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, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10254
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Total System Services, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-1493818
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1200 Sixth Avenue, Post Office Box 1755, Columbus, Georgia 31902
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(Address of principal executive offices) (Zip Code)
(706) 649-2310
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF November 12, 1998
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Common Stock, $.10 par value 194,043,698
TOTAL SYSTEM SERVICES, INC.
INDEX
Page
Number
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Income - Three months and
Nine months ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 9
Part II. Other Information
Item 6. (a) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
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TOTAL SYSTEM SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Unaudited)
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September 30, December 31,
1998 1997
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Assets
Current assets:
Cash and cash equivalents (includes $30.2 million and $40.6 million
on deposit with a related party at 1998 and 1997, respectively) . $ 30,383,492 43,335,922
Short-term investments with a related party ....................... -- 998,228
Accounts receivable, net of allowance for doubtful accounts of
$707,000 and $736,000 at 1998 and 1997, respectively ............ 69,034,053 69,450,919
Prepaid expenses and other current assets ......................... 26,574,898 18,620,638
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Total current assets .......................................... 125,992,443 132,405,707
Property and equipment, less accumulated depreciation and
amortization of $73.9 million and $65.1 million at 1998 and
1997, respectively ................................................ 83,717,592 68,968,574
Computer software, less accumulated amortization of
$45.8 million and $34.2 million at 1998 and 1997, respectively .... 55,734,275 43,133,137
Other assets ........................................................ 62,922,443 52,350,519
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Total assets .................................................. $ 328,366,753 296,857,937
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable .................................................. $ 7,953,972 6,400,365
Accrued salaries and related liabilities .......................... 6,225,475 6,680,979
Accrued employee benefits ......................................... 14,120,313 13,870,969
Current portion of long-term debt and obligations under
capital leases .................................................. 127,008 132,416
Other current liabilities (includes $1.7 and $1.2 million payable
to related parties at 1998 and 1997, respectively) ............. 36,163,716 34,421,668
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Total current liabilities ..................................... 64,590,484 61,506,397
Long-term debt and obligations under capital leases,
excluding current portion ....................................... 274,703 342,096
Deferred income taxes ............................................... 10,057,739 13,754,688
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Total liabilities ............................................. 74,922,926 75,603,181
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Shareholders' equity:
Common stock - $.10 par value. Authorized 300,000,000
shares; 194,225,283 issued at 1998 and 1997,
respectively; 194,027,648 and 193,995,337 outstanding
at 1998 and 1997, respectively ................................. 19,422,528 19,422,528
Additional paid-in capital ....................................... 818,013 414,748
Treasury stock, at cost ........................................... (325,813) (377,701)
Accumulated other comprehensive income ............................ (1,180,310) (1,178,182)
Retained earnings ................................................. 234,709,409 202,973,363
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Total shareholders' equity .................................... 253,443,827 221,254,756
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Total liabilities and shareholders' equity .................... $ 328,366,753 296,857,937
============= =============
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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1998 1997
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Revenues:
Bankcard data processing services (includes $8.2 million and $7.7 million from
related parties for 1998 and 1997, respectively) ........................... $ 88,954,052 82,705,215
Other services ............................................................... 10,447,873 9,429,762
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Total revenues ........................................................... 99,401,925 92,134,977
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Expenses:
Salaries and other personnel expense ......................................... 38,842,357 36,505,667
Net occupancy and equipment expense .......................................... 27,110,161 24,373,829
Other operating expenses (includes $2.8 million and $2.7 million to related
parties for 1998 and 1997, respectively) .................................... 15,220,491 14,568,649
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Total expenses ........................................................... 81,173,009 75,448,145
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Equity in income of joint ventures ............................................. 3,910,077 2,226,190
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Operating income ........................................................ 22,138,993 18,913,022
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Nonoperating income:
Gain (loss) on disposal of equipment, net .................................... (2,119) 12,533
Interest income, net (includes $590,000 and $577,000 from a related
party for 1998 and 1997, respectively) ..................................... 442,760 615,390
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Total nonoperating income ................................................ 440,641 627,923
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Income before income taxes ............................................... 22,579,634 19,540,945
Income taxes ................................................................... 7,408,466 6,315,550
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Net income ............................................................... $ 15,171,168 13,225,395
============= ==============
Basic earnings per share ................................................. $ .08 .07
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Diluted earnings per share ............................................... $ .08 .07
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Weighted average common shares outstanding ..................................... 194,024,390 193,967,280
Increase due to assumed issuance of shares
related to stock options outstanding ....................................... 589,805 218,643
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Weighted average common and common
equivalent shares outstanding .............................................. 194,614,195 194,185,923
============= ==============
Cash dividends per common share ................................................ $ .010 .008
============= ==============
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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1998 1997
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Revenues:
Bankcard data processing services (includes $22.4 million and
$21.4 million from related parties for 1998 and 1997, respectively) $254,699,719 238,122,326
Other services ...................................................... 32,489,600 26,885,932
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Total revenues .................................................. 287,189,319 265,008,258
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Expenses:
Salaries and other personnel expense ................................ 120,297,210 111,277,481
Net occupancy and equipment expense ................................. 76,859,661 72,070,173
Other operating expenses (includes $8.4 million and $7.7 million
to related parties for 1998 and 1997, respectively) ............... 45,575,611 41,243,054
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Total expenses .................................................. 242,732,482 224,590,708
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Equity in income of joint ventures .................................... 8,694,973 6,160,598
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Operating income ................................................ 53,151,810 46,578,148
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Nonoperating income:
Gain on disposal of equipment, net .................................. 2,289 1,603
Interest income, net (includes $1.9 million and $1.4 from a related
party for 1998 and 1997, respectively) ............................ 2,023,702 1,542,682
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Total nonoperating income ....................................... 2,025,991 1,544,285
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Income before income taxes ...................................... 55,177,801 48,122,433
Income taxes .......................................................... 18,106,212 16,438,886
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Net income ...................................................... $ 37,071,589 31,683,547
============ ============
Basic earnings per share ........................................ $ .19 .16
============ ============
Diluted earnings per share ...................................... $ .19 .16
============ ============
Weighted average common shares outstanding ............................ 194,013,625 193,945,621
Increase due to assumed issuance of shares
related to stock options outstanding .............................. 647,587 243,011
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Weighted average common and common
equivalent shares outstanding ..................................... 194,661,212 194,188,632
============ ============
Cash dividends per common share ....................................... $ .028 .023
============ ============
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,
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1998 1997
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Cash flows from operating activities:
Net income ................................................. $ 37,071,589 31,683,547
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in income of joint ventures ..................... (8,694,973) (6,160,598)
Depreciation and amortization .......................... 26,876,722 21,658,738
Provision for doubtful accounts ........................ 13,500 67,500
Deferred income tax benefit ............................ (3,696,949) (1,982,016)
(Gain) loss on disposal of equipment, net .............. (2,289) (1,603)
(Increase) decrease in:
Accounts receivable .................................... 403,366 (7,425,291)
Prepaid expenses and other assets ...................... (4,327,662) (2,751,758)
Increase (decrease) in:
Accounts payable ....................................... 1,553,607 4,983,646
Accrued expenses and other current liabilities ......... 1,395,048 4,812,369
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Net cash provided by operating activities .......... 50,591,959 44,884,534
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Cash flows from investing activities:
Purchase of property and equipment ......................... (24,582,248) (12,933,436)
Additions to computer software ............................. (24,519,958) (10,079,409)
Proceeds from disposal of equipment ........................ 80,594 52,457
Dividends received from joint ventures ..................... 5,618,616 3,252,561
Increase in contract acquisition costs ..................... (16,282,947) (16,377,924)
Redemption of short-term investment ........................ 998,228 5,000,000
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Net cash used in investing activities .............. (58,687,715) (31,085,751)
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Cash flows from financing activities:
Proceeds from issuance of short-term debt .................. -- 3,110,944
Principal payments on long-term debt and
capital lease obligations ................................ (72,801) (126,232)
Dividends paid on common stock ............................. (4,850,238) (4,363,527)
Proceeds from exercise of stock options .................... 66,365 82,712
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Net cash used in financing activities .............. (4,856,674) (1,296,103)
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Net increase (decrease) in cash and cash equivalents (12,952,430) 12,502,680
Cash and cash equivalents at beginning of period ............. 43,335,922 27,496,057
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Cash and cash equivalents at end of period ................... $ 30,383,492 39,998,737
============ ============
Cash paid for interest ....................................... $ 2,823 12,290
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Cash paid for income taxes (net of tax refunds received) ..... $ 19,168,260 15,932,646
============ ============
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.[R] (TSYS[R]) and its wholly owned
subsidiaries, Columbus Depot Equipment Company [SM] (CDEC [SM]), TSYS Total
Solutions, Inc. [R] (TSI), Columbus Productions, Inc.SM (CPI) and TSYS Canada,
Inc. [SM](TCI). These financial statements have been prepared in accordance with
the instructions to Form 10-Q and do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with generally accepted accounting principles. All
adjustments, consisting of normal recurring accruals, which, in the opinion of
management, are necessary for a fair statement of financial position and results
of operations for the periods covered by this report, have been included. The
accompanying unaudited consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and related
notes appearing in the Company's 1997 annual report previously filed on Form
10-K.
On April 16, 1998, TSYS declared a three-for-two stock split, which was
effected on May 8, 1998. All shareholder equity, share and per share amounts in
the accompanying consolidated financial statements have been retroactively
restated to give effect to the split.
Note 2 - Supplementary Balance Sheet Information
A significant component of other assets included in the consolidated
balance sheets at September 30, 1998 and December 31, 1997, is contract
acquisition costs, net, of $35,670,047 and $27,274,037, respectively. Also
included in other assets are investments in joint ventures of $24,135,030 and
$21,338,446 at September 30, 1998 and December 31, 1997, respectively. Included
in other current liabilities at September 30, 1998 and at December 31, 1997, are
reserves of $4,001,860 and $4,051,285, respectively, to cover transaction
processing provisions. Also included in other current liabilities are customer
postage deposits of $14,498,331 and $13,579,370 at September 30, 1998 and
December 31, 1997, respectively.
Note 3 - Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected
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Notes to Consolidated FInancial Statements (continued)
financial information about operating segments in interim financial reports
Notes to Consolidated Financial Statements issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131 need not
be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application shall be reported in financial statements for interim periods in
the second year of application. TSYS is in the process of evaluating the impact
SFAS 131 will have on its disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 requires all items that are required to be
recognized under accounting standards as components of comprehensive income to
be reported in an annual financial statement that is displayed in equal
prominence with other financial statements. For interim period financial
statements, enterprises are required to disclose a total for comprehensive
income in those financial statements. The term "comprehensive income" is used in
SFAS No. 130 to describe the total of all components of comprehensive income
including net income. "Other comprehensive income" refers to revenues, expenses,
gains and losses that are included in comprehensive income but excluded from
earnings under current accounting standards. Currently, "other comprehensive
income" for TSYS consists solely of items previously recorded as a component of
shareholders' equity under SFAS No. 52, "Foreign Currency Translation." TSYS has
adopted the interim period disclosure requirements of SFAS No. 130 effective
March 31, 1998, and will adopt the annual financial statement reporting and
disclosure requirements of SFAS No. 130 effective December 31, 1998.
Note 4 - Total Comprehensive Income
Total comprehensive income for the three months ended September 30, 1998,
was $15,172,829, compared to $13,225,395 for the three months ended September
30, 1997. Comprehensive income for the nine months ended September 30, 1998 and
1997, was $37,069,461 and $31,683,547, respectively.
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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
1998 1997 1998 vs 1997
Revenues:
Bankcard data processing services .. 89.5% 89.8% 7.6%
Other services ..................... 10.5 10.2 10.8
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Total revenues ................. 100.0 100.0 7.9
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Expenses:
Salaries and other personnel expense 39.1 39.6 6.4
Net occupancy and equipment expense 27.3 26.5 11.2
Other operating expenses ........... 15.2 15.8 4.5
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Total operating expenses ....... 81.6 81.9 7.6
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Equity in income of joint ventures ... 3.9 2.4 75.6
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Operating income ................. 22.3 20.5 17.1
Nonoperating income .................. 0.4 0.7 (29.8)
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Income before income taxes ..... 22.7 21.2 15.6
Income taxes ......................... 7.4 6.8 17.3
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Net income ........................... 15.3% 14.4% 14.7%
===== =====
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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
1998 1997 1998 vs 1997
Revenues:
Bankcard data processing services .. 88.7% 89.9% 7.0%
Other services ..................... 11.3 10.1 20.8
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Total revenues .................. 100.0 100.0 8.4
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Expenses:
Salaries and other personnel expense 41.9 42.0 8.1
Net occupancy and equipment expense 26.8 27.2 6.6
Other operating expenses ........... 15.8 15.5 10.5
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Total operating expenses ....... 84.5 84.7 8.1
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Equity in income of joint ventures ... 3.0 2.3 41.1
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Operating income ................. 18.5 17.6 14.1
Nonoperating income .................. 0.7 0.6 31.2
----- -----
Income before income taxes ..... 19.2 18.2 14.7
Income taxes ......................... 6.3 6.2 10.1
----- -----
Net income ........................... 12.9% 12.0% 17.0%
===== =====
Total revenues increased $7.3 million, or 7.9%, and $22.2 million, or 8.4%,
during the three months and nine months ended September 30, 1998, respectively,
compared to the same periods in 1997.
Revenues from bankcard data processing services increased $6.2 million, or
7.6%, in the three months ended September 30, 1998, compared to the same period
in 1997. During the nine months ended September 30, 1998, revenues from bankcard
data processing services increased $16.6 million, or 7.0%, compared to the same
period in 1997. Increased revenues from bankcard data processing services are
primarily attributable to the growth in the card portfolios of existing
customers. Increases in the
- 10 -
Results of Operations (continued)
volumes of authorizations and transactions associated with the additional
cardholder accounts also contributed to the increased revenues. Processing
contracts with large customers, representing a significant portion of the
Company's total revenues, generally provide for discounts on certain services
based on increases in the level of cardholder accounts processed. As a result,
bankcard data processing revenues and the related margins are influenced by the
customer mix relative to the size of customer bankcard portfolios, as well as
the number of individual cardholder accounts processed for each customer.
Average cardholder accounts on file for the three months ended September
30, 1998, were 101.3 million, which was an increase of approximately 13.8% over
the average of 89.0 million for the same period in 1997. For the first nine
months of 1998, average cardholder accounts were 96.5 million, a 12.6% increase
over the 85.7 million average cardholder accounts for the same period last year.
Cardholder accounts on file at September 30, 1998, were 103.1 million, a 14.4%
increase over the 90.1 million accounts on file at September 30, 1997. The
increase in cardholder accounts on file from September 1997 to September 1998
included net internal growth of existing customers of 9.0 million additional
cardholder accounts and approximately 4.0 million accounts of new customers.
During the first nine months of 1998, TSYS converted approximately 27.8
million existing cardholder accounts to TS2[R], bringing the total number of
accounts on TS2 at September 30, 1998, to more than 47.0 million, compared to
14.4 million at September 30, 1997.
A significant amount of the Company's revenues is derived from long-term
contracts with large customers, including certain major customers. In April
1998, two of the Company's customers, NationsBank and Bank of America, announced
their intent to merge and announced completion of the merger effective September
30, 1998. As a result, the percentage of revenues derived from major customers
increased. For the three months and nine months ended September 30, 1998, two
major customers accounted for approximately 36% and 35% of total revenues,
respectively, compared to 34% for the three months and the nine months ended
September 30, 1997. The loss of either one of the Company's major customers, or
other significant customers, could have a material adverse effect on the
Company's financial condition and results of operations.
Near the end of the first quarter of 1998, AT&T, a major customer of the
Company, completed the sale of its Universal Card Services (UCS) to Citibank,
now a part of Citigroup after Citibank's merger with Travelers Group, Inc. TSYS
and UCS (now Citibank) have a processing contract with a term until August 2000,
and, at the customer's instruction, TSYS converted all UCS accounts to TS2,
completing the conversion in October 1998. The long-term effect of the sale of
AT&T's credit card
- 11 -
Results of Operations (continued)
business on TSYS' financial condition and results of operations cannot be
determined at this time.
As discussed above, NationsBank and Bank of America merged effective
September 30, 1998. The Company has long-term processing contracts with each of
these customers and is in the process of assessing implications of the merger on
the existing contracts with each customer.
During the second quarter of 1998, the Company announced the signing of a
long-term processing agreement with Sears, Roebuck and Co. to convert and
process its 60 million private label accounts. TSYS successfully converted the
first 7.2 million of these accounts to TS2 in October 1998. The conversion of
the remainder of these accounts is anticipated to be completed by the end of the
second quarter of 1999. Additional revenue will be realized as these accounts
are added over the first half of 1999.
Total operating expenses increased 7.6% and 8.1% for the three months and
nine months ended September 30, 1998, respectively, compared to the same periods
in 1997. The increases in operating expenses are attributable to increases in
all expense categories as described below.
Employment expenses increased 6.4% and 8.1% for the three months and nine
months ended September 30, 1998, respectively, compared to the same periods in
1997. In the third quarter of 1998, due to the increase in TS2 conversion
activity, the Company capitalized additional employment expenses. Further,
employment expenses capitalized in conjunction with software development
increased in the third quarter of 1998. The majority of these expenditures were
related to the development of a commercial card system for TS2 which began in
May 1998 and is expected to be substantially completed by the end of the fourth
quarter of 1999. Increases in employment expenses attributable to normal growth
in salaries and related benefits were partially offset by the increased level of
capitalization. The average number of employees in the third quarter of 1998
increased to 3,434, a 15.0% increase over the 2,987 in the same period of 1997.
For the first nine months of 1998, the average number of employees was 3,361 an
18.6% increase over the first nine months of 1997. At October 31, 1998, TSYS had
3,335 full-time and 83 part-time employees.
In February 1998, TSYS announced the formation of TSYS Canada, Inc. (TCI),
a wholly owned subsidiary incorporated in the state of Georgia and headquartered
in Columbus. On February 1, 1998, TCI opened an office in Welland, Ontario,
Canada, which currently employs 19 programmers who are providing support and
assistance with the conversion of card portfolios to TS2.
Net occupancy and equipment expense increased 11.2% and 6.6% for the three
months and nine months ended September 30, 1998, respectively, over the same
periods in
- 12 -
Results of Operations (continued)
equipment expense, remained comparable. Due to rapidly changing technology in
computer equipment, TSYS' equipment needs are achieved substantially through
operating leases. Beginning in the fourth quarter of 1997, the Company began
entering into a larger number of more economical leases on technologically
advanced equipment rather than renewing certain expensive leases on older
equipment. Computer software upgrade licenses were purchased for additional
processors subsequent to the third quarter of 1997 to accommodate increased
volumes due to the expected growth in the number of accounts associated with new
customers. Amortization of these licenses accounts for the majority of the
increases in net occupancy and equipment.
Other operating expenses increased 4.5% and 10.5% for the three months and
nine months ended September 30, 1998, respectively, compared to the same periods
in 1997. The growth in other operating expenses for 1998 is primarily due to
increased travel, legal, telecommunication and other business development costs
associated with exploring new business opportunities.
TSYS' share of income from its equity in joint ventures was $3.9 million
and $2.2 million for the three months ended September 30, 1998 and 1997,
respectively. For the nine months ended September 30, 1998 and 1997, the
Company's equity in income of its joint ventures was $8.7 million and $6.2
million, respectively. The increase is primarily due to improved operating
results from Vital Processing Services, L.L.C. (Vital) which continued to grow
operating results in line with expectations. With respect to Total System
Services de Mexico, S.A. de C.V. (TSYS de Mexico), operating results continued
to remain flat through the third quarter of 1998. There remains uncertainty in
the Mexican economy which management continues to monitor. Any significant
adverse development in the operations of TSYS de Mexico or in the Mexican
economy could have a material adverse effect on the Company's financial
condition and results of operations.
Interest income, net, includes interest expense of $7,255 and $9,296 and
interest income of $450,015 and $624,684 for the third quarters of 1998 and
1997, respectively. For the nine months ended September 30, 1998 and 1997,
respectively, interest expense was $22,342 and $60,207, and interest income was
$2,046,044 and $1,602,889. The increase in interest income in 1998 as compared
to 1997 is primarily the result of higher levels of cash available for
investment.
Operating income increased 17.1% and 14.1% for the three and nine months
ended September 30, 1998, respectively, over the same periods in 1997. The
increase is primarily due to growth in revenues and equity in net income of
joint ventures combined with improved expense control.
TSYS' effective income tax rate for the third quarter of 1998 was 32.8%,
compared to 32.3% for the same period in 1997. For the nine months ended
September
- 13 -
Results of Operations (continued)
30, 1998, the effective tax rate was 32.8%, compared to 34.2% for the same
period in 1997. The decrease in TSYS' effective income tax rate for the
nine-month period is primarily due to certain effective income tax planning
strategies, including the identification and recognition of research and
experimentation credits for ongoing development activities, foreign tax credits
associated with the Mexican joint venture, and a reduction in state income taxes
due to favorable tax legislation.
Liquidity and Capital Resources
The Consolidated Statements of Cash Flows detail the Company's cash flows
from operating, investing and financing activities. TSYS' primary method of
funding its operations and growth has been cash generated from current
operations and the occasional use of borrowed funds to supplement financing of
capital expenditures. TSYS' net cash provided by operating activities in the
first nine months of 1998 increased to $50.6 million from $44.9 million in the
same period of 1997. The major uses of cash generated from operations have been
the addition of property and equipment; internal development and purchase of
computer software; investment in contract acquisition costs; and the payment of
cash dividends.
During the third quarter of 1998, TSYS purchased property and equipment of
$11.1 million for total purchases of $24.6 million for the first nine months of
1998. Computer software increased during the third quarter by $4.8 million,
bringing the total additions for 1998 to $24.5 million; additions primarily
consisted of purchased software. Also, in the third quarter of 1998, $5.3
million was invested in contract acquisition costs for a total of $16.3 million
invested in 1998, of which $9.6 million represents payments for processing
rights.
Dividends on common stock of $1.9 million were paid in the third quarter of
1998, bringing the total amount of dividends paid to $4.9 million. At the Annual
Meeting of Shareholders in April 1998, the Company, in addition to announcing a
three-for-two stock split, also increased the quarterly dividend 33.3% to $.01
per share.
In 1997, construction was begun on a campus-type facility which will serve
as the Company's corporate headquarters. The Company entered into an operating
lease agreement relating to the new corporate campus. Under the agreement, the
lessor has purchased the land, is paying for construction and development costs
and has leased the property to the Company commencing upon its completion, which
is expected to be in 1999. The lease provides for a substantial residual value
guarantee, up to $87 million, and includes purchase options at the original cost
of the property. Real estate taxes, insurance, maintenance and operating
expenses applicable to the leased property are obligations of the Company. The
Company expects net occupancy and equipment expense to increase in 1999 as a
result of the lease.
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Liquidity and Capital Resources (continued)
In addition, TSYS began a $5 million expansion of its operations center in
north Columbus during 1997. This expansion includes space for the card
production services now located in downtown Columbus. TSYS will begin relocating
the card production services in the fourth quarter of 1998. This expansion will
further include additional space for mailing support functions. TSYS also
purchased 18 acres of land containing a 104,000 square-foot speculative building
in east Columbus at a cost of $1.9 million. The building has been prepared for
an additional state-of-the-art data center at a cost of approximately $15.0
million and will be placed in service in phases over the remainder of the fourth
quarter of 1998. Permanent financing for these projects will be through
industrial revenue bonds.
The core system of TS2 was designed to be Year 2000 compliant, and the
Company is continuing its ongoing project to ensure that all of the Company's
processing systems are Year 2000 compliant. Many computer programs were written
with a two digit date field, and, if these programs are not made Year 2000
compliant, they will be unable to correctly process date information for the
year 2000 and after. While these issues impact all of the Company's data
processing systems to some extent, they are most significant in connection with
certain mainframe computer programs. Moreover, remediation efforts go beyond the
Company's internal computer systems and require coordination with clients,
vendors, government entities and other third parties to assure that their
systems and related interfaces are compliant. Failure to achieve timely
remediation of the Company's critical programs and computer systems for Year
2000 would have a material adverse effect on the Company's financial condition
and results of operations.
The Company's Year 2000 plans called for all mission critical systems to be
renovated by the end of the second quarter of 1998 which was accomplished.
Testing for clients and other third parties was begun in the third quarter of
1998. Completion of all third party interface testing is dependent upon those
third parties completing their own internal remediation. TSYS has made an
assessment of noncompliant suppliers and vendors and will schedule and
coordinate testing of incoming and outgoing interfaces with third-party vendors.
The Company could be adversely affected to the extent third parties with which
it interfaces have not properly addressed their Year 2000 issues.
TSYS is primarily utilizing existing internal resources to complete the
Year 2000 project. The Company incurred $1.7 million of direct costs related to
the Year 2000 remediation project during the third quarter of 1998, bringing the
total direct costs for 1998 to $4.6 million. The Company expects to incur an
additional $3.4 million of direct costs during the remainder of 1998 and
approximately $6.0 million in 1999. The Company has developed its remediation
contingency plan and is currently developing its Year 2000 business continuity
contingency plan which will be finalized by the end of the fourth quarter of
1998. Based upon progress to date, TSYS does not expect the cost of
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Liquidity and Capital Resources (continued)
the Year 2000 project to significantly impact its financial condition and
results of operations.
The costs of the project and the dates on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates which were derived utilizing numerous assumptions about future events,
including the continued availability of necessary technical resources and the
cooperation of customers and vendors. However, there are no guarantees that
these estimates will be achieved and actual results could differ materially from
those anticipated.
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 1.95:1. At September 30, 1998, TSYS had working capital of
$61.4 million compared to $70.9 million at December 31, 1997.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected financial information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 need not be applied to interim financial
statements in the initial year of its application, but comparative information
for interim periods in the initial year of application shall be reported in
financial statements for interim periods in the second year of application. TSYS
is in the process of evaluating the impact SFAS No. 131 will have on its
disclosures.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by TSYS with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of TSYS which are not statements of historical
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Forward-Looking Statements (continued)
fact constitute forward-looking statements within the meaning of the Act.
Examples of forward-looking statements include, but are not limited to: (i)
projections of revenue, income or loss, earnings or loss per share, the payment
or nonpayment of dividends, capital structure and other financial items; (ii)
statements of plans and objectives of TSYS or its management or Board of
Directors, including those relating to products or services; (iii) statements of
future economic performance; and (iv) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects," "intends,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (i) the strength of the U.S. economy
in general and relevant foreign economies; (ii) the Company's performance under
current and future contracts; (iii) inflation, interest rate and foreign
exchange rate fluctuations; (iv) timely and successful implementation of
processing systems to provide new products, improved functionality and increased
efficiencies; (v) changes in consumer spending, borrowing and saving habits,
including a shift from credit to debit cards; (vi) technological changes; (vii)
acquisitions; (viii) the ability to increase market share and control expenses;
(ix) changes in laws, regulations, credit card association rules or other
industry standards affecting TSYS' business which require significant product
redevelopment efforts; (x) the effect of changes in accounting policies and
practices as may be adopted by the Financial Accounting Standards Board; (xi)
changes in TSYS' organization, compensation and benefit plans; (xii) the costs
and effects of litigation and of unexpected or adverse outcomes in such
litigation; (xiii) failure to successfully implement the Company's Year 2000
modification plans substantially as scheduled and budgeted; and (xiv) the
success of TSYS at managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which
statements are made, and TSYS undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
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TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
(27) - Financial Data Schedule (For SEC use only)
b) There were no Forms 8-K filed during the quarter ended September 30, 1998.
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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 12, 1998 by: /s/ Richard W. Ussery
---------------------------
Richard W. Ussery
Chairman of the Board
and Chief Executive
Officer
Date: November 12, 1998 by: /s/ James B. Lipham
---------------------------
James B. Lipham
Chief Financial Officer
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