-----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, DoG+PrmF80To1maV6uZLY2YVzLEhgPZFf3m8vMjpakZuEAimL4dxwoHU1Z13IgeH mRHgrtvthmxz3wcZ+/Gcgw== /in/edgar/work/0000721683-00-000019/0000721683-00-000019.txt : 20001115 0000721683-00-000019.hdr.sgml : 20001115 ACCESSION NUMBER: 0000721683-00-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 763036 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 September 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 November 13, 2000 - ------------------------------- ------------------------------------ Common Stock, $.10 par value 194,781,170 TOTAL SYSTEM SERVICES, INC. INDEX Page Number -------- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets (unaudited) - September 30, 2000 and December 31, 1999 ............................................ 3 Consolidated Statements of Income (unaudited) - Three months and Nine months ended September 30, 2000 and 1999 .......... 4 Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 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 .................. 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 25 Part II. Other Information Item 6. (a) Exhibits ................................................ 26 (b) Reports on Form 8-K .................................... 26 Signatures ............................................................. 27 - 2 - TOTAL SYSTEM SERVICES, INC. Part I - Financial Information Consolidated Balance Sheets (Unaudited) - ---------------------------------------------------------------------------------------------------------- September 30, December 31, 2000 1999 - ---------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (includes $83.5 million and $54.3 million on deposit with a related party at 2000 and 1999, respectively) . $ 91,819,710 54,903,107 Accounts receivable, net of allowance for doubtful accounts of $2.7 million and $1.3 million at 2000 and 1999, respectively .... 96,529,702 99,601,498 Prepaid expenses and other current assets ......................... 24,603,217 25,171,328 ------------- ------------- Total current assets .......................................... 212,952,629 179,675,933 Property and equipment, less accumulated depreciation and amortization of $90.8 million and $82.9 million at 2000 and 1999, respectively ................................................ 95,891,673 96,254,657 Computer software, less accumulated amortization of $91.1 million and $72.3 million at 2000 and 1999, respectively .... 110,009,048 98,824,792 Deferred income tax assets .......................................... 10,915,647 9,422,203 Other assets ........................................................ 115,559,454 82,594,156 ------------- ------------- Total assets .................................................. $ 545,328,451 466,771,741 ============= ============= Liabilities and Shareholders' Equity Current liabilities: Accounts payable .................................................. $ 12,966,885 15,267,979 Accrued salaries and employee benefits ............................ 42,597,627 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) ............. 63,451,187 51,528,099 ------------- ------------- Total current liabilities ..................................... 119,015,699 103,261,836 Long-term debt and obligations under capital leases, excluding current portion ....................................... -- 159,766 Deferred income tax liabilities ..................................... 33,746,805 29,058,083 ------------- ------------- Total liabilities ............................................. 152,762,504 132,479,685 ------------- ------------- Minority interest in consolidated subsidiary ........................ 2,566,569 -- ------------- ------------- Shareholders' equity: Common stock - $.10 par value. Authorized 300,000,000 shares; 195,079,087 issued at 2000 and 1999, respectively; 194,781,170 and 194,861,620 outstanding ......... 19,507,909 19,507,909 Additional paid-in capital ........................................ 6,457,600 6,442,300 Accumulated other comprehensive loss .............................. (1,612,255) (1,453,708) Treasury stock .................................................... (2,915,345) (1,529,176) Retained earnings ................................................. 368,561,469 311,324,731 ------------- ------------- Total shareholders' equity .................................... 389,999,378 334,292,056 ------------- ------------- Total liabilities and shareholders' equity .................... $ 545,328,451 466,771,741 ============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements. - 3 - TOTAL SYSTEM SERVICES, INC. Consolidated Statements of Income (Unaudited) - ---------------------------------------------------------------------------------------------------------------- Three months ended September 30, -------------------------------- 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Revenues: Bankcard data processing services (includes $11.6 million and $10.6 million from related parties for 2000 and 1999, respectively) ................... $ 126,251,382 118,682,592 Other services (includes $1.8 million and $1.3 million from related parties for 2000 and 1999, respectively) ................................ 22,707,215 19,144,629 ------------- ------------- Total revenues ........................................................ 148,958,597 137,827,221 ------------- ------------- Expenses: Salaries and other personnel expense ...................................... 63,288,206 53,277,547 Net occupancy and equipment expense ....................................... 38,910,480 40,237,543 Other operating expenses (includes $2.4 million and $3.6 million to related parties for 2000 and 1999, respectively) ................................. 21,383,610 23,768,982 ------------- ------------- Total expenses ........................................................ 123,582,296 117,284,072 ------------- ------------- Equity in income of joint ventures .......................................... 3,290,956 3,337,868 ------------- ------------- Operating income ........................................................... 28,667,257 23,881,017 ------------- ------------- Nonoperating income (expense): Gain (loss) on disposal of equipment, net ................................. (610,452) 1,071,433 Interest income, net (includes $1.4 million and $483,000 from a related party for 2000 and 1999, respectively) .................................. 1,493,358 566,524 Minority interest in consolidated subsidiary's net income ................. (42,319) -- ------------- ------------- Total nonoperating income ............................................. 840,587 1,637,957 ------------- ------------- Income before income taxes ............................................ 29,507,844 25,518,974 Income taxes ................................................................ 10,441,259 8,585,253 ------------- ------------- Net income ............................................................ $ 19,066,585 16,933,721 ============= ============= Basic earnings per share .............................................. $ .10 .09 ============= ============= Diluted earnings per share ............................................ $ .10 .09 ============= ============= Weighted average common shares outstanding .................................. 194,781,635 194,935,906 Increase due to assumed issuance of shares related to stock options outstanding .................................... 484,536 406,304 ------------- ------------- Weighted average common and common equivalent shares outstanding ........................................... 195,266,171 195,342,210 ============= ============= 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) - --------------------------------------------------------------------------------------------------------------- Nine months ended, September 30, ------------------------------- 2000 1999 - --------------------------------------------------------------------------------------------------------------- Revenues: Bankcard data processing services (includes $32.3 million and $27.2 million from related parties for 2000 and 1999, respectively) ..... $ 375,350,392 334,841,503 Other services (includes $5.0 million and $4.0 million from related parties for 2000 and 1999, respectively) ................................ 69,957,237 55,288,729 ------------- ------------- Total revenues ........................................................ 445,307,629 390,130,232 ------------- ------------- Expenses: Salaries and other personnel expense ...................................... 176,981,570 154,241,282 Net occupancy and equipment expense ....................................... 118,739,781 109,669,927 Other operating expenses (includes $7.4 million and $10.1 million to related parties for 2000 and 1999, respectively) ..................... 65,137,548 63,906,199 ------------- ------------- Total expenses ........................................................ 360,858,899 327,817,408 ------------- ------------- Equity in income of joint ventures .......................................... 11,019,602 8,446,189 ------------- ------------- Operating income ........................................................... 95,468,332 70,759,013 ------------- ------------- Nonoperating income (expense): Gain (loss) on disposal of equipment, net ................................. (591,871) 746,319 Interest income, net (includes $3.3 million and $1.0 million from a related party for 2000 and 1999, respectively) .................................. 3,556,438 1,340,423 Minority interest in consolidated subsidiary's net income ................. (42,319) -- ------------- ------------- Total nonoperating income ............................................. 2,922,248 2,086,742 ------------- ------------- Income before income taxes ............................................ 98,390,580 72,845,755 Income taxes ................................................................ 34,336,172 24,527,605 ------------- ------------- Net income ............................................................ $ 64,054,408 48,318,150 ============= ============= Basic earnings per share .............................................. $ .33 .25 ============= ============= Diluted earnings per share ............................................ $ .33 .25 ============= ============= Weighted average common shares outstanding .................................. 194,794,598 194,913,533 Increase due to assumed issuance of shares related to stock options outstanding .................................... 490,900 600,131 ------------- ------------- Weighted average common and common equivalent shares outstanding ........................................... 195,285,498 195,513,664 ============= ============= Cash dividends per common share ............................................. $ .0350 .0300 ============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements. - 5 - TOTAL SYSTEM SERVICES, INC. Consolidated Statements of Cash Flows (Unaudited) Nine months ended - -------------------------------------------------------------------------------------------------- September 30, - -------------------------------------------------------------------------------------------------- 2000 1999 - -------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income .................................................. $ 64,054,408 48,318,150 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest in consolidated subsidiary's net income 42,319 -- Equity in income of joint ventures ...................... (11,019,602) (8,446,189) Depreciation and amortization ........................... 37,391,774 36,989,900 Provision for doubtful accounts ......................... 1,240,629 643,500 Deferred income tax expense (benefit) ................... 3,195,328 4,894,704 (Gain) loss on disposal of equipment, net ............... 591,871 (746,319) (Increase) decrease in: Accounts receivable ..................................... 2,996,754 (27,503,232) Prepaid expenses and other assets ....................... (1,225,211) (1,381,668) Increase (decrease) in: Accounts payable ........................................ (2,771,770) 8,324,412 Accrued expenses and other current liabilities .......... 15,775,980 20,814,359 ------------- ------------- Net cash provided by operating activities ........... 110,272,480 81,907,617 ------------- ------------- Cash flows from investing activities: Purchase of property and equipment .......................... (11,846,500) (12,986,403) Additions to computer software .............................. (29,773,766) (42,520,304) Proceeds from disposal of equipment ......................... 27,898 4,390,451 Cash acquired in acquisition of subsidiary .................. 623,364 -- Dividends received from joint ventures ...................... 5,369,192 4,664,307 Refund of contract acquisition costs ........................ 10,000,000 -- Increase in contract acquisition costs ...................... (39,845,833) (3,812,318) ------------- ------------- Net cash used in investing activities ............... (65,445,645) (50,264,267) ------------- ------------- Cash flows from financing activities: Purchase of common stock .................................... (1,397,963) -- Principal payments on long-term debt and capital lease obligations ................................. (204,286) (29,861) Dividends paid on common stock .............................. (6,332,071) (5,838,620) Proceeds from exercise of stock options ..................... 24,088 93,100 ------------- ------------- Net cash used in financing activities ............... (7,910,232) (5,775,381) ------------- ------------- Net increase in cash and cash equivalents ........... 36,916,603 25,867,969 Cash and cash equivalents at beginning of year ................ 54,903,107 9,555,760 ------------- ------------- Cash and cash equivalents at end of year ...................... $ 91,819,710 35,423,729 ============= ============= Cash paid for interest (net of capitalized amounts) ........... $ 37,837 1,316 ============= ============= Cash paid for income taxes (net of refunds received) .......... $ 33,841,211 19,357,501 ============= =============
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. - 6 - TOTAL SYSTEM SERVICES, INC. Notes to Unaudited Consolidated Financial Statements Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements represent the accounts of Total System Services, Inc.(R) (TSYS(R)); its wholly owned subsidiaries, Columbus Depot Equipment Company(SM) (CDEC(SM)), TSYS Total Solutions(R), Inc. (TSI), Columbus Productions, Inc.SM (CPI), TSYS Canada, Inc.SM (TCI) and DotsConnect, Inc. (DotsConnect); and its majority owned foreign subsidiary, GP Network Corporation (GP Net). These financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. All adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of financial position and results of operations for the periods covered by this report, have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes appearing in the Company's 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: September 30, 2000 December 31, 1999 ---------------------- ------------------- Contract acquisition costs, net $ 6,630,988 $ 7,861,069 Prepaid expenses 10,871,251 9,709,740 Other 7,100,978 7,600,519 ------------- -------------- Total $ 24,603,217 $ 25,171,328 ============== ============== Significant components of other assets are summarized as follows: September 30, 2000 December 31, 1999 ---------------------- ------------------- Contract acquisition costs, net $ 68,171,004 $ 43,001,304 Equity investments, net 41,191,813 35,951,632 Other 6,196,637 3,641,220 ------------- ------------- Total $ 115,559,454 $ 82,594,156 ============= ============= - 7 - Notes to Unaudited Consolidated Financial Statements (continued) Significant components of other current liabilities are summarized as follows: September 30, 2000 December 31, 1999 --------------------- ------------------- Customer postage deposits $ 16,718,213 $ 14,913,211 Transaction processing provisions 7,892,456 5,445,862 Other 38,840,518 31,169,026 ------------- ------------- Total $ 63,451,187 $ 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 September 30 is as follows: 2000 1999 -------------------- -------------------- Net income $ 19,066,585 $ 16,933,721 Other comprehensive income (loss): Foreign currency translation adjustments, net of tax 8,004 (44,340) -------------- -------------- Comprehensive income $ 19,074,589 $ 16,889,381 ============== ============== Total comprehensive income for the nine months ended September 30 is as follows: 2000 1999 -------------------- -------------------- Net income $ 64,054,408 $ 48,318,150 Other comprehensive income (loss): Foreign currency translation adjustments, net of tax (158,547) (215,982) -------------- -------------- Comprehensive income $ 63,895,861 $ 48,102,168 ============== ============== 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 September 30, 2000 -------------------- ---------- ----------- ------------------- Currency translation adjustments ($ 1,453,708) (222,863) 64,316 ($1,612,255) =================== ========== =========== ================ - 8 - Notes to Unaudited Consolidated Financial Statements (continued) Note 4 - Segment Reporting and Major Customers The Company reports selected information about operating segments in accordance with Statement of Financial Accounting Standard No. 131 (SFAS 131). Through an online accounting and bankcard data processing system, Total System Services, Inc. provides card processing and electronic commerce services to card-issuing institutions in the United States, Mexico, Canada, Honduras 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 nine months ended September 30, 2000 and 1999. Three subsidiaries were aggregated into transaction processing services. One of these subsidiaries' sole business activity is to provide programming support services to the parent company. The other subsidiary provides electronic commerce activities previously performed by TSYS for its clients. The other transaction processing subsidiary serves as a payment gateway for more than 100,000 merchants in Japan. The remaining segments were aggregated into support services. Transaction Support Operating Segments processing services services Consolidated - -------------------------------------------------------------------------------------------------------------------------------- At September 30, 2000 - -------------------------------------------------------------------------------------------------------------------------------- Identifiable assets $ 532,349,547 55,027,413 $ 587,376,960 Intersegment eliminations (42,047,538) (971) (42,048,509) ----------------------- -------------------- ----------------------- Total assets $ 490,302,009 55,026,442 $ 545,328,451 ======================= ==================== ======================= - -------------------------------------------------------------------------------------------------------------------------------- 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 September 30, 2000 - --------------------------------------------------------------------------------------------------------------------------------- Total revenue $ 128,878,631 21,005,240 $ 149,883,871 Intersegment revenue (464,801) (460,473) (925,274) ------------------------- ----------------------- ----------------------- Revenue from external customers $ 128,413,830 20,544,767 $ 148,958,597 ========================= ======================= ======================= Equity in income of joint ventures $ 3,290,956 - $ 3,290,956 ========================= ======================= ======================= Segment operating income $ 26,048,780 2,618,477 $ 28,667,257 ========================= ======================= ======================= Income taxes $ 9,421,906 1,019,353 $ 10,441,259 ========================= ======================= ======================= Net income $ 17,379,106 1,687,479 $ 19,066,585 ========================= ======================= ======================= - --------------------------------------------------------------------------------------------------------------------------------- Three Months Ended September 30, 1999 - --------------------------------------------------------------------------------------------------------------------------------- Total revenue $ 121,054,134 17,560,228 $ 138,614,362 Intersegment revenue (137,325) (649,816) (787,141) ------------------------- ----------------------- ----------------------- Revenue from external customers $ 120,916,809 16,910,412 $ 137,827,221 ========================= ======================= ======================= Equity in income of joint ventures $ 3,337,868 - $ 3,337,868 ========================= ======================= =======================
- 9 - Notes to Unaudited Consolidated Financial Statements (continued) Transaction Support Operating Segments processing services services Consolidated - -------------------------------------------------------------------------------------------------------------------------------- At September 30, 2000 - -------------------------------------------------------------------------------------------------------------------------------- Segment operating income $ 21,127,444 2,753,573 $ 23,881,017 ========================= ======================= ======================= Income taxes $ 7,547,475 1,037,778 $ 8,585,253 ========================= ======================= ======================= Net income $ 15,209,702 1,724,019 $ 16,933,721 ======================== ======================= ======================= - --------------------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, 2000 - --------------------------------------------------------------------------------------------------------------------------------- Total revenue $ 382,872,204 64,726,541 $ 447,598,745 Intersegment revenue (724,122) (1,566,994) (2,291,116) ------------------------- ----------------------- ----------------------- Revenue from external customers $ 382,148,082 63,159,547 $ 445,307,629 ========================= ======================= ======================= Equity in income of joint ventures $ 11,019,602 - $ 11,019,602 ========================= ======================= ======================= Segment operating income $ 85,350,197 10,118,135 $ 95,468,332 ========================= ======================= ======================= Income taxes $ 30,420,735 3,915,437 $ 34,336,172 ========================= ======================= ======================= Net income $ 57,624,066 6,430,342 $ 64,054,408 ========================= ======================= ======================= - --------------------------------------------------------------------------------------------------------------------------------- Nine Months Ended September 30, 1999 - --------------------------------------------------------------------------------------------------------------------------------- Total revenue $ 340,700,367 51,300,791 $ 392,001,158 Intersegment revenue (366,543) (1,504,383) (1,870,926) ------------------------- ----------------------- ----------------------- Revenue from external customers $ 340,333,824 49,796,408 $ 390,130,232 ========================= ======================= ======================= Equity in income of joint ventures $ 8,446,189 - $ 8,446,189 ========================= ======================= ======================= Segment operating income $ 61,680,726 9,078,287 $ 70,759,013 ========================= ======================= ======================= Income taxes $ 21,096,214 3,431,391 $ 24,527,605 ========================= ======================= ======================= Net income $ 42,672,031 5,646,119 $ 48,318,150 ========================= ======================= =======================
The following geographic area data represent revenues for the three and nine months ended September 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 September 30, Nine Months Ended September 30, --------------------- --------------------------------------------- -------------------------------------------- 2000 1999 2000 1999 --------------------- ------------------- ------------------ ------------------ ---------------------- United States $ 135,537,510 125,280,017 407,266,597 362,217,328 Canada* 8,401,414 8,178,254 24,499,879 15,167,391 Mexico 4,101,594 4,138,596 11,904,490 12,101,167 Other 918,079 230,354 1,636,663 644,346 --------------------- ------------------- ------------------ ------------------ ---------------------- Totals $ 148,958,597 137,827,221 445,307,629 390,130,232 --------------------- =================== ================== ================== ======================
*These revenues include those generated from the Caribbean accounts owned by the Bank of Nova Scotia. - 10 - Notes to Unaudited Consolidated Financial Statements (continued) Major Customers Three Months Ended September 30, - ---------------------------- ------------------------------------------------------------------------- Revenue 2000 1999 - ---------------------------- ---------------------------- ---------------------------- (Dollars in millions) % of Total % of Total Dollars Revenues Dollars Revenues - ---------------------------- ------------ ---------------- ------------- -------------- One $ 23.0 15.5% $ 21.3 15.5% Two 17.1 11.5 na na Three 15.4 10.4 14.4 10.5 Four na na 17.9 13.0 ------------ ---------------- ------------- --------------- Totals $ 55.5 37.4% $ 53.6 39.0% ============ ================ ============= ===============
Nine Months Ended September 30, - -------------------------- ----------------------------------------------------------------------------- Revenue 2000 1999 - ---------------------------- ---------------------------------- ------------------------------- (Dollars in millions) % of Total % of Total Dollars Revenues Dollars Revenues - ---------------------------- ----------- ---------------- ------------ --------------- One $ 68.9 15.5% $ 64.5 16.5% Two 47.8 10.7 na na Three 46.0 10.3 na na Four na na 51.4 13.1 ----------- ---------------- ------------ --------------- Totals $ 162.7 36.5% $ 115.9 29.6% =========== ================ ============ =============== na = not applicable. Client represented less than 10% of total revenues. For the three months ended September 30, 2000 and 1999, the Company had three major customers. The three major customers for the quarter and nine months ended September 30, 2000 accounted for approximately 37.4% and 36.5% of total revenues, respectively. For the three months ended September 30, 1999, TSYS also had three major customers that accounted for 39.0%, or $53.6 million, of total revenues. For the nine months ended September 30, 1999, the Company had two major customers that accounted for 29.6% of total revenues, or $115.9 million. 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 - 11 - Notes to Unaudited Consolidated Financial Statements (continued) 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. 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 cost of $10.0 million to a prospective client. Under the terms of the arrangement, the prospective client agreed to repay the $10.0 million in the event a processing agreement was not executed by July 1, 2000. Subsequently, the prospective client announced its intention to exit the credit card business through a sale of its accounts in 2000. The parent of the prospective client - 12 - Notes to Unaudited Consolidated Financial Statements (continued) repaid the $10.0 million advance in June 2000 by obtaining a five-year loan. TSYS has agreed to guarantee the loan from a related party. Note 8 - Acquisition During August 2000, TSYS announced that it had purchased an equity position in an established electronic payments company in Japan. The Company paid $4.7 million to acquire 51% of GP Net. The Company recorded $2.0 million as goodwill. Because it acquired controlling interest, the Company is consolidating GP Net's financial statements. TSYS began consolidating GP Net's financial results as of September 1, 2000. The foreign currency financial statements of GP Net 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 GP Net, net of tax, are accumulated in a separate section of shareholders' equity titled accumulated other comprehensive income. Note 9- Computer Software During 2000, the Company ceased development of two software projects. The projects were evaluated to determine their utilization in a new design plan that included expanded international functionality. Based on its review, the Company expensed $6.1 million of costs originally capitalized on those projects. - 13 - 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 ----------------- ----------------- 2000 1999 2000 vs. 1999 ------ ------ ----------------- Revenues: Bankcard data processing services ....................... 84.8 % 86.1 % 6.4 % Other services .......................................... 15.2 13.9 18.6 ------ ------ Total revenues ....................................... 100.0 100.0 8.1 ------ ------ Expenses: Salaries and other personnel expense .................... 42.5 38.7 18.8 Net occupancy and equipment expense ..................... 26.1 29.2 (3.3) Other operating expenses ................................ 14.4 17.2 (10.0) ------ ------- Total expenses ...................................... 83.0 85.1 5.4 ------ ------- Equity in income of joint ventures ........................ 2.2 2.4 (1.4) ------ ------- Operating income .................................... 19.2 17.3 20.0 Nonoperating income ....................................... 0.6 1.2 (48.7) ------ ------- Income before income taxes .......................... 19.8 18.5 15.6 Income taxes .............................................. 7.0 6.2 21.6 ------ ------- Net income ................................................ 12.8 % 12.3 % 12.6 % ====== =======
- 14 - 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 ----------------- ----------------- 2000 1999 2000 vs. 1999 ------ ------ ----------------- Revenues: Bankcard data processing services ....................... 84.3 % 85.8 % 12.1 % Other services .......................................... 15.7 14.2 26.5 ------ ------- Total revenues ....................................... 100.0 100.0 14.1 ------ ------- Expenses: Salaries and other personnel expense .................... 39.7 39.5 14.7 Net occupancy and equipment expense ..................... 26.7 28.1 8.3 Other operating expenses ................................ 14.6 16.4 1.9 ------ ------- Total expenses ...................................... 81.0 84.0 10.1 ------ ------- Equity in income of joint ventures ........................ 2.4 2.2 30.5 ------ ------- Operating income ..................................... 21.4 18.2 34.9 Nonoperating income ........................................ 0.7 0.5 40.0 ------ ------- Income before income taxes ........................... 22.1 18.7 35.1 Income taxes ............................................... 7.7 6.3 40.0 ------ ------- Net income ................................................. 14.4 % 12.4 % 32.6 % ====== =======
Total revenues increased $11.1 million, or 8.1%, and $55.2 million, or 14.1%, during the three months and nine months ended September 30, 2000, respectively, compared to the same periods in 1999. Revenues from bankcard data processing services increased $7.6 million, or 6.4%, in the three months ended September 30, 2000, compared to the same period in 1999. During the nine months ended September 30, 2000, revenues from bankcard data processing services increased $40.5 million, or 12.1%, 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. Increases in the volumes of authorizations and transactions associated with the additional cardholder accounts also contributed to the increased revenues. Processing contracts with large customers, - 15 - Results of Operations (continued) 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. The Company's revenues are also impacted by the use of value added products and services of TSYS' processing systems by clients. Value added products and services are optional features each client can choose to subscribe to in order to increase the financial performance of their portfolio. For the three months ended September 30, 2000 and 1999, value added products and services represented 12.5% and 11.2% of total revenues, respectively. Revenues from value added products and services were up 19.9%, or $3.1 million, for the three months ended September 30, 2000, compared to the same period in 1999. For the nine months ended September 30, 2000 and 1999, value added products and services represented 12.2% and 11.0% of total revenues, respectively. Revenues from value added products and services were up 26.4%, or $11.3 million, for the nine months ended September 30, 2000, compared to the same period in 1999. Average cardholder accounts on file for the three months ended September 30, 2000, were 184.6 million, a decrease of approximately 6.2% over the average of 196.9 million for the same period in 1999. For the first nine months of 2000, average cardholder accounts were 195.1 million, a 13.0% increase over the 172.6 million average cardholder accounts on file for the same period last year. Cardholder accounts on file at September 30, 2000, were 186.6 million, a 6.4% decrease compared to the 199.3 million accounts on file at September 30, 1999. The change in the number of cardholder accounts on file from September 1999 to September 2000 included a decrease of 36.4 million accounts related to the deconversion of and/or purging of inactive accounts by certain customers, offset by internal growth of existing customers of 22.1 million accounts and approximately 1.6 million accounts of new customers. The Company provides services to its clients including processing debit, commercial, retail, stored value and consumer cards. Commercial cards include purchasing cards, corporate cards and fleet cards for employees. Retail cards include private label and gift cards. Consumer cards include Visa and MasterCard bank and debit cards. The following table summarizes TSYS' accounts on file by portfolio type: Accounts on File Types Sept 30, Sept 30, (in millions) 2000 1999 % Change - --------------------------- ------------- ----------- ----------------- Consumer 85.6 103.4 (17.2) Retail 87.5 85.9 1.8 Commercial 13.5 10.0 35.2 - --------------------------- ------------- ----------- ----------------- Total 186.6 199.3 (6.4) - --------------------------- ============= =========== - 16 - Results of Operations (continued) TSYS provides processing services to its clients worldwide. TSYS plans to continue to expand its service offerings to other countries in the future. The following table summarizes TSYS accounts on file by region: Accounts on File by Region Sept 30, Sept 30, (in millions) 2000 1999 % Change - -------------------------- ------------- ----------- ----------------- Domestic 169.6 184.0 (7.8) Foreign 17.0 15.3 11.2 - -------------------------- ------------- ----------- ----------------- Total 186.6 199.3 (6.4) - -------------------------- ============= =========== 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 September 30, 2000 and 1999, the Company had three major customers. The three major customers for the quarter and nine months ended September 30, 2000, accounted for approximately 37.4% and 36.5% of total revenues, respectively. For the three months ended September 30, 1999, TSYS also had three major customers that accounted for 39.0%, or $53.6 million, of total revenues. For the nine months ended September 30, 1999, the Company had two major customers that accounted for 29.6% of total revenues, or $115.9 million. The loss of one of the Company's major customers, or other significant customers, could have a material adverse effect on the Company's financial condition and results of operations. On February 26, 1999, CITIBANK notified TSYS of its decision to terminate UCS' processing agreement with TSYS for consumer credit card accounts at the end of its original term on August 1, 2000. The deconversion of the consumer credit accounts occurred during May 2000; 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. In August 2000, the Company announced that it had entered the Asian card market by purchasing a controlling equity interest in GP Network Corporation (GP Net), an established - 17 - Results of Operations (continued) electronics payment company for more than 100,000 merchants in Japan. TSYS also announced the opening of a Japanese office to facilitate its marketing of processing services for card-issuing financial institutions and retailers. GP Net's revenues are included in bankcard processing revenues. Revenues from other services consist primarily of revenues generated by TSYS' wholly owned subsidiaries. Revenues from other services increased $3.6 million, or 18.6%, in the third quarter of 2000, compared to the third quarter of 1999. Revenues from other services for the first nine months of 1999 increased $14.7 million, or 26.5%, compared to the same period last year. The majority of the revenues from other services are generated by TSYS Total Solutions, Inc. (TSI). Revenues for the three months ended September 30, 2000, for TSI have increased 38.2% compared to the same period last year. Revenues for the nine months ended September 30, 2000, for TSI have increased 36.9% compared to the same period last year. Total expenses increased 5.4% and 10.1% for the three and nine months ended September 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 $10.0 million, or 18.8% for the three months ended September 30, 2000, compared to the same period in 1999. For the first nine months of 2000, employment expenses increased $22.7 million, or 14.7%, compared to the same period in 1999. The change in employment expenses consists of increases of $13.0 million and $29.6 million for the three and nine months ended September 30, 2000, respectively, associated with the growth in the number of employees, normal salary increases and related benefits. This change was offset by $3.0 million and $6.9 million invested in software development costs and contract acquisition costs for the three and nine months ending September 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 2001. The average number of employees in the third quarter of 2000 increased to 4,512, a 10.6% increase over the 4,081 in the same period of 1999. For the first nine months of 2000, the average number of employees was 4,490, a 14.0% increase over the first nine months of 1999. At October 31, 2000, TSYS had 4,459 full-time and 222 part-time employees. Net occupancy and equipment expense decreased $1.3 million, or 3.3%, for the three months ended September 30, 2000, over the same period in 1999. For the nine months ended September 30, 2000, net occupancy and equipment expense increased $9.1 million, or 8.3%, over the same period last year. Computer equipment and software rentals, which represent the largest component of net occupancy and equipment expense, decreased 15.2% to $18.1 million in the third quarter of 2000, compared to $21.4 million in the same period of 1999. During the first nine months of 2000, equipment and software rentals increased 1.6% to $58.8 million, compared to $57.8 million in the same period in 1999, as a result of significant cost controls and improved productivity. Due to rapidly changing technology in computer equipment, TSYS' equipment needs are achieved to a large extent through operating leases. - 18 - Results of Operations (continued) During the third quarter of 1999, TSYS officially opened the first phase of its Riverfront Campus and completed moving 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. The Campus has allowed TSYS to consolidate several locations into one facility to improve efficiencies. Other operating expenses decreased 10.0% and increased 1.9% for the three and nine months ended September 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. for human resource functions which TSYS assumed 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 international offices and a data processing center in the UK; 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 $3.3 million for each of the third quarters of 2000 and 1999. For the nine months ended September 30, 2000 and 1999, the Company's equity in income of its joint ventures was $11.0 million and $8.4 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 $1,493,358 and no interest expense for the third quarter of 2000. During the third quarter of 1999, interest income, net, included interest income of $572,200 and interest expense of $5,700. For the nine months ended September 30, 2000 and 1999, respectively, interest expense was $34,100 and $19,700, and interest income was $3,590,500 and $1,360,100. The increase in interest income for the nine months ending September 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 increased revenues as well as decreased outlays related to the purchase of equipment and software additions and higher interest rates earned on short-term investments. Operating income increased 20.0% and 34.9% for the three and nine months ended September 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 third quarter of 2000 was 35.4%, compared to 33.6% for the same period in 1999. For the nine months ended September 30, 2000, the effective - 19 - Results of Operations (continued) tax rate was 34.9%, compared to 33.7% for the same period in 1999. The increase in the Company's effective tax rate is primarily a result of federal and state tax credits being relatively fixed in amount, year over year, while pretax income is growing. Net income for the three months ended September 30, 2000, increased 12.6% to $19.1 million, or basic and diluted earnings per share of $.10, compared to $16.9 million, or basic and diluted earnings per share of $.09, for the same period in 1999. Net income for the first nine months of 2000 increased 32.6% to $64.1 million, up from $48.3 million for the same period last year. Basic and diluted earnings per share for the first nine months of 2000 increased to $.33, up from $.25 for the same period of 1999. The Company expects its 2000 net income to exceed 1999 net income by approximately 25 percent. TSYS announced that it expects its 2001 net income to exceed its estimated 2000 net income by approximately 20 percent. This anticipated increase in net income is based in part upon the following assumptions: a 10-12% internal growth rate for existing Visa and MasterCard consumer card clients; an approximately 50% increase in international revenues on an annualized basis; an aggressive focus on expense control and productivity improvement; the successful implementation and market acceptance of new product offerings, including stored value and e-commerce; and increasing the total cardholder base to approximately 222 million accounts. The Company also expects to grow its net income by 20-25% each year for the years 2002 and 2003. Liquidity and Capital Resources The Consolidated Statements of Cash Flows detail the Company's cash flows from operating, investing and financing activities. TSYS' primary method of funding its operations and growth has been cash generated from current operations and the occasional use of borrowed funds to supplement financing of capital expenditures. TSYS' net cash provided by operating activities in the first nine months of 2000 was $110.3 million, compared to $81.9 million in the same period of 1999. The major uses of cash generated from operations have been the internal development and purchase of computer software, the addition of property and equipment, investment in contract acquisition costs, and the payment of cash dividends. During the third quarter of 2000, TSYS purchased property and equipment of $6.4 million, bringing the total purchases for the first nine months of 2000 to $11.8 million. Additions to computer software during the third quarter were $9.0 million, bringing the total additions for 2000 to $29.8 million. Of the $9.0 million computer software additions made during the third quarter, $6.5 million was for purchased software and $2.5 million was for internally developed software, bringing the totals for the first nine months of 2000 to $23.6 million for purchased software and $6.2 million for internally developed software. In the first nine months of 2000, the Company made investments in contract acquisition costs of $39.8 million compared to $3.8 million in the first nine 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 - 20 - Liquidity and Capital Resources (continued) 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 from a related party. Dividends on common stock of $2.4 million were paid in the third quarter of 2000, bringing the total amount of dividends paid year to date to $6.3 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 nine months of 2000, the Company purchased 88,100 shares for $1.4 million. Since the plan was announced, the Company has purchased 165,200 shares for $2.7 million. 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. During the third quarter of 1999, TSYS officially opened the first phase of its Riverfront Campus and essentially completed moving 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 $1.3 million for the nine months ended September 30, 2000. - 21 - Liquidity and Capital Resources (continued) 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 which 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. In July 2000, TSYS exercised the forward exchange contract. TSYS accounted for the forward exchange contract as a hedge under Financial Accounting Standards No. 52, "Foreign Currency Translation." Due to the complexity of the differences between the English language and Asian languages, computer systems require two bytes to store an Asian character compared to one byte in the English language. With its entrance into the Asian card processing market, TSYS will begin modifying its current TS2 system to be able to accommodate language and currency differences with Asia, commonly referred to as the "double byte project." TSYS is in the planning stages of the double byte project. Management expects to spend $10-15 million on the project. Although the impact of inflation on its operations cannot be precisely determined, the Company believes that by controlling its operating expenses and by taking advantage of more efficient computer hardware and software, it can minimize the impact of inflation. TSYS may seek additional external sources of capital in the future. The form of any such financing will vary depending upon prevailing market and other conditions and may include short-term or long-term borrowings from financial institutions or the issuance of additional equity and/or debt securities such as industrial revenue bonds. However, there can be no assurance that funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future, as evidenced by TSYS' current ratio of 1.8:1. At September 30, 2000, TSYS had working capital of $93.9 million compared to $76.4 million at December 31, 1999. 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 - 22 - Year 2000 Readiness Disclosure (continued) 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 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. Euro Conversion Readiness Disclosure The Company has announced the signing of The Royal Bank of Scotland Group, plc as a processing client for 2001. The United Kingdom is not a "participating country" with respect to January 1, 1999, "Euro" currency conversion and it currently is not known when or if the United Kingdom will elect to convert to the Euro. Nonetheless as of October 2000, TSYS' TS2 processing system is capable of processing Euro-denominated transactions and is now in the client acceptance testing mode. TSYS' costs in connection with the Euro conversion were not material. 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 - 23 - Legal Proceedings (continued) TSYS' financial condition or results of operations and management expects the settlement to be substantially covered by insurance. Forward-Looking Statements Certain statements contained in this filing which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the Act). 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); lower than anticipated internal growth rates for existing customers; 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. - 24 - 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 $8.0 million (U.S.) at September 30, 2000, and the carrying value of the assets of its Canadian operation was approximately $387,000 (U.S.) at September 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 UK. 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. 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. In August 2000, TSYS opened an office in Japan, which will serve as a base to expand its card-issuing services to financial institutions and retailers in Asia. During August 2000, the Company announced that it had purchased a controlling equity interest in GP Network Corporation (GP Net), an established electronics payment company for more than 100,000 merchants in Japan. To date, TSYS' activities in Japan have not been material. The foreign currency financial statements of GP Net 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 GP Net, net of tax, are accumulated in a separate section of shareholders' equity titled accumulated other comprehensive income. - 25 - 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 the second quarter 2000 10-Q. 1. The report dated October 18, 2000, included the following important event: On October 18, 2000, Total System Services, Inc. ("Registrant") issued a press release with respect to its third quarter 2000 earnings. - 26 - TOTAL SYSTEM SERVICES, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TOTAL SYSTEM SERVICES, INC. Date: November 13, 2000 by: /s/ Richard W. Ussery ---------------------------- Richard W. Ussery Chairman of the Board and Chief Executive Officer Date: November 13, 2000 by: /s/ James B. Lipham ---------------------------- James B. Lipham Chief Financial Officer - 27 - EX-27 2 0002.txt ARTICLE 5 FINANCIAL DATA SCHEDULE FOR SEPT 2000
5 0000721683 TOTAL SYSTEM SERVICES, INC. 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 91,819,710 0 99,220,222 2,690,520 0 212,952,629 186,722,519 90,830,846 545,328,451 119,015,699 0 0 0 19,507,909 370,491,469 545,328,451 445,307,629 445,307,629 0 360,858,899 0 0 0 98,390,580 34,336,172 64,054,408 0 0 0 64,054,408 .33 .33
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