-----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, BfB3hHTfHvP24aQ2pGf8m622f6Rl+KFjI1uKP15yipxo8IPKg7VfuqN+KV7dCA27 NpQc9l8c0Unmw5cycC2XGQ== 0000721683-98-000024.txt : 19981118 0000721683-98-000024.hdr.sgml : 19981118 ACCESSION NUMBER: 0000721683-98-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOTAL SYSTEM SERVICES INC CENTRAL INDEX KEY: 0000721683 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [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: 98751490 BUSINESS ADDRESS: STREET 1: 1200 SIXTH AVENUE STREET 2: P O BOX 1755 CITY: COLUMBUS STATE: GA ZIP: 31901 BUSINESS PHONE: 7066492267 MAIL ADDRESS: STREET 1: 1200 SISTH AVENUE CITY: COLUMBUS STATE: GA ZIP: 31901 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 ---------------------------------------------- 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.) 1200 Sixth 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 12, 1998 ---------------------------- --------------------------------------- Common Stock, $.10 par value 194,043,698 TOTAL SYSTEM SERVICES, INC. INDEX Page Number ------- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Consolidated Statements of Income - Three months and Nine months ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows - Nine months ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 9 Part II. Other Information Item 6. (a) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 (b) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
- 2 - TOTAL SYSTEM SERVICES, INC. Part I - Financial Information Consolidated Balance Sheets (Unaudited) - -------------------------------------------------------------------------------------------------------- September 30, December 31, 1998 1997 - -------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (includes $30.2 million and $40.6 million on deposit with a related party at 1998 and 1997, respectively) . $ 30,383,492 43,335,922 Short-term investments with a related party ....................... -- 998,228 Accounts receivable, net of allowance for doubtful accounts of $707,000 and $736,000 at 1998 and 1997, respectively ............ 69,034,053 69,450,919 Prepaid expenses and other current assets ......................... 26,574,898 18,620,638 ------------- ------------- Total current assets .......................................... 125,992,443 132,405,707 Property and equipment, less accumulated depreciation and amortization of $73.9 million and $65.1 million at 1998 and 1997, respectively ................................................ 83,717,592 68,968,574 Computer software, less accumulated amortization of $45.8 million and $34.2 million at 1998 and 1997, respectively .... 55,734,275 43,133,137 Other assets ........................................................ 62,922,443 52,350,519 ------------- ------------- Total assets .................................................. $ 328,366,753 296,857,937 ============= ============= Liabilities and Shareholders' Equity Current liabilities: Accounts payable .................................................. $ 7,953,972 6,400,365 Accrued salaries and related liabilities .......................... 6,225,475 6,680,979 Accrued employee benefits ......................................... 14,120,313 13,870,969 Current portion of long-term debt and obligations under capital leases .................................................. 127,008 132,416 Other current liabilities (includes $1.7 and $1.2 million payable to related parties at 1998 and 1997, respectively) ............. 36,163,716 34,421,668 ------------- ------------- Total current liabilities ..................................... 64,590,484 61,506,397 Long-term debt and obligations under capital leases, excluding current portion ....................................... 274,703 342,096 Deferred income taxes ............................................... 10,057,739 13,754,688 ------------- ------------- Total liabilities ............................................. 74,922,926 75,603,181 ------------- ------------- Shareholders' equity: Common stock - $.10 par value. Authorized 300,000,000 shares; 194,225,283 issued at 1998 and 1997, respectively; 194,027,648 and 193,995,337 outstanding at 1998 and 1997, respectively ................................. 19,422,528 19,422,528 Additional paid-in capital ....................................... 818,013 414,748 Treasury stock, at cost ........................................... (325,813) (377,701) Accumulated other comprehensive income ............................ (1,180,310) (1,178,182) Retained earnings ................................................. 234,709,409 202,973,363 ------------- ------------- Total shareholders' equity .................................... 253,443,827 221,254,756 ------------- ------------- Total liabilities and shareholders' equity .................... $ 328,366,753 296,857,937 ============= =============
See accompanying notes to consolidated financial statements. - 3 - TOTAL SYSTEM SERVICES, INC. Consolidated Income Statements (Unaudited) - ------------------------------------------------------------------------------------------------------------------------ Three months ended September 30, ------------------------------------- 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Revenues: Bankcard data processing services (includes $8.2 million and $7.7 million from related parties for 1998 and 1997, respectively) ........................... $ 88,954,052 82,705,215 Other services ............................................................... 10,447,873 9,429,762 ------------- -------------- Total revenues ........................................................... 99,401,925 92,134,977 ------------- -------------- Expenses: Salaries and other personnel expense ......................................... 38,842,357 36,505,667 Net occupancy and equipment expense .......................................... 27,110,161 24,373,829 Other operating expenses (includes $2.8 million and $2.7 million to related parties for 1998 and 1997, respectively) .................................... 15,220,491 14,568,649 ------------- -------------- Total expenses ........................................................... 81,173,009 75,448,145 ------------- -------------- Equity in income of joint ventures ............................................. 3,910,077 2,226,190 ------------- -------------- Operating income ........................................................ 22,138,993 18,913,022 ------------- -------------- Nonoperating income: Gain (loss) on disposal of equipment, net .................................... (2,119) 12,533 Interest income, net (includes $590,000 and $577,000 from a related party for 1998 and 1997, respectively) ..................................... 442,760 615,390 ------------- -------------- Total nonoperating income ................................................ 440,641 627,923 ------------- -------------- Income before income taxes ............................................... 22,579,634 19,540,945 Income taxes ................................................................... 7,408,466 6,315,550 ------------- -------------- Net income ............................................................... $ 15,171,168 13,225,395 ============= ============== Basic earnings per share ................................................. $ .08 .07 ============= ============== Diluted earnings per share ............................................... $ .08 .07 ============= ============== Weighted average common shares outstanding ..................................... 194,024,390 193,967,280 Increase due to assumed issuance of shares related to stock options outstanding ....................................... 589,805 218,643 ------------- -------------- Weighted average common and common equivalent shares outstanding .............................................. 194,614,195 194,185,923 ============= ============== Cash dividends per common share ................................................ $ .010 .008 ============= ==============
See accompanying notes to consolidated financial statements. - 4 - TOTAL SYSTEM SERVICES, INC. Consolidated Income Statements (Unaudited) - -------------------------------------------------------------------------------------------------------- Nine months ended September 30, ----------------------------- 1998 1997 - ------------------------------------------------------------------------------------------------------- Revenues: Bankcard data processing services (includes $22.4 million and $21.4 million from related parties for 1998 and 1997, respectively) $254,699,719 238,122,326 Other services ...................................................... 32,489,600 26,885,932 ------------ ------------ Total revenues .................................................. 287,189,319 265,008,258 ------------ ------------ Expenses: Salaries and other personnel expense ................................ 120,297,210 111,277,481 Net occupancy and equipment expense ................................. 76,859,661 72,070,173 Other operating expenses (includes $8.4 million and $7.7 million to related parties for 1998 and 1997, respectively) ............... 45,575,611 41,243,054 ------------ ------------ Total expenses .................................................. 242,732,482 224,590,708 ------------ ------------ Equity in income of joint ventures .................................... 8,694,973 6,160,598 ------------ ------------ Operating income ................................................ 53,151,810 46,578,148 ------------ ------------ Nonoperating income: Gain on disposal of equipment, net .................................. 2,289 1,603 Interest income, net (includes $1.9 million and $1.4 from a related party for 1998 and 1997, respectively) ............................ 2,023,702 1,542,682 ------------ ------------ Total nonoperating income ....................................... 2,025,991 1,544,285 ------------ ------------ Income before income taxes ...................................... 55,177,801 48,122,433 Income taxes .......................................................... 18,106,212 16,438,886 ------------ ------------ Net income ...................................................... $ 37,071,589 31,683,547 ============ ============ Basic earnings per share ........................................ $ .19 .16 ============ ============ Diluted earnings per share ...................................... $ .19 .16 ============ ============ Weighted average common shares outstanding ............................ 194,013,625 193,945,621 Increase due to assumed issuance of shares related to stock options outstanding .............................. 647,587 243,011 ------------ ------------ Weighted average common and common equivalent shares outstanding ..................................... 194,661,212 194,188,632 ============ ============ Cash dividends per common share ....................................... $ .028 .023 ============ ============
See accompanying notes to consolidated financial statements. - 5 - TOTAL SYSTEM SERVICES, INC. Consolidated Statements of Cash Flows (Unaudited) - ------------------------------------------------------------------------------------------------------ Nine months ended September 30, -------------------------------------- 1998 1997 - ------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income ................................................. $ 37,071,589 31,683,547 Adjustments to reconcile net income to net cash provided by operating activities: Equity in income of joint ventures ..................... (8,694,973) (6,160,598) Depreciation and amortization .......................... 26,876,722 21,658,738 Provision for doubtful accounts ........................ 13,500 67,500 Deferred income tax benefit ............................ (3,696,949) (1,982,016) (Gain) loss on disposal of equipment, net .............. (2,289) (1,603) (Increase) decrease in: Accounts receivable .................................... 403,366 (7,425,291) Prepaid expenses and other assets ...................... (4,327,662) (2,751,758) Increase (decrease) in: Accounts payable ....................................... 1,553,607 4,983,646 Accrued expenses and other current liabilities ......... 1,395,048 4,812,369 ------------ ------------ Net cash provided by operating activities .......... 50,591,959 44,884,534 ------------ ------------ Cash flows from investing activities: Purchase of property and equipment ......................... (24,582,248) (12,933,436) Additions to computer software ............................. (24,519,958) (10,079,409) Proceeds from disposal of equipment ........................ 80,594 52,457 Dividends received from joint ventures ..................... 5,618,616 3,252,561 Increase in contract acquisition costs ..................... (16,282,947) (16,377,924) Redemption of short-term investment ........................ 998,228 5,000,000 ------------ ------------ Net cash used in investing activities .............. (58,687,715) (31,085,751) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of short-term debt .................. -- 3,110,944 Principal payments on long-term debt and capital lease obligations ................................ (72,801) (126,232) Dividends paid on common stock ............................. (4,850,238) (4,363,527) Proceeds from exercise of stock options .................... 66,365 82,712 ------------ ------------ Net cash used in financing activities .............. (4,856,674) (1,296,103) ------------ ------------ Net increase (decrease) in cash and cash equivalents (12,952,430) 12,502,680 Cash and cash equivalents at beginning of period ............. 43,335,922 27,496,057 ------------ ------------ Cash and cash equivalents at end of period ................... $ 30,383,492 39,998,737 ============ ============ Cash paid for interest ....................................... $ 2,823 12,290 ============ ============ Cash paid for income taxes (net of tax refunds received) ..... $ 19,168,260 15,932,646 ============ ============
See accompanying notes to consolidated financial statements. - 6 - TOTAL SYSTEM SERVICES, INC. Notes to Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements represent the accounts of Total System Services, Inc.[R] (TSYS[R]) and its wholly owned subsidiaries, Columbus Depot Equipment Company [SM] (CDEC [SM]), TSYS Total Solutions, Inc. [R] (TSI), Columbus Productions, Inc.SM (CPI) and TSYS Canada, Inc. [SM](TCI). These financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. All adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of financial position and results of operations for the periods covered by this report, have been included. The accompanying unaudited consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and related notes appearing in the Company's 1997 annual report previously filed on Form 10-K. On April 16, 1998, TSYS declared a three-for-two stock split, which was effected on May 8, 1998. All shareholder equity, share and per share amounts in the accompanying consolidated financial statements have been retroactively restated to give effect to the split. Note 2 - Supplementary Balance Sheet Information A significant component of other assets included in the consolidated balance sheets at September 30, 1998 and December 31, 1997, is contract acquisition costs, net, of $35,670,047 and $27,274,037, respectively. Also included in other assets are investments in joint ventures of $24,135,030 and $21,338,446 at September 30, 1998 and December 31, 1997, respectively. Included in other current liabilities at September 30, 1998 and at December 31, 1997, are reserves of $4,001,860 and $4,051,285, respectively, to cover transaction processing provisions. Also included in other current liabilities are customer postage deposits of $14,498,331 and $13,579,370 at September 30, 1998 and December 31, 1997, respectively. Note 3 - Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected - 7 - Notes to Consolidated FInancial Statements (continued) financial information about operating segments in interim financial reports Notes to Consolidated Financial Statements issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. SFAS No. 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application shall be reported in financial statements for interim periods in the second year of application. TSYS is in the process of evaluating the impact SFAS 131 will have on its disclosures. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in an annual financial statement that is displayed in equal prominence with other financial statements. For interim period financial statements, enterprises are required to disclose a total for comprehensive income in those financial statements. The term "comprehensive income" is used in SFAS No. 130 to describe the total of all components of comprehensive income including net income. "Other comprehensive income" refers to revenues, expenses, gains and losses that are included in comprehensive income but excluded from earnings under current accounting standards. Currently, "other comprehensive income" for TSYS consists solely of items previously recorded as a component of shareholders' equity under SFAS No. 52, "Foreign Currency Translation." TSYS has adopted the interim period disclosure requirements of SFAS No. 130 effective March 31, 1998, and will adopt the annual financial statement reporting and disclosure requirements of SFAS No. 130 effective December 31, 1998. Note 4 - Total Comprehensive Income Total comprehensive income for the three months ended September 30, 1998, was $15,172,829, compared to $13,225,395 for the three months ended September 30, 1997. Comprehensive income for the nine months ended September 30, 1998 and 1997, was $37,069,461 and $31,683,547, respectively. - 8 - TOTAL SYSTEM SERVICES, INC. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage increases or decreases in those items for the three months ended September 30: Percentage of Percentage Change Total Revenues in Dollar Amounts 1998 1997 1998 vs 1997 Revenues: Bankcard data processing services .. 89.5% 89.8% 7.6% Other services ..................... 10.5 10.2 10.8 ----- ----- Total revenues ................. 100.0 100.0 7.9 ----- ----- Expenses: Salaries and other personnel expense 39.1 39.6 6.4 Net occupancy and equipment expense 27.3 26.5 11.2 Other operating expenses ........... 15.2 15.8 4.5 ----- ----- Total operating expenses ....... 81.6 81.9 7.6 ----- ----- Equity in income of joint ventures ... 3.9 2.4 75.6 ----- ----- Operating income ................. 22.3 20.5 17.1 Nonoperating income .................. 0.4 0.7 (29.8) ----- ----- Income before income taxes ..... 22.7 21.2 15.6 Income taxes ......................... 7.4 6.8 17.3 ----- ----- Net income ........................... 15.3% 14.4% 14.7% ===== ===== - 9 - Results of Operations (continued) The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage increases or decreases in those items for the nine months ended September 30: Percentage of Percentage Change Total Revenues in Dollar Amounts 1998 1997 1998 vs 1997 Revenues: Bankcard data processing services .. 88.7% 89.9% 7.0% Other services ..................... 11.3 10.1 20.8 ----- ----- Total revenues .................. 100.0 100.0 8.4 ----- ----- Expenses: Salaries and other personnel expense 41.9 42.0 8.1 Net occupancy and equipment expense 26.8 27.2 6.6 Other operating expenses ........... 15.8 15.5 10.5 ----- ----- Total operating expenses ....... 84.5 84.7 8.1 ----- ----- Equity in income of joint ventures ... 3.0 2.3 41.1 ----- ----- Operating income ................. 18.5 17.6 14.1 Nonoperating income .................. 0.7 0.6 31.2 ----- ----- Income before income taxes ..... 19.2 18.2 14.7 Income taxes ......................... 6.3 6.2 10.1 ----- ----- Net income ........................... 12.9% 12.0% 17.0% ===== ===== Total revenues increased $7.3 million, or 7.9%, and $22.2 million, or 8.4%, during the three months and nine months ended September 30, 1998, respectively, compared to the same periods in 1997. Revenues from bankcard data processing services increased $6.2 million, or 7.6%, in the three months ended September 30, 1998, compared to the same period in 1997. During the nine months ended September 30, 1998, revenues from bankcard data processing services increased $16.6 million, or 7.0%, compared to the same period in 1997. Increased revenues from bankcard data processing services are primarily attributable to the growth in the card portfolios of existing customers. Increases in the - 10 - Results of Operations (continued) volumes of authorizations and transactions associated with the additional cardholder accounts also contributed to the increased revenues. Processing contracts with large customers, representing a significant portion of the Company's total revenues, generally provide for discounts on certain services based on increases in the level of cardholder accounts processed. As a result, bankcard data processing revenues and the related margins are influenced by the customer mix relative to the size of customer bankcard portfolios, as well as the number of individual cardholder accounts processed for each customer. Average cardholder accounts on file for the three months ended September 30, 1998, were 101.3 million, which was an increase of approximately 13.8% over the average of 89.0 million for the same period in 1997. For the first nine months of 1998, average cardholder accounts were 96.5 million, a 12.6% increase over the 85.7 million average cardholder accounts for the same period last year. Cardholder accounts on file at September 30, 1998, were 103.1 million, a 14.4% increase over the 90.1 million accounts on file at September 30, 1997. The increase in cardholder accounts on file from September 1997 to September 1998 included net internal growth of existing customers of 9.0 million additional cardholder accounts and approximately 4.0 million accounts of new customers. During the first nine months of 1998, TSYS converted approximately 27.8 million existing cardholder accounts to TS2[R], bringing the total number of accounts on TS2 at September 30, 1998, to more than 47.0 million, compared to 14.4 million at September 30, 1997. A significant amount of the Company's revenues is derived from long-term contracts with large customers, including certain major customers. In April 1998, two of the Company's customers, NationsBank and Bank of America, announced their intent to merge and announced completion of the merger effective September 30, 1998. As a result, the percentage of revenues derived from major customers increased. For the three months and nine months ended September 30, 1998, two major customers accounted for approximately 36% and 35% of total revenues, respectively, compared to 34% for the three months and the nine months ended September 30, 1997. The loss of either one of the Company's major customers, or other significant customers, could have a material adverse effect on the Company's financial condition and results of operations. Near the end of the first quarter of 1998, AT&T, a major customer of the Company, completed the sale of its Universal Card Services (UCS) to Citibank, now a part of Citigroup after Citibank's merger with Travelers Group, Inc. TSYS and UCS (now Citibank) have a processing contract with a term until August 2000, and, at the customer's instruction, TSYS converted all UCS accounts to TS2, completing the conversion in October 1998. The long-term effect of the sale of AT&T's credit card - 11 - Results of Operations (continued) business on TSYS' financial condition and results of operations cannot be determined at this time. As discussed above, NationsBank and Bank of America merged effective September 30, 1998. The Company has long-term processing contracts with each of these customers and is in the process of assessing implications of the merger on the existing contracts with each customer. During the second quarter of 1998, the Company announced the signing of a long-term processing agreement with Sears, Roebuck and Co. to convert and process its 60 million private label accounts. TSYS successfully converted the first 7.2 million of these accounts to TS2 in October 1998. The conversion of the remainder of these accounts is anticipated to be completed by the end of the second quarter of 1999. Additional revenue will be realized as these accounts are added over the first half of 1999. Total operating expenses increased 7.6% and 8.1% for the three months and nine months ended September 30, 1998, respectively, compared to the same periods in 1997. The increases in operating expenses are attributable to increases in all expense categories as described below. Employment expenses increased 6.4% and 8.1% for the three months and nine months ended September 30, 1998, respectively, compared to the same periods in 1997. In the third quarter of 1998, due to the increase in TS2 conversion activity, the Company capitalized additional employment expenses. Further, employment expenses capitalized in conjunction with software development increased in the third quarter of 1998. The majority of these expenditures were related to the development of a commercial card system for TS2 which began in May 1998 and is expected to be substantially completed by the end of the fourth quarter of 1999. Increases in employment expenses attributable to normal growth in salaries and related benefits were partially offset by the increased level of capitalization. The average number of employees in the third quarter of 1998 increased to 3,434, a 15.0% increase over the 2,987 in the same period of 1997. For the first nine months of 1998, the average number of employees was 3,361 an 18.6% increase over the first nine months of 1997. At October 31, 1998, TSYS had 3,335 full-time and 83 part-time employees. In February 1998, TSYS announced the formation of TSYS Canada, Inc. (TCI), a wholly owned subsidiary incorporated in the state of Georgia and headquartered in Columbus. On February 1, 1998, TCI opened an office in Welland, Ontario, Canada, which currently employs 19 programmers who are providing support and assistance with the conversion of card portfolios to TS2. Net occupancy and equipment expense increased 11.2% and 6.6% for the three months and nine months ended September 30, 1998, respectively, over the same periods in - 12 - Results of Operations (continued) equipment expense, remained comparable. Due to rapidly changing technology in computer equipment, TSYS' equipment needs are achieved substantially through operating leases. Beginning in the fourth quarter of 1997, the Company began entering into a larger number of more economical leases on technologically advanced equipment rather than renewing certain expensive leases on older equipment. Computer software upgrade licenses were purchased for additional processors subsequent to the third quarter of 1997 to accommodate increased volumes due to the expected growth in the number of accounts associated with new customers. Amortization of these licenses accounts for the majority of the increases in net occupancy and equipment. Other operating expenses increased 4.5% and 10.5% for the three months and nine months ended September 30, 1998, respectively, compared to the same periods in 1997. The growth in other operating expenses for 1998 is primarily due to increased travel, legal, telecommunication and other business development costs associated with exploring new business opportunities. TSYS' share of income from its equity in joint ventures was $3.9 million and $2.2 million for the three months ended September 30, 1998 and 1997, respectively. For the nine months ended September 30, 1998 and 1997, the Company's equity in income of its joint ventures was $8.7 million and $6.2 million, respectively. The increase is primarily due to improved operating results from Vital Processing Services, L.L.C. (Vital) which continued to grow operating results in line with expectations. With respect to Total System Services de Mexico, S.A. de C.V. (TSYS de Mexico), operating results continued to remain flat through the third quarter of 1998. There remains uncertainty in the Mexican economy which management continues to monitor. Any significant adverse development in the operations of TSYS de Mexico or in the Mexican economy could have a material adverse effect on the Company's financial condition and results of operations. Interest income, net, includes interest expense of $7,255 and $9,296 and interest income of $450,015 and $624,684 for the third quarters of 1998 and 1997, respectively. For the nine months ended September 30, 1998 and 1997, respectively, interest expense was $22,342 and $60,207, and interest income was $2,046,044 and $1,602,889. The increase in interest income in 1998 as compared to 1997 is primarily the result of higher levels of cash available for investment. Operating income increased 17.1% and 14.1% for the three and nine months ended September 30, 1998, respectively, over the same periods in 1997. The increase is primarily due to growth in revenues and equity in net income of joint ventures combined with improved expense control. TSYS' effective income tax rate for the third quarter of 1998 was 32.8%, compared to 32.3% for the same period in 1997. For the nine months ended September - 13 - Results of Operations (continued) 30, 1998, the effective tax rate was 32.8%, compared to 34.2% for the same period in 1997. The decrease in TSYS' effective income tax rate for the nine-month period is primarily due to certain effective income tax planning strategies, including the identification and recognition of research and experimentation credits for ongoing development activities, foreign tax credits associated with the Mexican joint venture, and a reduction in state income taxes due to favorable tax legislation. Liquidity and Capital Resources The Consolidated Statements of Cash Flows detail the Company's cash flows from operating, investing and financing activities. TSYS' primary method of funding its operations and growth has been cash generated from current operations and the occasional use of borrowed funds to supplement financing of capital expenditures. TSYS' net cash provided by operating activities in the first nine months of 1998 increased to $50.6 million from $44.9 million in the same period of 1997. The major uses of cash generated from operations have been the addition of property and equipment; internal development and purchase of computer software; investment in contract acquisition costs; and the payment of cash dividends. During the third quarter of 1998, TSYS purchased property and equipment of $11.1 million for total purchases of $24.6 million for the first nine months of 1998. Computer software increased during the third quarter by $4.8 million, bringing the total additions for 1998 to $24.5 million; additions primarily consisted of purchased software. Also, in the third quarter of 1998, $5.3 million was invested in contract acquisition costs for a total of $16.3 million invested in 1998, of which $9.6 million represents payments for processing rights. Dividends on common stock of $1.9 million were paid in the third quarter of 1998, bringing the total amount of dividends paid to $4.9 million. At the Annual Meeting of Shareholders in April 1998, the Company, in addition to announcing a three-for-two stock split, also increased the quarterly dividend 33.3% to $.01 per share. In 1997, construction was begun on a campus-type facility which will serve as the Company's corporate headquarters. The Company entered into an operating lease agreement relating to the new corporate campus. Under the agreement, the lessor has purchased the land, is paying for construction and development costs and has leased the property to the Company commencing upon its completion, which is expected to be in 1999. The lease provides for a substantial residual value guarantee, up to $87 million, and includes purchase options at the original cost of the property. Real estate taxes, insurance, maintenance and operating expenses applicable to the leased property are obligations of the Company. The Company expects net occupancy and equipment expense to increase in 1999 as a result of the lease. - 14 - Liquidity and Capital Resources (continued) In addition, TSYS began a $5 million expansion of its operations center in north Columbus during 1997. This expansion includes space for the card production services now located in downtown Columbus. TSYS will begin relocating the card production services in the fourth quarter of 1998. This expansion will further include additional space for mailing support functions. TSYS also purchased 18 acres of land containing a 104,000 square-foot speculative building in east Columbus at a cost of $1.9 million. The building has been prepared for an additional state-of-the-art data center at a cost of approximately $15.0 million and will be placed in service in phases over the remainder of the fourth quarter of 1998. Permanent financing for these projects will be through industrial revenue bonds. The core system of TS2 was designed to be Year 2000 compliant, and the Company is continuing its ongoing project to ensure that all of the Company's processing systems are Year 2000 compliant. Many computer programs were written with a two digit date field, and, if these programs are not made Year 2000 compliant, they will be unable to correctly process date information for the year 2000 and after. While these issues impact all of the Company's data processing systems to some extent, they are most significant in connection with certain mainframe computer programs. Moreover, remediation efforts go beyond the Company's internal computer systems and require coordination with clients, vendors, government entities and other third parties to assure that their systems and related interfaces are compliant. Failure to achieve timely remediation of the Company's critical programs and computer systems for Year 2000 would have a material adverse effect on the Company's financial condition and results of operations. The Company's Year 2000 plans called for all mission critical systems to be renovated by the end of the second quarter of 1998 which was accomplished. Testing for clients and other third parties was begun in the third quarter of 1998. Completion of all third party interface testing is dependent upon those third parties completing their own internal remediation. TSYS has made an assessment of noncompliant suppliers and vendors and will schedule and coordinate testing of incoming and outgoing interfaces with third-party vendors. The Company could be adversely affected to the extent third parties with which it interfaces have not properly addressed their Year 2000 issues. TSYS is primarily utilizing existing internal resources to complete the Year 2000 project. The Company incurred $1.7 million of direct costs related to the Year 2000 remediation project during the third quarter of 1998, bringing the total direct costs for 1998 to $4.6 million. The Company expects to incur an additional $3.4 million of direct costs during the remainder of 1998 and approximately $6.0 million in 1999. The Company has developed its remediation contingency plan and is currently developing its Year 2000 business continuity contingency plan which will be finalized by the end of the fourth quarter of 1998. Based upon progress to date, TSYS does not expect the cost of - 15 - Liquidity and Capital Resources (continued) the Year 2000 project to significantly impact its financial condition and results of operations. The costs of the project and the dates on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates which were derived utilizing numerous assumptions about future events, including the continued availability of necessary technical resources and the cooperation of customers and vendors. However, there are no guarantees that these estimates will be achieved and actual results could differ materially from those anticipated. TSYS may seek additional external sources of capital in the future. The form of any such financing will vary depending upon prevailing market and other conditions and may include short-term or long-term borrowings from financial institutions, or the issuance of additional equity and/or debt securities such as industrial revenue bonds. However, there can be no assurance that funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future, as evidenced by TSYS' current ratio of 1.95:1. At September 30, 1998, TSYS had working capital of $61.4 million compared to $70.9 million at December 31, 1997. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected financial information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. SFAS No. 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application shall be reported in financial statements for interim periods in the second year of application. TSYS is in the process of evaluating the impact SFAS No. 131 will have on its disclosures. Forward-Looking Statements Certain statements contained in this filing which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the Act). In addition, certain statements in future filings by TSYS with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of TSYS which are not statements of historical - 16 - Forward-Looking Statements (continued) fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans and objectives of TSYS or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as "believes," "anticipates," "expects," "intends," "targeted," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to: (i) the strength of the U.S. economy in general and relevant foreign economies; (ii) the Company's performance under current and future contracts; (iii) inflation, interest rate and foreign exchange rate fluctuations; (iv) timely and successful implementation of processing systems to provide new products, improved functionality and increased efficiencies; (v) changes in consumer spending, borrowing and saving habits, including a shift from credit to debit cards; (vi) technological changes; (vii) acquisitions; (viii) the ability to increase market share and control expenses; (ix) changes in laws, regulations, credit card association rules or other industry standards affecting TSYS' business which require significant product redevelopment efforts; (x) the effect of changes in accounting policies and practices as may be adopted by the Financial Accounting Standards Board; (xi) changes in TSYS' organization, compensation and benefit plans; (xii) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; (xiii) failure to successfully implement the Company's Year 2000 modification plans substantially as scheduled and budgeted; and (xiv) the success of TSYS at managing the risks involved in the foregoing. Such forward-looking statements speak only as of the date on which statements are made, and TSYS undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. - 17 - TOTAL SYSTEM SERVICES, INC. Part II - Other Information Item 6 - Exhibits and Reports on Form 8-K a) Exhibits (27) - Financial Data Schedule (For SEC use only) b) There were no Forms 8-K filed during the quarter ended September 30, 1998. - 18 - TOTAL SYSTEM SERVICES, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TOTAL SYSTEM SERVICES, INC. Date: November 12, 1998 by: /s/ Richard W. Ussery --------------------------- Richard W. Ussery Chairman of the Board and Chief Executive Officer Date: November 12, 1998 by: /s/ James B. Lipham --------------------------- James B. Lipham Chief Financial Officer - 19 - EX-27 2 ARTICLE 5 FINANCIAL DATA SCHEDULE FOR 3RD QTR 10-Q
5 0000721683 TOTAL SYSTEM SERVICES, INC. 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 30,383,492 0 69,740,741 706,688 0 125,992,443 157,597,717 73,880,125 328,366,753 64,590,484 0 0 0 19,422,528 234,021,299 328,366,753 287,189,319 287,189,319 0 242,732,482 0 0 0 55,177,801 18,106,212 37,071,589 0 0 0 37,071,589 .19 .19 On April 16, 1998, TSYS announced a three-for-two stock split that was issued on May 8, 1998, to shareholders of record as of April 27, 1998. Financial data schedules have not been restated for prioir periods for this recapitalization.
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