-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B6VV1YnODetEWXBO63IFjuwWQl31ZaujHnCpD5hsmMW7cQY4QFOoXsF45N49xv7J 4IMkM955UtV1VUbdGi4s4g== /in/edgar/work/20000814/0000721683-00-000017/0000721683-00-000017.txt : 20000921 0000721683-00-000017.hdr.sgml : 20000921 ACCESSION NUMBER: 0000721683-00-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOTAL SYSTEM SERVICES INC CENTRAL INDEX KEY: 0000721683 STANDARD INDUSTRIAL CLASSIFICATION: [7374 ] IRS NUMBER: 581493818 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10254 FILM NUMBER: 697827 BUSINESS ADDRESS: STREET 1: 1600 FIRST AVENUE STREET 2: P O BOX 1755 CITY: COLUMBUS STATE: GA ZIP: 31901 BUSINESS PHONE: 7066492267 MAIL ADDRESS: STREET 1: 1600 FIRST AVENUE CITY: COLUMBUS STATE: GA ZIP: 31901 10-Q 1 0001.txt 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, 2000 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-10254 -------------------------------------------------------- Total System Services, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Georgia 58-1493818 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1600 First Avenue, Post Office Box 1755, Columbus, Georgia 31902 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (706) 649-2310 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------- (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 11, 2000 ------------------------------ ------------------------------------ Common Stock, $.10 par value 194,783,770 TOTAL SYSTEM SERVICES, INC. INDEX Page Number ---------- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets (unaudited) - June 30, 2000 and December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Income (unaudited) - Three months and Six months ended June 30, 2000 and 1999 . . . . . . . . 4 Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 2000 and 1999 . . . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements (unaudited) . . . . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . 23 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders . . . . 24 Item 6. (a) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . 25 (b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . 25 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 - 2 - TOTAL SYSTEM SERVICES, INC. Part I - Financial Information Consolidated Balance Sheets (Unaudited) - ---------------------------------------------------------------------------------------------------------- June 30, December 31, 2000 1999 - ---------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (includes $89.9 million and $54.3 million on deposit with a related party at 2000 and 1999, respectively) . $ 93,621,835 54,903,107 Accounts receivable, net of allowance for doubtful accounts of $1.7 million and $1.3 million at 2000 and 1999, respectively .... 98,992,409 99,601,498 Prepaid expenses and other current assets ......................... 27,405,856 25,171,328 ------------- ------------- Total current assets .......................................... 220,020,100 179,675,933 Property and equipment, less accumulated depreciation and amortization of $90.4 million and $82.9 million at 2000 and 1999, respectively ................................................ 93,770,883 96,254,657 Computer software, less accumulated amortization of $84.6 million and $72.3 million at 2000 and 1999, respectively .... 107,326,345 98,824,792 Deferred income tax assets .......................................... 10,096,071 9,422,203 Other assets ........................................................ 75,452,603 82,594,156 ------------- ------------- Total assets .................................................. $ 506,666,002 466,771,741 ============= ============= Liabilities and Shareholders' Equity Current liabilities: Accounts payable .................................................. $ 10,656,723 15,267,979 Accrued salaries and employee benefits ............................ 26,781,343 36,421,238 Current portion of long-term debt and obligations under capital leases .................................................. -- 44,520 Other current liabilities (includes $2.1 and $1.9 million payable to related parties at 2000 and 1999, respectively) ............. 63,648,680 51,528,099 ------------- ------------- Total current liabilities ..................................... 101,086,746 103,261,836 Long-term debt and obligations under capital leases, excluding current portion ....................................... -- 159,766 Deferred income tax liabilities ..................................... 32,155,766 29,058,083 ------------- ------------- Total liabilities ............................................. 133,242,512 132,479,685 ------------- ------------- Shareholders' equity: Common stock - $.10 par value. Authorized 300,000,000 shares; 195,079,087 issued at 2000 and 1999, respectively; 194,780,470 and 194,861,620 outstanding at 2000 and 1999, respectively ...................................... 19,507,909 19,507,909 Additional paid-in capital .......................................... 6,446,200 6,442,300 Accumulated other comprehensive loss .............................. (1,620,259) (1,453,708) Treasury stock ...................................................... (2,840,085) (1,529,176) Retained earnings ................................................. 351,929,725 311,324,731 ------------- ------------- Total shareholders' equity .................................... 373,423,490 334,292,056 ------------- ------------- Total liabilities and shareholders' equity .................... $ 506,666,002 466,771,741 ============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements. - 3 - TOTAL SYSTEM SERVICES, INC. Consolidated Statements of Income (Unaudited) - --------------------------------------------------------------------------------------------------------------- Three months ended June 30, ------------------------------------- 2000 1999 - --------------------------------------------------------------------------------------------------------------- Revenues: Bankcard data processing services (includes $10.7 million and $8.8 million from related parties for 2000 and 1999, respectively) ................... $ 126,143,849 120,080,315 Other services (includes $1.8 million and $900,000 from related parties for 2000 and 1999, respectively ................................... 24,345,902 16,912,184 ------------- ------------- Total revenues ........................................................ 150,489,751 136,992,499 ------------- ------------- Expenses: Salaries and other personnel expense ...................................... 56,795,298 52,495,655 Net occupancy and equipment expense ....................................... 40,835,124 36,711,298 Other operating expenses (includes $1.7 million and $3.4 million to related parties for 2000 and 1999, respectively) ................................. 21,344,156 23,144,255 ------------- ------------- Total expenses ........................................................ 118,974,578 112,351,208 ------------- ------------- Equity in income of joint ventures .......................................... 4,760,762 2,995,033 ------------- ------------- Operating income ...................................................... 36,275,935 27,636,324 ------------- ------------- Nonoperating income: Gain (loss) on disposal of equipment, net ................................. (1,255) (44,498) Interest income, net (includes $1,140,000 and $281,000 from a related party for 2000 and 1999, respectively) .................................. 1,125,474 404,032 ------------- ------------- Total nonoperating income ............................................. 1,124,219 359,534 ------------- ------------- Income before income taxes ............................................ 37,400,154 27,995,858 Income taxes ................................................................ 13,069,572 9,559,997 ------------- ------------- Net income ............................................................ $ 24,330,582 18,435,861 ============= ============= Basic earnings per share .............................................. $ .12 .09 ============= ============= Diluted earnings per share ............................................ $ .12 .09 ============= ============= Weighted average common shares outstanding .................................. 194,780,470 194,923,269 Increase due to assumed issuance of shares related to stock options outstanding .................................... 565,377 589,190 ------------- ------------- Weighted average common and common equivalent shares outstanding ........................................... 195,345,847 195,512,459 ============= ============= Cash dividends per common share ............................................. $ .0125 .0100 ============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements. - 4 - TOTAL SYSTEM SERVICES, INC. Consolidated Statements of Income (Unaudited) - ----------------------------------------------------------------------------------------------------------- Six months ended, June 30, --------------------------------------- 2000 1999 - ----------------------------------------------------------------------------------------------------------- Revenues: Bankcard data processing services (includes $20.7 million and $16.6 million from related parties for 2000 and 1999, respectively) $249,099,008 216,158,911 Other services (includes $3.2 million and $2.7 million from related parties for 2000 and 1999, respectively ............................. 47,250,023 36,144,100 ------------ ------------ Total revenues .................................................. 296,349,031 252,303,011 ------------ ------------ Expenses: Salaries and other personnel expense ................................ 113,693,364 100,963,735 Net occupancy and equipment expense ................................. 79,829,301 69,432,384 Other operating expenses (includes $5.0 million and $6.5 million to related parties for 2000 and 1999, respectively) ............... 43,753,938 40,137,217 ------------ ------------ Total expenses .................................................. 237,276,603 210,533,336 ------------ ------------ Equity in income of joint ventures .................................... 7,728,646 5,108,321 ------------ ------------ Operating income ................................................ 66,801,074 46,877,996 ------------ ------------ Nonoperating income: Gain (loss) on disposal of equipment, net ........................... 18,581 (325,114) Interest income, net (includes $1,918,000 and $534,000 from a related party for 2000 and 1999, respectively) ............................ 2,063,080 773,899 ------------ ------------ Total nonoperating income ....................................... 2,081,661 448,785 ------------ ------------ Income before income taxes ...................................... 68,882,735 47,326,781 Income taxes .......................................................... 23,894,914 15,942,352 ------------ ------------ Net income ...................................................... $ 44,987,821 31,384,429 ============ ============ Basic earnings per share ........................................ $ .23 .16 ============ ============ Diluted earnings per share ...................................... $ .23 .16 ============ ============ Weighted average common shares outstanding ............................ 194,801,150 194,902,161 Increase due to assumed issuance of shares related to stock options outstanding .............................. 493,235 682,635 ------------ ------------ Weighted average common and common equivalent shares outstanding ..................................... 195,294,385 195,584,796 ============ ============ Cash dividends per common share ....................................... $ .0225 .0200 ============ ============
See accompanying Notes to Unaudited Consolidated Financial Statements. - 5 - TOTAL SYSTEM SERVICES, INC. Consolidated Statements of Cash Flows (Unaudited) - ------------------------------------------------------------------------------------ Six months ended June 30, -------------- 2000 1999 - ------------------------------------------------------------------------------------ Cash flows from operating activities: Net income ....................................... $ 44,987,821 31,384,429 Adjustments to reconcile net income to net cash provided by operating activities: Equity in income of joint ventures ........... (7,728,646) (5,108,321) Depreciation and amortization ................ 24,912,581 24,467,608 Provision for doubtful accounts .............. 581,793 334,000 Deferred income tax expense (benefit) ........ 2,423,815 2,644,378 (Gain) loss on disposal of equipment, net .... (18,581) 325,114 (Increase) decrease in: Accounts receivable .......................... 27,296 (2,258,119) Prepaid expenses and other assets ............ (7,533,427) (3,893,678) Increase (decrease) in: Accounts payable ............................. (4,611,256) 5,522,204 Accrued expenses and other current liabilities 2,097,958 8,410,417 ------------ ------------ Net cash provided by operating activities 55,139,354 61,828,032 ------------ ------------ Cash flows from investing activities: Purchase of property and equipment ............... (5,366,351) (8,426,335) Additions to computer software ................... (20,782,440) (30,060,703) Proceeds from disposal of equipment .............. 21,610 52,954 Dividends received from joint ventures ........... 5,369,192 4,664,307 Repayment of contract acquisition costs .......... 10,000,000 -- Increase in contract acquisition costs ........... (253,559) (2,788,819) ------------ ------------ Net cash used in investing activities .... (11,011,548) (36,558,596) ------------ ------------ Cash flows from financing activities: Purchase of common stock ......................... (1,313,916) -- Principal payments on long-term debt and capital lease obligations ...................... (204,286) (29,861) Dividends paid on common stock ................... (3,897,320) (3,889,275) Proceeds from exercise of stock options .......... 6,444 93,100 ------------ ------------ Net cash used in financing activities .... (5,409,078) (3,826,036) ------------ ------------ Net increase in cash and cash equivalents 38,718,728 21,443,400 Cash and cash equivalents at beginning of year ..... 54,903,107 9,555,760 ------------ ------------ Cash and cash equivalents at end of year ........... $ 93,621,835 30,999,160 ============ ============ Cash paid for interest (net of capitalized amounts) $ 37,735 1,316 ============ ============ Cash paid for income taxes (net of refunds received) $ 21,348,993 8,896,843 ============ ============
Significant noncash transaction: The Company acquired Partnership Card Services through the issuance of 854,042 shares of common stock with a market value of $20,070,000 in January 1999. 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.[registered mark] (TSYS[registered mark]) and its wholly owned subsidiaries, Columbus Depot Equipment Company [service mark] (CDEC[service mark]), TSYS Total Solutions[registered mark], Inc., Inc. (TSI), Columbus Productions, Inc.[service mark] (CPI), TSYS Canada, Inc.[service amrk] (TCI) and DotsConnect, Inc. (DotsConnect). These financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. All adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of financial position and results of operations for the periods covered by this report, have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes appearing in the Company's 1999 annual report previously filed on Form 10-K. Certain reclassifications have been made to the 1999 financial statements to conform to the presentation adopted in 2000. Note 2 - Supplementary Balance Sheet Information Significant components of prepaid expenses and other current assets are summarized as follows: June 30, 2000 December 31, 1999 ------------------ ----------------------- Contract acquisition costs, net $ 5,799,672 $ 7,861,069 Prepaid expenses 12,996,392 9,709,740 Other 8,609,792 7,600,519 ------------------ ----------------------- Total $ 27,405,856 $ 25,171,328 ================== ======================= Significant components of other assets are summarized as follows: June 30, 2000 December 31, 1999 ------------------ ----------------------- Contract acquisition costs, net $ 30,822,322 $ 43,001,304 Equity investments, net 38,531,975 35,951,632 Other 6,098,306 3,641,220 ------------------ ----------------------- Total $ 75,452,603 $ 82,594,156 ================== ======================= - 7 - Notes to Unaudited Consolidated Financial Statements (continued) Significant components of other current liabilities are summarized as follows: June 30, 2000 December 31, 1999 ------------------- ---------------------- Customer postage deposits $ 17,301,837 $ 14,913,211 Transaction processing provisions 7,767,207 5,445,862 Other 38,579,636 31,169,026 ------------------- ---------------------- Total $ 63,648,680 $ 51,528,099 =================== ====================== Note 3 - Comprehensive Income (Loss) Comprehensive income (loss) for TSYS consists of net income and foreign currency translation adjustments recorded as a component of shareholders' equity. Total comprehensive income for the three months ended June 30 is as follows: 2000 1999 ----------------- --------------------- Net income $ 24,330,582 $ 18,435,861 Other comprehensive income (loss): Foreign currency translation adjustments, net of tax (106,221) (66,749) ----------------- --------------------- Comprehensive income $ 24,224,361 $ 18,369,112 ================= ===================== Total comprehensive income for the six months ended June 30 is as follows: 2000 1999 ----------------- --------------------- Net income $ 44,987,821 $ 31,384,429 Other comprehensive income (loss): Foreign currency translation adjustments, net of tax (166,551) (171,642) ----------------- --------------------- Comprehensive income $ 44,821,270 $ 31,212,787 ================= ===================== The income tax effects allocated to and the cumulative balance of each component of other comprehensive loss are as follows: Balance at December Pretax Balance at 31, 1999 amount Tax benefit June 30, 2000 ------------------- ----------- ------------- ------------- Currency translation adjustments .............................. ($ 1,453,708) (268,873) 102,322 ($1,620,259) =================== ============ ============= =============
- 8 - Notes to Unaudited Consolidated Financial Statements (continued) The Company reports selected information about operating segments in accordance with Statement of Financial Accounting Standard No. 131 (SFAS 131). Through an online accounting and bankcard data processing system, Total System Services, Inc. provides card processing and electronic commerce services to card-issuing institutions in the United States, Mexico, Canada, Honduras and the Caribbean. TSYS' subsidiaries provide support services including correspondence processing, commercial printing and equipment leasing. Segments are identified based on the services provided. Transaction processing services account for approximately 85% or more of financial activity in all the quantitative thresholds required to be measured under SFAS 131 for the three and six months ended June 30, 2000 and 1999. Two subsidiaries were aggregated into transaction processing services. One of these subsidiaries' sole business activity is to provide programming support services to the parent company. The other subsidiary provides electronic commerce activities previously performed by TSYS for its clients. The remaining segments were aggregated into support services. Transaction Support Operating Segments processing services services Consolidated - --------------------------------------------------------------------------------------------------------------------------------- At June 30, 2000 - --------------------------------------------------------------------------------------------------------------------------------- Identifiable assets $ 494,600,615 52,733,207 $ 547,333,822 Intersegment eliminations (40,389,929) (277,891) (40,667,820) ------------------------- ----------------------- ----------------------- Total assets $ 454,210,686 52,455,316 $ 506,666,002 ========================= ======================= ======================= - --------------------------------------------------------------------------------------------------------------------------------- At December 31, 1999 - --------------------------------------------------------------------------------------------------------------------------------- Identifiable assets $ 454,926,573 47,704,132 $ 502,630,705 Intersegment eliminations (35,704,897) (154,067) (35,858,964) ------------------------- ----------------------- ----------------------- Total assets $ 419,221,676 47,550,065 $ 466,771,741 ========================= ======================= ======================= - --------------------------------------------------------------------------------------------------------------------------------- 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 tax expense $ 11,294,493 1,775,079 $ 13,069,572 ========================= ======================= ======================= Net income $ 21,427,875 2,902,707 $ 24,330,582 ========================= ======================= ======================= - --------------------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 1999 - --------------------------------------------------------------------------------------------------------------------------------- Total revenue $ 121,765,072 15,782,884 $ 137,547,956 Intersegment revenue (101,587) (453,870) (555,457) ------------------------- ----------------------- ----------------------- Revenue from external customers $ 121,663,485 15,329,014 $ 136,992,499 ========================= ======================= ======================= Equity in income of joint ventures $ 2,995,033 - $ 2,995,033 ========================= ======================= ======================= Segment operating income $ 25,132,157 2,504,167 $ 27,636,324 ========================= ======================= =======================
- 9 - Notes to Unaudited Consolidated Financial Statements (continued) Transaction Support Operating Segments processing services services Consolidated - --------------------------------------------------------------------------------------------------------------------------------- Income tax expense $ 8,607,747 952,250 $ 9,559,997 ========================= ======================= ======================= Net income $ 16,867,214 1,568,647 $ 18,435,861 ======================== ======================= ======================= - --------------------------------------------------------------------------------------------------------------------------------- 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 tax expense $ 20,998,829 2,896,085 $ 23,894,914 ========================= ======================= ======================= Net income $ 40,244,960 4,742,861 $ 44,987,821 ========================= ======================= ======================= - --------------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30, 1999 - --------------------------------------------------------------------------------------------------------------------------------- Total revenue $ 219,646,226 33,739,761 $ 253,385,987 Intersegment revenue (229,218) (853,758) (1,082,976) ------------------------- ----------------------- ----------------------- Revenue from external customers $ 219,417,008 32,886,003 $ 252,303,011 ========================= ======================= ======================= Equity in income of joint ventures $ 5,108,321 - $ 5,108,321 ========================= ======================= ======================= Segment operating income $ 40,553,276 6,324,720 $ 46,877,996 ========================= ======================= ======================= Income tax expense $ 13,548,739 2,393,613 $ 15,942,352 ========================= ======================= ======================= Net income $ 27,462,322 3,922,107 $ 31,384,429 ========================= ======================= =======================
The following geographic area data represent revenues for the three and six months ended June 30, 2000 and 1999, respectively, based on the geographic locations of customers. Substantially all property and equipment is located in the United States. Three Months Ended June 30, Six Months Ended June 30, --------------------- ---------------------------------------- ------------------------------------------ 2000 1999 2000 1999 --------------------- ------------------- ------------------ ------------------ -------------------- United States $ 138,002,750 127,506,523 271,729,086 236,937,311 Canada* 8,122,341 5,357,563 16,098,465 6,989,137 Mexico 3,993,549 3,926,675 7,802,896 7,962,571 Other 371,111 201,738 718,584 413,992 --------------------- ------------------- ------------------ ------------------ -------------------- Totals $ 150,489,751 136,992,499 296,349,031 252,303,011 =================== ================== ================== ====================
*These revenues include those generated by the Caribbean accounts belonging to the Bank of Nova Scotia. - 10 - Notes to Unaudited Consolidated Financial Statements (continued) For the three months ended June 30, 2000 and 1999, three major customers accounted for approximately 36.2% and 33.2% of total revenues, respectively. One of these customers (major customer one) provided 15.3%, or $23.0 million, of total revenues for the three months ended June 30, 2000, and 15.7%, or $21.6 million, for the three months ended June 30, 1999. Another major customer (major customer two) accounted for 10.7%, or $16.1 million, of total revenues for the three months ended June 30, 2000, and 8.3%, or $11.4 million, of total revenues for the three months ended June 30, 1999. The other major customer (major customer three) accounted for 10.2%, or $15.4 million, of total revenues for the three months ended June 30, 2000, and 9.2%, or $12.6 million, for the three months ended June 30, 1999. Revenues from major customers for the periods reported are attributable to both reporting segments. In 1999, TSYS had a customer that was a major customer (major customer four) that accounted for 12.4%, or $17.0 million, of total revenues for the three months ended June 30, 1999. Major customer four was not a major customer for the three months ended June 30, 2000. For the six months ended June 30, 2000 and 1999, the same four major customers accounted for approximately 47.1% and 45.0% of total revenues, respectively. Major customer one provided 15.5%, or $45.8 million, of total revenues for the six months ended June 30, 2000, and 17.1%, or $43.2 million, for the six months ended June 30, 1999. Major customer two accounted for 10.4%, or $30.7 million, of total revenues for the six months ended June 30, 2000, and 8.3%, or $21.0 million, of total revenues for the six months ended June 30, 1999. Major customer three accounted for 10.3%, or $30.5 million, of total revenues for the six months ended June 30, 2000, and 6.3%, or $15.8 million, for the six months ended June 30, 1999. Major customer four accounted for 10.9%, or $32.3 million, of total revenues for the six months ended June 30, 2000, and 13.3%, or $33.5 million, for the six months ended June 30, 1999. Revenues from major customers for the periods reported are attributable to both reporting segments. Note 5 - Legal Proceedings On November 10, 1998, a class action complaint was filed against NationsBank of Delaware, N.A., in the United States District Court for the Southern District of Mississippi. On March 23, 1999, the named plaintiff amended the complaint and named the Company and certain credit bureaus as defendants in the case. The named plaintiff alleges, among other things, that the defendants failed to report properly the credit standing of each member of the putative class. The named plaintiff has defined the class as all persons and entities within the United States who obtained credit cards from NationsBank and whose accounts were purchased by or transferred to U.S. BankCard and whose accounts were reported to credit bureaus or credit agencies incorrectly in August 1998. The amended complaint alleges negligence, violation of the Fair Credit Reporting Act, breach of the duty of good faith and fair dealing, and seeks declaratory relief, injunctive relief and the imposition of punitive damages. The parties have reached a settlement of this litigation in principle which is subject to, among other things, confirmatory due diligence to be conducted by the plaintiff's counsel, negotiation, finalization and execution of the necessary - 11 - Notes to Unaudited Consolidated Financial Statements (continued) settlement documents, and court approval under Rule 23(e) of the Federal Rules of Civil Procedure. 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 issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. For TSYS, SFAS 133, as amended by SFAS 137 and SFAS 138, is effective January 1, 2001. On adoption, the provisions of SFAS 133 must be applied prospectively. TSYS is in the process of assessing the impact SFAS 133 will have on its financial statements. Note 7 - Commitments and Contingencies In the fourth quarter of 1999, the Company made a payment representing a contract acquisition investment 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. TSYS has agreed to guarantee the loan. - 12 - 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 June 30: Percentage of Percentage Change Total Revenues in Dollar Amounts ------------------------ ------------------------ 2000 1999 2000 vs. 1999 -------- -------- ------------------------ Revenues: Bankcard data processing services 83.8 % 87.7 % 5.0 % Other services 16.2 12.3 44.0 -------- ------- Total revenues 100.0 100.0 9.9 -------- ------- Expenses: Salaries and other personnel expense 37.7 38.3 8.2 Net occupancy and equipment expense 27.1 26.8 11.2 Other operating expenses 14.3 16.9 (7.8) -------- ------- Total expenses 79.1 82.0 5.9 -------- ------- Equity in income of joint ventures 3.2 2.2 59.0 -------- ------- Operating income 24.1 20.2 31.3 Nonoperating income 0.8 0.3 nm -------- ------- Income before income taxes 24.9 20.5 33.6 Income taxes 8.7 7.0 36.7 -------- ------- Net income 16.2 % 13.5 % 32.0 % ======== =========
nm = not meaningful - 13 - 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 ----------------------- ---------------------- 2000 1999 2000 vs. 1999 ------- ------ ---------------------- Revenues: Bankcard data processing services 84.1 % 85.7 % 15.2 % Other services 15.9 14.3 30.7 --------- ------- Total revenues 100.0 100.0 17.5 --------- ------- Expenses: Salaries and other personnel expense 38.4 40.0 12.6 Net occupancy and equipment expense 26.9 27.5 15.0 Other operating expenses 14.8 15.9 9.0 --------- ------- Total expenses 80.1 83.4 12.7 --------- ------- Equity in income of joint ventures 2.6 2.0 51.3 --------- ------- Operating income 22.5 18.6 42.5 Nonoperating income 0.7 0.1 nm --------- ------- Income before income taxes 23.2 18.7 45.5 Income taxes 8.0 6.3 49.9 --------- ------- Net income 15.2 % 12.4 % 43.3 % ========== =======
nm = not meaningful Total revenues increased $13.5 million, or 9.9%, and $44.0 million, or 17.5%, during the three months and six months ended June 30, 2000, respectively, compared to the same periods in 1999. Revenues from bankcard data processing services increased $6.1 million, or 5.0%, in the three months ended June 30, 2000, compared to the same period in 1999. During the six months ended June 30, 2000, revenues from bankcard data processing services increased $32.9 million, or 15.2%, compared to the same period in 1999. Increased revenues from bankcard data processing services are attributable to the growth in the card portfolios of existing customers, as well as cardholder accounts of new customers converted to THE TOTAL SYSTEM(R). Increases in - 14 - Results of Operations (continued) the volumes of authorizations and transactions associated with the additional cardholder accounts also contributed to the increased revenues. Processing contracts with large customers, representing a significant portion of the Company's total revenues, generally provide for discounts on certain services based on the size and activity of customers' portfolios. As a result, bankcard data processing revenues and the related margins are influenced by the customer mix relative to the size of customer bankcard portfolios, as well as the number and activity of individual cardholder accounts processed for each customer. Average cardholder accounts on file for the three months ended June 30, 2000, were 191.3 million, an increase of approximately 0.7% over the average of 189.9 million for the same period in 1999. For the first six months of 2000, average cardholder accounts were 200.4 million, a 24.9% increase over the 160.5 million average cardholder accounts on file for the same period last year. Cardholder accounts on file at June 30, 2000, were 181.4 million, a 5.5% decrease over the 192.0 million accounts on file at June 30, 1999. The change in the number of cardholder accounts on file from June 1999 to June 2000 included the deconversion of the 33.5 million consumer credit accounts of Universal Card Services, the decrease of 9.4 million accounts related to the deconversion of and/or purging of inactive accounts by other customers, internal growth of existing customers of 22.3 million cardholder accounts and approximately 10.0 million accounts of new customers. TSYS was processing 119.9 million accounts on TS2(R) at June 30, 2000, a 10.2% decrease over the 133.6 million at June 30, 1999. The change in TS2 accounts on file from June 1999 to June 2000 included the deconversion of the 33.5 million consumer credit accounts of Universal Card Services, net internal growth of existing customers of 10.1 million and approximately 9.7 million accounts of new customers. The Company provides services to its clients which include processing debit, commercial, retail, stored value and consumer cards. Commercial cards include purchasing cards, corporate cards and fleet cards for employees. The Company was processing 12.2 million commercial cards at the end of June 30, 2000, an increase of 24.5% compared to 9.8 million commercial cards at the end of June 30, 1999. TSYS is the leading third-party processor of retail accounts. At June 30, 2000, the Company was processing 92.9 million retail accounts, an increase of 19.6% over the 77.7 million retail accounts at June 30, 1999. The significant increase in the number of retail accounts is due to the conversion of the account portfolio for Nordstrom, which occurred during the third quarter of 1999, and the growth in the account portfolios of Sears and Circuit City. 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, 2000, three major customers accounted for approximately 36.2% of total revenues compared to 33.2% for the three months ended June 30, 1999. For the three months ended June 30, 1999, there was an additional major customer which accounted for 12.4% of total revenues. This customer was not a - 15 - Results of Operations (continued) major customer for the three months ended June 30, 2000. For the six months ended June 30, 2000, four major customers accounted for approximately 47.1% of total revenues compared to 45.0% for the six months ended June 30, 1999. 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. Near the end of the first quarter of 1998, AT&T, a major customer of the Company, completed the sale of its Universal Card Services (UCS) to CITIBANK, now a part of Citigroup after CITIBANK's merger with Travelers Group, Inc. On February 26, 1999, CITIBANK notified TSYS of its decision to terminate UCS' processing agreement with TSYS for consumer credit card accounts at the end of its original term on August 1, 2000. The deconversion of the consumer credit accounts occurred during May 2000; however, the Company continued to receive contractually obligated minimum processing fees from UCS until August 1, 2000. TSYS' management believes that CITIBANK will not be a major customer for the year 2000. TSYS' management further believes that the loss of revenues from UCS for the months of August through December 2000, combined with decreased expenses from the reduction in hardware and software and the redeployment of personnel, should not have a material adverse effect on the Company's financial condition or results of operations for the year ending December 31, 2000. In March 2000, the Company announced its intention to launch a new, wholly owned subsidiary, DotsConnect, Inc. (DotsConnect), to focus exclusively on the electronic payments (e-payments) market. DotsConnect will deliver premier e-payments software that allows buyers and sellers to conduct commerce electronically. The business of DotsConnect will focus on four areas: business-to-consumer financial services applications, Web hosting, business-to-business financial services applications, and electronic bill presentment and payment. DotsConnect is headquartered in Columbus, Georgia, with an office in Atlanta, Georgia. DotsConnect commenced operations on May 1, 2000, with approximately 30 team members comprising the initial DotsConnect team. Revenues from other services increased $7.4 million, or 44.0%, in the second quarter of 2000, compared to the second quarter of 1999. Revenues from other services for the first six months of 1999 increased $11.1 million, or 30.7%, compared to the same period last year. Revenues from other services consist primarily of revenues generated by TSYS' wholly owned subsidiaries. Total expenses increased 5.9% and 12.7% for the three and six months ended June 30, 2000, respectively, compared to the same periods in 1999. The increases in operating expenses are attributable to increases in a majority of expense categories as described below. Employment expenses increased $4.3 million, or 8.2% for the three months ended June 30, 2000, compared to the same period in 1999. For the first six months of 2000, employment expenses increased $12.7 million, or 12.6%, compared to the same period in 1999. The change in employment expenses consists of increases of $5.2 million and $16.6 million for the three and six - 16 - Results of Operations (continued) months ended June 30, 2000, respectively, associated with the growth in the number of employees, normal salary increases and related benefits. This change was offset by $900,000 and $3.9 million invested in software development costs and contract acquisition costs for the three and six months ending June 30, 2000, respectively. The majority of the software development costs related to the development of a commercial card system for TS2 which began in May 1998 and is expected to be substantially completed in 2000. The average number of employees in the second quarter of 2000 increased to 4,467, a 13.9% increase over the 3,921 in the same period of 1999. For the first six months of 2000, the average number of employees was 4,413, a 16.0% increase over the first six months of 1999. At July 31, 2000, TSYS had 4,377 full-time and 258 part-time employees. Net occupancy and equipment expense increased $4.1 million, or 11.2%, for the three months ended June 30, 2000, over the same period in 1999. For the six months ended June 30, 2000, net occupancy and equipment expense increased $10.4 million, or 15.0%, over the same period last year. Computer equipment and software rentals, which represent the largest component of net occupancy and equipment expense, increased 4.7% to $20.8 million in the second quarter of 2000, compared to $19.8 million in the same period of 1999. During the first six months of 2000, equipment and software rentals increased 11.5% to $40.6 million compared to $36.4 million in the same period in 1999. Due to rapidly changing technology in computer equipment, TSYS' equipment needs are achieved to a large extent through operating leases. During 1999 and the first six months of 2000, the Company made investments in computer software licenses and hardware to accommodate increased volumes due to the expected growth in the number of accounts associated with new and existing customers. During the third quarter of 1999, TSYS officially opened the first phase of its Riverfront Campus and essentially completed moving the majority of its downtown employees to the facility. TSYS did not renew several leases at the end of September and sold two of its vacated buildings. Other operating expenses decreased 7.8% and increased 9.0% for the three and six months ended June 30, 2000, respectively, compared to the same periods in 1999. The decrease in expenses for the quarter is the result of expense control and a decrease in management fees paid to Synovus Service Corp. (SSC) for human resource functions. TSYS assumed certain human resource responsibilities from SSC in 2000. The growth in other operating expenses for 2000 is primarily due to increased business development costs associated with exploring new business opportunities, both domestically and internationally; the establishment of an international office in London; increased transaction processing expenses associated with the increase in the volume of accounts processed; and an increase in the amortization of contract acquisition costs. The conversions of Sears, Royal Bank and Canadian Tire Acceptance Limited, begun in March 1999 and completed early in the second quarter of 1999, contributed to the increase in amortization of contract acquisition costs. TSYS' share of income from its equity in joint ventures was $4.8 million and $3.0 million for the second quarters of 2000 and 1999, respectively. For the six months ended June 30, 2000 - 17 - Results of Operations (continued) and 1999, the Company's equity in income of its joint ventures was $7.7 million and $5.1 million, respectively. The increase is the result of Vital Processing Services L.L.C.'s (Vital) infrastructure costs impacting its operating results in 1999 and an increase in operating results from Total System Services de Mexico, S.A. de C.V. (TSYS de Mexico). There remains uncertainty in the Mexican economy which management continues to monitor. Interest income, net, includes interest income of $1,125,500 and no interest expense for the second quarter of 2000. During the second quarter of 1999, interest income, net, included interest income of $411,300 and interest expense of $7,300. For the six months ended June 30, 2000 and 1999, respectively, interest expense was $34,000 and $14,100, and interest income was $2,097,100 and $788,000. The increase in interest income for the six months ending June 30, 2000, as compared to the same period in 1999, was primarily the result of improved levels of cash available for investment as a result of decreased outlays related to the purchase of equipment and software additions and higher interest rates earned on short-term investments. Operating income increased 31.3% and 42.5% for the three and six months ended June 30, 2000, respectively, over the same periods in 1999. The increase in operating income was enhanced by the achievement of the Company's commitment to contain the growth in operating expenses below the growth rate in revenues. TSYS' effective income tax rate for the second quarter of 2000 was 34.9%, compared to 34.1% for the same period in 1999. For the six months ended June 30, 2000, the effective tax rate was 34.7%, compared to 33.7% for the same period in 1999. Growth in pretax income at rates greater than the growth in federal and state tax credits is the cause for the increase in the Company's effective tax rate. Net income for the three months ended June 30, 2000, increased 32.0% to $24.3 million, or basic and diluted earnings per share of $.12, compared to $18.4 million, or basic and diluted earnings per share of $.09, for the same period in 1999. Net income for the first six months of 2000 increased 43.3% to $45.0 million, up from $31.4 million for the same period last year. Basic and diluted earnings per share for the first six months of 2000 increased to $.23, up from $.16 for the same period of 1999. The Company expects its 2000 net income to exceed 1999 net income by approximately 25 percent. Liquidity and Capital Resources The Consolidated Statements of Cash Flows detail the Company's cash flows from operating, investing and financing activities. TSYS' primary method of funding its operations and growth has been cash generated from current operations and the occasional use of borrowed funds to supplement financing of capital expenditures. TSYS' net cash provided by operating activities in the first six months of 2000 was $55.1 million, compared to $61.8 million in the same period of 1999. The major uses of cash generated from operations have been the internal - 18 - Liquidity and Capital Resources (continued) development and purchase of computer software, the addition of property and equipment, investment in contract acquisition costs, and the payment of cash dividends. During the second quarter of 2000, TSYS purchased property and equipment of $3.1 million for total purchases of $5.4 million for the first six months of 2000. Additions to computer software during the second quarter were $16.3 million, bringing the total additions for 2000 to $20.8 million. Of the $16.3 million computer software additions made during the second quarter, $15.6 million was for purchased software and $700,000 was for internally developed software, bringing the totals for the first six months of 2000 to $17.1 million for purchased software and $3.7 million for internally developed software. In the first half of 2000, the Company made investments in contract acquisition costs of $254,000 compared to $2.8 million in the first six months of 1999. 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. TSYS has agreed to guarantee the loan. Dividends on common stock of $2.0 million were paid in the second quarter of 2000, bringing the total amount of dividends paid year to date to $3.9 million. On April 13, 2000, the Company announced a 25% increase in its quarterly cash dividend from $0.01 to $0.0125 per share. The cash dividend was paid on July 1, 2000, to shareholders of record on June 22, 2000. In October 1999, the Company announced a plan to repurchase up to 1.5 million shares of its common stock from time to time and at various prices over the next 24 months. Shares repurchased could be utilized to fund TSYS' various stock option and other compensation arrangements or used for other purposes, including potential acquisitions. The maximum of 1.5 million shares represents approximately five percent of the shares of TSYS common stock held by shareholders other than TSYS' affiliates, including Synovus Financial Corp. The Company will use internally generated cash to fund the purchases. During the first half of 2000, the Company purchased 83,100 shares for $1.3 million. Since the plan was announced, the Company has purchased 160,200 shares for $2.6 million. In 1997, construction was begun on a campus-type facility which now serves as the Company's corporate headquarters. The Company entered into an operating lease agreement relating to the new corporate campus. Under the agreement, the lessor purchased the land, paid for construction and development costs and leased the property to the Company. The lease provides for a substantial residual value guarantee, up to $81.3 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. - 19 - Liquidity and Capital Resources (continued) During the third quarter of 1999, TSYS officially opened the first phase of its Riverfront Campus and essentially completed moving the majority of its downtown employees to the facility. TSYS did not renew several leases at the end of September 1999 and sold two of its vacated buildings. In 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 facility is expected to cost approximately $5.0 million and is scheduled to open during the third quarter of 2001. 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 $876,500 for the six months ended June 30, 2000. In June 2000, Synovus announced the completion of the acquisition of ProCard, Inc., a leading provider of software and Internet tools designed to assist organizations with the management of purchasing, travel and fleet card programs. Synovus' acquisition of ProCard offers TSYS the opportunity to further expand its services to ProCard's clients. ProCard's software solutions will be integrated into TSYS' processing solutions. The Company will assist in managing ProCard, for which the Company will be paid a management fee by Synovus. In the third quarter of 2000, TSYS signed a ten-year contract with The Royal Bank of Scotland Group plc (Royal Bank). In conjunction with the requirements of its contract, TSYS paid $37.8 million in contract acquisition costs to Royal Bank. In anticipation of the signing of a contract, TSYS entered into a forward exchange contract in June 2000. The contract provided for $20 million to be converted into British Pounds Sterling at a rate of 1.5187 any time between July 3, 2000 and September 29, 2000. TSYS is accounting for the forward exchange contract as a hedge under Financial Accounting Standards No. 52, "Foreign Currency Translation." Although the impact of inflation on its operations cannot be precisely determined, the Company believes that by controlling its operating expenses and by taking advantage of more efficient computer hardware and software, it can minimize the impact of inflation. TSYS may seek additional external sources of capital in the future. The form of any such financing will vary depending upon prevailing market and other conditions and may include short-term or long-term borrowings from financial institutions or the issuance of additional equity and/or debt securities such as industrial revenue bonds. However, there can be no assurance that funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future, as evidenced by TSYS' current ratio of 2.2:1. At June 30, 2000, TSYS had working capital of $118.9 million compared to $76.4 million at December 31, 1999. - 20 - Year 2000 Readiness Disclosure Many computer programs were written with a two-digit date field. If these programs were not made Year 2000 compliant, they would not be able to correctly process date information for the year 2000 and beyond. Remediation efforts went beyond the Company's internal computer systems and required coordination with customers, vendors, government entities and other third parties to assure that their systems and related interfaces were compliant. Failure to achieve timely remediation of the Company's critical programs and computer systems for Year 2000 would have had a material adverse effect on the Company's financial condition and results of operations. TSYS experienced a smooth transition in passing the century date changeover. TSYS did not experience any significant internal or external issues concerning Y2K, and all TSYS companies, systems, facilities and clients processed, and have continued to process, without incident since the date changeover. TSYS will continue to monitor Y2K issues by overseeing critical tasks during the year 2000. The TSYS Year 2000 Command Center and Command Posts remained staffed during the first quarter of 2000 but have since been disbanded. Heightened coverage of year-end 2000 processing is planned, and TSYS intends to maintain its reporting methods to evaluate any problems. TSYS' total cost for the Year 2000 Project amounted to approximately $17 million of direct costs. This amount consists primarily of the costs associated with personnel dedicated to the Year 2000 Project and hardware/software costs related to testing. During the first quarter of 2000, TSYS incurred $1.0 million of direct costs associated with the Year 2000 Project. Legal Proceedings On November 10, 1998, a class action complaint was filed against NationsBank of Delaware, N.A., in the United States District Court for the Southern District of Mississippi. On March 23, 1999, the named plaintiff amended the complaint and named the Company and certain credit bureaus as defendants in the case. The named plaintiff alleges, among other things, that the defendants failed to report properly the credit standing of each member of the putative class. The named plaintiff has defined the class as all persons and entities within the United States who obtained credit cards from NationsBank and whose accounts were purchased by or transferred to U.S. BankCard and whose accounts were reported to credit bureaus or credit agencies incorrectly in August 1998. The amended complaint alleges negligence, violation of the Fair Credit Reporting Act, breach of the duty of good faith and fair dealing, and seeks declaratory relief, injunctive relief and the imposition of punitive damages. The parties have reached a settlement of this litigation in principle which is subject to, among other things, confirmatory due diligence to be conducted by the plaintiff's counsel, negotiation, finalization and execution of the necessary settlement documents, and court approval under Rule 23(e) of the Federal Rules of Civil Procedure. 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. - 21 - Forward-Looking Statements Certain statements contained in this filing which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the Act). In addition, certain statements in future filings by TSYS with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of TSYS which are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of TSYS or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "targeted," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (i) the strength of the U.S. economy in general and relevant foreign economies; (ii) the Company's performance under - - and retention of - current and future processing agreements with customers; (iii) inflation, interest rate and foreign exchange rate fluctuations; (iv) timely and successful implementation of processing systems to provide new products, improved functionality and increased efficiencies; (v) changes in consumer spending, borrowing and saving habits, including a shift from credit to debit cards; (vi) technological changes, particularly with respect to e-commerce; (vii) acquisitions; (viii) the ability to increase market share and control expenses; (ix) changes in laws, regulations, credit card association rules or other industry standards affecting TSYS' business which require significant product redevelopment efforts; (x) the effect of changes in accounting policies and practices as may be adopted by the Financial Accounting Standards Board or the Securities and Exchange Commission; (xi) changes in TSYS' organization, compensation and benefit plans; (xii) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; (xiii) failure to successfully implement the Company's Year 2000 modification plans substantially as scheduled and budgeted; (xiv) lower than anticipated internal growth rates for existing customers; and (xv) the success of TSYS at managing the risks involved in the foregoing. Such forward-looking statements speak only as of the date on which statements are made, and TSYS undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. - 22 - TOTAL SYSTEM SERVICES, INC. Item 3 - Quantitative and Qualitative Disclosures About Market Risk Foreign Currency Exchange Risk The foreign currency financial statements of TSYS' Mexican joint venture and TSYS' wholly owned subsidiary with an operation in Canada 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' Mexican joint venture and the Canadian operation, net of tax, are accumulated in a separate section of shareholders' equity titled accumulated other comprehensive income. Currently, TSYS does not use financial instruments to hedge its exposure to exchange rate changes in Mexico or Canada 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 $7.3 million (U.S.) at June 30, 2000, and the carrying value of the assets of its Canadian operation was approximately $353,000 (U.S.) at June 30, 2000. In 1999, TSYS opened an office in the United Kingdom, which will serve as the headquarters for TSYS' European operations. During the second quarter of 2000, TSYS announced its intention to open a European data center in the U.K. TSYS has signed an agreement with VData Limited for data center services in Europe. The data center is expected to be operational by year-end 2000. To date, TSYS' activities in the United Kingdom have not been material. In conjunction with its contract with The Royal Bank of Scotland Group plc, TSYS entered into a forward exchange contract in June 2000. The contract provided for $20 million to be converted into British Pounds Sterling at a rate of 1.5187 any time between July 3, 2000 and September 29, 2000. TSYS has not used any other instruments to hedge its foreign exposure in the United Kingdom. In July 2000, the Company exercised the forward exchange contract. - 23 - 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 13, 2000. There were three proposals voted on at the meeting. Proposal I voted on at the meeting was the election of nine directors. Following is a tabulation of votes for each nominee: WITHHELD AUTHORITY NOMINEE VOTES FOR TO VOTE James H. Blanchard 188,933,198 112,594 Richard Y. Bradley 187,912,637 1,133,155 G. Wayne Clough 188,932,429 113,363 Thomas G. Cousins 188,932,814 112,978 Gardiner W. Garrard, Jr. 188,932,926 112,866 Sidney E. Harris 188,932,149 113,643 John P. Illges, III 188,905,790 140,002 W. Walter Miller, Jr. 188,933,184 112,608 Rebecca K. Yarbrough 188,930,680 115,112 Proposal II voted on at the meeting was the proposal to approve the Synovus Financial Corp. 2000 Long-Term Incentive Plan. Following is a tabulation of votes: For 178,138,548 Against 1,702,869 Abstain 9,204,375 Proposal III voted on at the meeting was the proposal to approve the Total System Services, Inc. 2000 Long-Term Incentive Plan. Following is a tabulation of votes: For 185,502,765 Against 3,280,952 Abstain 262,075 - 24 - TOTAL SYSTEM SERVICES, INC. Part II - Other Information Item 6 - Exhibits and Reports on Form 8-K a) Exhibits (27) - Financial Data Schedule (for SEC use only) b) Forms 8-K filed since March 31, 2000. 1. The report dated May 31, 2000, included the following important event: On May 31, 2000, Total System Services, Inc. ("Registrant") announced the signing of a letter of intent with The Royal Bank of Scotland Group plc in connection with the negotiation of a definitive agreement for Registrant to process Royal Bank Group's seven million consumer and commercial card accounts for a ten-year period. 2. The report dated July 5, 2000, included the following important event: On July 5, 2000, Total System Services, Inc. ("Registrant") announced that it expects its 2000 net income to exceed its 1999 net income by 25% and expects its earnings per share to be $.44. 3. The report dated August 9, 2000, included the following important event: On August 9, 2000, Total System Services, Inc. ("Registrant") announced the signing of a definitive card processing agreement with The Royal Bank of Scotland Group plc for Registrant to process Royal Bank Group's seven million consumer and commercial card accounts for a ten-year period. - 25 - 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 11, 2000 by: /s/ Richard W. Ussery --------------------------- Richard W. Ussery Chairman of the Board and Chief Executive Officer Date: August 11, 2000 by: /s/ James B. Lipham --------------------------- James B. Lipham Chief Financial Officer - 26 - EX-27 2 0002.txt ARTICLE 5 FINANCIAL DATA SCHEDULE FOR 2ND QTR 10-Q
5 0000721683 TOTAL SYSTEM SERVICES, INC. 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 93,621,835 0 100,730,827 1,738,418 0 220,020,100 184,196,174 90,425,291 506,666,002 101,086,746 0 0 0 19,507,909 353,915,581 506,666,002 296,349,031 296,349,031 0 237,276,603 0 0 0 68,882,735 23,894,914 44,987,821 0 0 0 44,987,821 .23 .23
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