expected to be approximately $12 million.
The core system of TS2 was designed to be year 2000 compliant, and the
Company is continuing its ongoing project to ensure that all of the Company's
processing systems are year 2000 compliant. The modification phase of the
project is expected to be completed in the fourth quarter of 1998, with the
testing phase to be performed in 1998 and 1999. A significant portion of the
costs associated with the year 2000 project is not likely to be incremental
costs to TSYS, but rather will represent the redeployment of existing internal
information technology resources.
TSYS may seek external sources of capital in the future. The form of any
such financing will vary depending upon prevailing market and other conditions
and may include short-term or long-term borrowings from financial institutions,
or the issuance of additional equity and/or debt securities such as industrial
revenue bonds. However, there can be no assurance that funds will be available
on terms acceptable to TSYS. Management expects that TSYS will continue to be
able to fund a significant portion of its capital expenditure needs through
internally generated cash in the future, as evidenced by TSYS' current ratio of
2:1. At September 30, 1997, TSYS had working capital of $61.6 million compared
to $46.2 million at December 31, 1996.
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TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
(11) - Statement re Computation of Per Share Earnings
(27) - Financial Data Schedule (For SEC use only)
b) Forms 8-K filed during the quarter ended September 30, 1997
1. There were no reports filed on Form 8-K during the quarter.
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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: November 13, 1997 by: /s/ Richard W. Ussery
-----------------------
Richard W. Ussery
Chairman of the Board
and Chief Executive
Officer
Date: November 13, 1997 by: /s/ James B. Lipham
-----------------------
James B. Lipham
Chief Financial Officer
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