-----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, FZ6ec9bJMJR27UUHATaabs8PIX71iZ+T6IZMWiAJxDctQRa7OSxjvReBz6g6vcEx teBR+zg+sZF6V7C5z8pJ5A== 0000721683-99-000038.txt : 19991117 0000721683-99-000038.hdr.sgml : 19991117 ACCESSION NUMBER: 0000721683-99-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99752187 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 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, 1999 ------------------------------------------------- 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) 1200 Sixth Avenue - ------------------------------------------------------------------------------- (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 10, 1999 - ----------------------- ----------------------------------- Common Stock, $.10 par value 194,918,470 TOTAL SYSTEM SERVICES, INC. INDEX Page Number ------- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets (unaudited) - September 30, 1999 and December 31, 1998........................................... 3 Consolidated Statements of Income (unaudited) - Three months and Nine months ended September 30, 1999 and 1998............... 4 Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 30, 1999 and 1998........................ 6 Notes to Consolidated Financial Statements (unaudited)............ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 13 Part II. Other Information Item 6. (a) Exhibits............................................... 25 (b) Reports on Form 8-K................................... 25 Signatures................................................................ 26 - 2- TOTAL SYSTEM SERVICES, INC. Part I - Financial Information Consolidated Balance Sheets (Unaudited) - ---------------------------------------------------------------------------------------------------------- September 30, December 31, 1999 1998 - ---------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents (includes $32.7 million and $9.4 million on deposit with a related party at 1999 and 1998, respectively) $ 35,423,729 9,555,760 Accounts receivable, net of allowance for doubtful accounts of $1.3 million and $711,000 at 1999 and 1998, respectively ....... 111,655,459 84,795,727 Prepaid expenses and other current assets ........................ 26,470,807 25,370,604 ------------- ------------- Total current assets ......................................... 173,549,995 119,722,091 Property and equipment, less accumulated depreciation and amortization of $81.0 million and $77.0 million at 1999 and 1998, respectively ............................................... 93,558,063 92,619,005 Computer software, less accumulated amortization of $67.3 million and $50.7 million at 1999 and 1998, respectively ... 92,397,022 65,861,735 Other assets ....................................................... 69,004,226 70,705,481 ------------- ------------- Total assets ................................................. $ 428,509,306 348,908,312 ============= ============= Liabilities and Shareholders' Equity Current liabilities: Accounts payable ................................................. $ 15,727,435 7,403,023 Accrued salaries and employee benefits ........................... 29,607,834 24,643,449 Current portion of long-term debt and obligations under capital leases ................................................. 40,758 130,781 Other current liabilities (includes $1.6 and $1.7 million payable to related parties at 1999 and 1998, respectively) ............ 42,768,412 27,072,542 ------------- ------------- Total current liabilities .................................... 88,144,439 59,249,795 Long-term debt and obligations under capital leases, excluding current portion ...................................... 204,286 211,316 Deferred income taxes .............................................. 23,988,186 19,093,482 ------------- ------------- Total liabilities ............................................ 112,336,911 78,554,593 ------------- ------------- Shareholders' equity: Common stock - $.10 par value. Authorized 300,000,000 shares; 195,079,087 and 194,225,045 issued at 1999 and 1998, respectively; 194,937,070 and 194,043,785 outstanding at 1999 and 1998, respectively ............................... 19,507,909 19,422,504 Additional paid-in capital ....................................... 5,301,638 1,882,814 Accumulated other comprehensive income ........................... (1,395,319) (1,179,337) Retained earnings ................................................ 292,758,167 250,227,738 ------------- ------------- Total shareholders' equity ................................... 316,172,395 270,353,719 ------------- ------------- Total liabilities and shareholders' equity ................... $ 428,509,306 348,908,312 ============= =============
See accompanying Notes to Unaudited Consolidated Financial Statements. - 3 - TOTAL SYSTEM SERVICES, INC. Consolidated Income Statements (Unaudited) - ---------------------------------------------------------------------------------------------------------------------- Three months ended September 30, ----------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- Revenues: Bankcard data processing services (includes $10.6 million and $8.2 million from related parties for 1999 and 1998, respectively) ............................ $118,682,592 88,954,052 Other services ................................................................ 19,144,629 10,447,873 ------------ ------------ Total revenues ............................................................ 137,827,221 99,401,925 ------------ ------------ Expenses: Salaries and other personnel expense .......................................... 53,277,547 38,842,357 Net occupancy and equipment expense ........................................... 40,237,543 27,110,161 Other operating expenses (includes $3.6 million and $2.8 million to related parties for 1999 and 1998, respectively) ..................................... 23,768,982 15,220,491 ------------ ------------ Total expenses ............................................................ 117,284,072 81,173,009 ------------ ------------ Equity in income of joint ventures .............................................. 3,337,868 3,910,077 ------------ ------------ Operating income ............................................................... 23,881,017 22,138,993 ------------ ------------ Nonoperating income: Gain (loss) on disposal of equipment, net ..................................... 1,071,433 (2,119) Interest income, net (includes $483,000 and $590,000 from a related party for 1999 and 1998, respectively) ...................................... 566,524 442,760 ------------ ------------ Total nonoperating income ................................................. 1,637,957 440,641 ------------ ------------ Income before income taxes ................................................ 25,518,974 22,579,634 Income taxes .................................................................... 8,585,253 7,408,466 ------------ ------------ Net income ................................................................ $ 16,933,721 15,171,168 ============ ============ Basic earnings per share .................................................. $ .09 .08 ============ ============ Diluted earnings per share ................................................ $ .09 .08 ============ ============ Weighted average common shares outstanding ...................................... 194,935,906 194,024,152 Increase due to assumed issuance of shares related to stock options outstanding ........................................ 406,304 589,805 ------------ ------------ Weighted average common and common equivalent shares outstanding ............................................... 195,342,210 194,613,957 ============ ============ Cash dividends per common share ................................................. $ .010 .010 ============ ============
See accompanying notes to Unaudited Consolidated Financial Statements. - 4 - TOTAL SYSTEM SERVICES, INC. Consolidated Income Statements (Unaudited) - ----------------------------------------------------------------------------------------------------------------- Nine months ended September 30, ------------------------------ 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Revenues: Bankcard data processing services (includes $27.2 million and $23.2 million from related parties for 1999 and 1998, respectively)......... $334,841,503 254,699,719 Other services ............................................................... 55,288,729 32,489,600 ------------ ------------ Total revenues ........................................................... 390,130,232 287,189,319 ------------ ------------ Expenses: Salaries and other personnel expense ......................................... 154,241,282 120,297,210 Net occupancy and equipment expense .......................................... 109,669,927 76,859,661 Other operating expenses (includes $10.1 million and $8.1 million to related parties for 1999 and 1998, respectively) ........................ 63,906,199 45,575,611 ------------ ------------ Total expenses ........................................................... 327,817,408 242,732,482 ------------ ------------ Equity in income of joint ventures ............................................. 8,446,189 8,694,973 ------------ ------------ Operating income .............................................................. 70,759,013 53,151,810 ------------ ------------ Nonoperating income: Gain (loss) on disposal of equipment, net .................................... 746,319 2,289 Interest income, net (includes $1.0 and $1.9 million from a related party for 1999 and 1998, respectively) ..................................... 1,340,423 2,023,702 ------------ ------------ Total nonoperating income ................................................ 2,086,742 2,025,991 ------------ ------------ Income before income taxes ............................................... 72,845,755 55,177,801 Income taxes ................................................................... 24,527,605 18,106,212 ------------ ------------ Net income ............................................................... $ 48,318,150 37,071,589 ============ ============ Basic earnings per share ................................................. $ .25 .19 ============ ============ Diluted earnings per share ............................................... $ .25 .19 ============ ============ Weighted average common shares outstanding ..................................... 194,913,533 194,013,498 Increase due to assumed issuance of shares related to stock options outstanding ....................................... 600,131 647,587 ------------ ------------ Weighted average common and common equivalent shares outstanding .............................................. 195,513,664 194,661,085 ============ ============ Cash dividends per common share ................................................ $ .030 .028 ============ ============
See accompanying notes to Unaudited Consolidated Financial Statements. - 5 - TOTAL SYSTEM SERVICES, INC. Consolidated Statements of Cash Flows (Unaudited) - ------------------------------------------------------------------------------------------------------------------------ Nine months ended September 30, ----------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income ................................................................... $ 48,318,150 37,071,589 Adjustments to reconcile net income to net cash provided by operating activities: Equity in income of joint ventures ....................................... (8,446,189) (8,694,973) Depreciation and amortization ............................................ 36,989,900 26,876,722 Provision for doubtful accounts .......................................... 643,500 13,500 Deferred income tax expense (benefit) .................................... 4,894,704 (3,696,949) (Gain) loss on disposal of equipment, net ................................ (746,319) (2,289) (Increase) decrease in: Accounts receivable ...................................................... (27,503,232) 403,366 Prepaid expenses and other assets ........................................ (1,381,668) (4,327,662) Increase (decrease) in: Accounts payable ......................................................... 8,324,412 1,553,607 Accrued expenses and other current liabilities ........................... 20,814,359 1,395,048 --------------- ------------ Net cash provided by operating activities ............................ 81,907,617 50,591,959 --------------- ------------ Cash flows from investing activities: Purchase of property and equipment ........................................... (12,986,403) (24,582,248) Additions to computer software ............................................... (42,520,304) (24,519,958) Proceeds from disposal of equipment .......................................... 4,390,451 80,594 Dividends received from joint ventures ....................................... 4,664,307 5,618,616 Increase in contract acquisition costs ....................................... (3,812,318) (16,282,947) Redemption of short-term investment .......................................... -- 998,228 --------------- ------------ Net cash used in investing activities ................................ (50,264,267) (58,687,715) --------------- ------------ Cash flows from financing activities: Principal payments on long-term debt and capital lease obligations .................................................. (29,861) (72,801) Dividends paid on common stock ............................................... (5,838,620) (4,850,238) Proceeds from exercise of stock options ...................................... 93,100 66,365 --------------- ------------ Net cash used in financing activities ................................ (5,775,381) (4,856,674) --------------- ------------ Net increase (decrease) in cash and cash equivalents.................. 25,867,969 (12,952,430) Cash and cash equivalents at beginning of period ............................... 9,555,760 43,335,922 --------------- ------------ Cash and cash equivalents at end of period ..................................... $ 35,423,729 30,383,492 =============== ============ Cash paid for interest ......................................................... $ 1,316 2,823 =============== ============ Cash paid for income taxes (net of tax refunds received) ....................... $ 19,357,501 19,168,260 =============== ============
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 (see Note 5). See accompanying notes to Unaudited Consolidated Financial Statements. - 6 - TOTAL SYSTEM SERVICES, INC. Notes to Unaudited Consolidated Financial Statements Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements represent the accounts of Total System Services, Inc.(R) (TSYS(R)) and its wholly owned subsidiaries, Columbus Depot Equipment Company(service mark) (CDEC(service mark)), TSYS Total Solutions(R), Inc. (TSI), Columbus Productions, Inc.(service mark) (CPI) and TSYS Canada, Inc.(service mark) (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 1998 annual report previously filed on Form 10-K. Note 2 - Supplementary Balance Sheet Information Significant components of prepaid expenses and other current assets are summarized as follows: September 30, 1999 December 31, 1998 -------------------- -------------------- Contract acquisition costs, net $ 8,891,443 $ 9,900,416 Prepaid expenses 10,747,792 7,643,395 Other 6,831,572 7,826,793 ------------------ ---------------- Total $ 26,470,807 $ 25,370,604 ================== ================ Significant components of other assets are summarized as follows: September 30, 1999 December 31, 1998 -------------------- -------------------- Contract acquisition costs, net $ 33,783,369 $ 36,780,395 Investment in joint ventures, net 31,756,946 28,304,322 Other 3,463,911 5,620,764 ---------------- ---------------- Total $ 69,004,226 $ 70,705,481 ================ ================ - 7 - Notes to Unaudited Consolidated Financial Statements (continued) Significant components of other current liabilities are summarized as follows: September 30, 1999 December 31, 1998 ---------------------- -------------------- Customer postage deposits $ 16,173,176 $ 14,753,284 Transaction processing provisions 5,221,318 3,941,318 Other 21,373,918 8,377,940 ---------------- ----------------- Total $ 42,768,412 $ 27,072,542 ================ ================= Note 3 - Comprehensive Income Comprehensive income 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, 1999 and 1998, is as follows: September 30, 1999 September 30, 1998 ------------------ -------------------- Net income $ 16,933,721 $ 15,171,168 Other comprehensive income (expense): Foreign currency translation adjustments, net of tax (44,340) 1,661 ---------------- ----------------- Comprehensive income $ 16,889,381 $ 15,172,829 ================ ================= Total comprehensive income for the nine months ended September 30, 1999 and 1998, is as follows: September 30, 1999 September 30, 1998 ------------------ ------------------ Net income $ 48,318,150 $ 37,071,589 Other comprehensive income (expense): Foreign currency translation adjustments, net of tax (215,982) (2,128) --------------- --------------- Comprehensive income $ 48,102,168 $ 37,069,461 =============== =============== From January 1, 1997, through December 31, 1998, the Mexican economy was designated as highly inflationary, and thus all currency translation adjustments related to the Mexican joint venture for the year ended December 31, 1998, were expensed. The Mexican economy was determined not to be highly inflationary effective January 1, 1999. The income tax effects allocated to and the cumulative balance of each component of other comprehensive income are as follows: Balance at December Pretax Balance at 31, 1998 amount Tax benefit September 30, 1999 ----------------------- ------------------ ---------------- ------------------------- Currency translation adjustment ($ 1,179,337) (336,688) 120,706 ($1,395,319) ============= ========= ========= ==============
- 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 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, 1999 and 1998. One subsidiary, whose sole business activity is to provide programming support services to the parent company, was aggregated into transaction processing services. The remaining segments were aggregated into support services. Transaction Support Operating Segments processing services services Consolidated - ---------------------------------------------------------------------------------------- At September 30, 1999 - ---------------------------------------------------------------------------------------- Identifiable assets ................. $ 418,734,810 43,961,214 $ 462,696,024 Intersegment eliminations ........... (33,949,382) (237,336) (34,186,718) ------------- ------------- ------------- Total assets ........................ $ 384,785,428 43,723,878 $ 428,509,306 ============= ============= ============= - ---------------------------------------------------------------------------------------- At December 31, 1998 - ---------------------------------------------------------------------------------------- Identifiable assets ................. $ 341,926,653 32,895,850 $ 374,822,503 Intersegment eliminations ........... (24,955,949) (958,242) (25,914,191) ------------- ------------- ------------- Total assets ........................ $ 316,970,704 31,937,608 $ 348,908,312 ============= ============= ============= - --------------------------------------------------------------------------------------- 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 ============= ============= ============= Segment operating income ............ $ 21,127,444 2,753,573 $ 23,881,017 ============= ============= ============= Income tax expense .................. $ 7,547,475 1,037,778 $ 8,585,253 ============= ============= ============= Net income .......................... $ 15,209,702 1,724,019 $ 16,933,721 ============= ============= =============
- 9 - Notes to Unaudited Consolidated Financial Statements (continued) Transaction Support Operating Segments processing services services Consolidated - --------------------------------------------------------------------------------------- Three Months Ended September 30, 1998 - --------------------------------------------------------------------------------------- Total revenue ....................... $ 90,836,277 9,123,943 $ 99,960,220 Intersegment revenue ................ (139,938) (418,357) (558,295) ------------- ------------- ------------- Revenue from external customers ..... $ 90,696,339 8,705,586 $ 99,401,925 ============= ============= ============= Equity in income of joint ventures .. $ 3,910,077 -- $ 3,910,077 ============= ============= ============= Segment operating income ............ $ 20,711,818 1,427,175 $ 22,138,993 ============= ============= ============= Income tax expense .................. $ 6,870,950 537,516 $ 7,408,466 ============= ============= ============= Net income .......................... $ 14,348,821 822,347 $ 15,171,168 ============= ============= ============= - --------------------------------------------------------------------------------------- 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 tax expense .................. $ 21,096,214 3,431,391 $ 24,527,605 ============= ============= ============= Net income .......................... $ 42,672,031 5,646,119 $ 48,318,150 ============= ============= ============= - --------------------------------------------------------------------------------------- Nine Months Ended September 30, 1998 - --------------------------------------------------------------------------------------- Total revenue ....................... $ 259,573,379 28,961,436 $ 288,534,815 Intersegment revenue ................ (407,729) (937,767) (1,345,496) ------------- ------------- ------------- Revenue from external customers ..... $ 259,165,650 28,023,669 $ 287,189,319 ============= ============= ============= Equity in income of joint ventures .. $ 8,694,973 -- $ 8,694,973 ============= ============= ============= Segment operating income ............ $ 48,792,589 4,359,221 $ 53,151,810 ============= ============= ============= Income tax expense .................. $ 16,485,172 1,621,040 $ 18,106,212 ============= ============= ============= Net income .......................... $ 34,602,040 2,469,549 $ 37,071,589 ============= ============= =============
The following geographic area data represent revenues for the three months and nine months ended September 30, 1999 and 1998, 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, -------------------------------------------- --------------------------------------------- 1999 1998 1999 1998 ------------------- ----------------- ------------------ ----------------- United States $ 125,280,017 94,517,924 $ 362,217,328 272,429,318 Mexico 4,138,596 4,299,242 12,101,167 13,145,165 Canada 8,178,254 416,253 15,167,391 1,122,738 Other 230,354 168,506 644,346 492,098 ================= =============== ================ =============== Totals $ 137,827,221 99,401,925 $ 390,130,232 287,189,319 ================= =============== ================ ===============
- 10 - Notes to Unaudited Consolidated Financial Statements (continued) For the three months ended September 30, 1999 and 1998, three major customers accounted for approximately 38% and 36% of total revenues, respectively. One of these customers provided 15%, or $21.3 million, of total revenues for the three months ended September 30, 1999, and 21%, or $20.9 million, for the three months ended September 30, 1998. Another major customer accounted for 13%, or $17.8 million, of total revenues for the three months ended September 30, 1999, and 15%, or $14.9 million, of total revenues for the three months ended September 30, 1998. The other major customer accounted for 10%, or $14.4 million, of total revenues for the three months ended September 30, 1999, and no revenue in 1998. Revenues from major customers for the periods reported are attributable to both reporting segments. For the nine months ended September 30, 1999 and 1998, two major customers accounted for approximately 30% and 35% of total revenues, respectively. One of these customers provided 17%, or $64.5 million, of total revenues for the nine months ended September 30, 1999, and 22%, or $61.9 million, for the nine months ended September 30, 1998. The other major customer accounted for 13%, or $51.4 million, of total revenues for the nine months ended September 30, 1999, and 13%, or $37.6 million, of total revenues for the nine months ended September 30, 1998. Note 5 - Acquisition Effective January 1, 1999, TSYS acquired Partnership Card Services (PCS) from its majority shareholder, Columbus Bank and Trust Company (CB&T), the flagship bank of Synovus Financial Corp., in exchange for 854,042 newly issued shares of TSYS common stock with a market value of approximately $20.1 million. Prior to its acquisition by TSYS, PCS operated as a division of CB&T, providing services such as credit, collection and customer service to card-issuing financial institutions, including CB&T. The business of PCS has become part of TSYS' wholly owned subsidiary, TSYS Total Solutions, Inc. Because the acquisition of PCS was a transaction between entities under common control, the Company has reflected the acquisition at historical cost in a manner similar to a pooling of interests and has reflected the results of operations of PCS in the Company's financial statements beginning January 1, 1999. Presented below are the pro forma consolidated results of TSYS' operations for the three months and nine months ended September 30, 1998, as though the acquisition of PCS had occurred at the beginning of that period, compared to TSYS' actual consolidated results of operations for the three months and nine months ended September 30, 1999. - 11 - Notes to Unaudited Consolidated Financial Statements (continued) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------------- --------------------------------------------- 1999 1998 1999 1998 ------------------ ----------------- ------------------ ------------------ Revenues $ 137,827,221 103,295,469 $ 390,130,232 296,721,633 ================ ================ ================= ================ Net Income $ 16,933,721 15,331,007 $ 48,318,150 38,040,269 ================ ================ ================= ================ Earnings per share - basic and diluted $ .09 .08 $ .25 .20 ================ ================ ================= ================
Note 6 - 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. 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. This lawsuit seeks unspecified damages. This litigation is in its initial phases, and, though settlement negotiations have occurred, these negotiations have to date been unproductive. TSYS is not in a position to determine its possible exposure, if any, as a result of the litigation. - 12 - TOTAL SYSTEM SERVICES, INC. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage increases or decreases in those items for the three months ended September 30: Percentage of Percentage Change Total Revenues in Dollar Amounts ------------------- ----------------- 1999 1998 1999 vs 1998 -------- ------ ---------------- Revenues: Bankcard data processing services 86.1 % 89.5 % 33.4% Other services 13.9 10.5 83.2 ------ ------- Total revenues 100.0 100.0 38.7 ------ ------- Expenses: Salaries and other personnel expense 38.7 39.1 37.2 Net occupancy and equipment expense 29.2 27.3 48.4 Other operating expenses 17.2 15.2 56.2 ------ ------ Total operating expenses 85.1 81.6 44.5 ------ ------ Equity in income of joint ventures 2.4 3.9 (14.6) ------ ------ Operating income 17.3 22.3 7.9 Nonoperating income 1.2 0.4 nm ----- ------ Income before income taxes 18.5 22.7 13.0 Income taxes 6.2 7.4 15.9 ----- ------ Net income 12.3 % 15.3 % 11.6 % ===== ====== nm = not meaningful - 13 - Results of Operations (continued) The following table sets forth certain revenue and expense items as a percentage of total revenues and the percentage increases or decreases in those items for the nine months ended September 30: Percentage of Percentage Change Total Revenues in Dollar Amounts ------------------ ----------------- 1999 1998 1999 vs 1998 ------ ------ ----------------- Revenues: Bankcard data processing services 85.8 % 88.7 % 31.5 % Other services 14.2 11.3 70.2 ------ ------ Total revenues 100.0 100.0 35.8 ------ ------ Expenses: Salaries and other personnel expense 39.5 41.9 28.2 Net occupancy and equipment expense 28.1 26.8 42.7 Other operating expenses 16.4 15.8 40.2 ------ ----- Total operating expenses 84.0 84.5 35.1 ------ ----- Equity in income of joint ventures 2.2 3.0 (2.9) ------ ----- Operating income 18.2 18.5 33.1 Nonoperating income 0.5 0.7 3.0 ------ ----- Income before income taxes 18.7 19.2 32.0 Income taxes 6.3 6.3 35.5 ----- ----- Net income 12.4 % 12.9 % 30.3 % ===== ===== Total revenues increased $38.4 million, or 38.7%, and $102.9 million, or 35.8%, during the three months and nine months ended September 30, 1999, respectively, compared to the same periods in 1998. Revenues from bankcard data processing services increased $29.7 million, or 33.4%, in the three months ended September 30, 1999, compared to the same period in 1998. During the nine months ended September 30, 1999, revenues from bankcard data processing services increased $80.1 million, or 31.5%, compared to the same period in 1998. Increased revenues from bankcard data processing services are attributable to the growth in the card portfolios of existing customers, as well as cardholder accounts of new customers converted to THE TOTAL SYSTEM(R). Increases in the volumes of authorizations and transactions associated with the additional cardholder accounts also contributed to the increased revenues. Processing contracts - 14 - Results of Operations (continued) 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, 1999, were 196.9 million, which was an increase of approximately 94.4% over the average of 101.3 million for the same period in 1998. For the first nine months of 1999, average cardholder accounts were 172.6 million, a 78.9% increase over the 96.5 million average cardholder accounts on file for the same period last year. Cardholder accounts on file at September 30, 1999, were 199.3 million, a 93.3% increase over the 103.1 million accounts on file at September 30, 1998. The increase in cardholder accounts on file from September 1998 to September 1999 included net internal growth of existing customers of 10.7 million cardholder accounts and approximately 85.5 million accounts of new customers. During the first nine months of 1999, TSYS converted approximately 74.2 million new cardholder accounts to TS2(R). These 74.2 million accounts, combined with the internal growth of existing customers on TS2, bring the total number of accounts on TS2 at September 30, 1999, to approximately 143.3 million, compared to 47.0 million at September 30, 1998. Of the 74.2 million accounts converted to TS2 during the first nine months of 1999, approximately 57.7 million accounts were related to Sears private-label card accounts. The accounts converted for Sears in 1999, combined with the 7.5 million converted in the fourth quarter of 1998 and the internal growth in the portfolio, bring the total accounts for Sears to 66 million. During the first nine months of 1999, TSYS also converted approximately 16.5 million accounts to TS2 for Canadian Tire Acceptance Limited (CTAL), Royal Bank of Canada and Nordstrom. During the second quarter of 1999, TSYS received a one-time termination fee of $6.9 million from a client which terminated its processing agreement with TSYS as a result of its merger with a financial institution that processes in-house. The payment is in lieu of processing fees which would have been paid throughout the remaining life of the processing contract. 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, 1999, three major customers accounted for approximately 38% of total revenues, compared to 36% for the three months ended September 30, 1998. For the nine months ended September 30, 1999, two major customers accounted for approximately 30% of total revenues, compared to 35% for the nine months ended September 30, 1998. The loss of one of the Company's major customers, or other significant customers, could have a material adverse effect on the Company's financial condition and results of operations. Near the end of the first quarter of 1998, AT&T, a major customer of the Company, completed the sale of its Universal Card Services (UCS) to CITIBANK, now a part of Citigroup - 15 - Results of Operations (continued) after CITIBANK's merger with Travelers Group, Inc. On February 26, 1999, CITIBANK notified TSYS of its decision to terminate UCS' processing agreement with TSYS for consumer credit card accounts at the end of its original term on August 1, 2000. TSYS' management believes that CITIBANK will continue to be a major customer in 1999, but will not be a major customer in 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. Effective September 30, 1998, NationsBank and Bank of America merged. The Company had long-term processing contracts with each of these customers, with NationsBank's ending in 2005 and Bank of America's in 2007. In September 1999, TSYS announced a new ten-year agreement with the combined entity, known as Bank of America, to continue processing its credit card portfolio until 2009. The combination of NationsBank and Bank of America under a single processing agreement with TSYS will reduce TSYS' revenues in 1999 and future years because together NationsBank and Bank of America will be entitled to receive greater discounts than either would have been entitled to receive standing alone. TSYS expects its new processing agreement to produce a net profit margin consistent with its historical net profit margins. Revenues from other services increased $8.7 million in the third quarter of 1999, compared to the third quarter of 1998. Revenues from other services for the first nine months of 1999 increased $22.8 million, compared to the same period last year. Revenues from other services consist primarily of revenues generated by TSYS' wholly owned subsidiaries. Effective January 1, 1999, TSYS acquired Partnership Card Services (PCS) from CB&T. PCS has become part of TSYS' wholly owned subsidiary, TSYS Total Solutions, Inc (TSI). PCS' revenues for the third quarter of 1999 were approximately $6.9 million. For the first nine months of 1999, PCS' revenues were approximately $18.3 million, including a $1.4 million early termination fee resulting from the loss of a portfolio by a customer. Total operating expenses increased 44.5% and 35.1% for the three months and nine months ended September 30, 1999, respectively, compared to the same period in 1998. The increases in operating expenses are attributable to increases in all expense categories as described below. Employment expenses increased $14.4 million, or 37.2%, for the three months ended September 30, 1999, compared to the same period in 1998. For the first nine months of 1999, employment expenses increased $33.9 million, or 28.2%, compared to the same period in 1998. The change in employment expenses consists of increases of $17.1 million and $46.7 million for the three months and nine months ending September 30, 1999, respectively, associated with the growth in the number of employees, normal salary increases and related benefits. This change was offset by $2.7 million and $12.8 million invested in software development costs and contract acquisition costs for the three months and nine months ending September 30, 1999, respectively. - 16 - Results of Operations (continued) The majority of the software development costs were related to the development of a commercial card system for TS2 which began in May 1998 and is expected to be substantially completed early in 2000. The average number of employees in the third quarter of 1999 increased to 4,081, an 18.8% increase over the 3,434 in the same period of 1998. For the first nine months of 1999, the average number of employees was 3,938, a 17.2% increase over the first nine months of 1998. At October 31, 1999, TSYS had 4,037 full-time and 213 part-time employees. Effective January 1, 1999, TSYS acquired PCS from its majority shareholder, CB&T. As a result of the acquisition, approximately 330 employees were added to TSYS Total Solutions, Inc. Employment expenses related to PCS in the three months and nine months ended September 30, 1999, were $3.5 million and $8.7 million, respectively. Net occupancy and equipment expense increased 48.4% and 42.7% for the three months and nine months ended September 30, 1999, respectively, over the same periods in 1998. Computer equipment and software rentals, which represent the largest component of net occupancy and equipment expense, increased 57.6% to $21.4 million in the third quarter of 1999, compared to $13.6 million in the same period of 1998. During the first nine months of 1999, equipment and software rentals increased 48.7% to $57.8 million compared to $38.9 million in the same period in 1998. Due to rapidly changing technology in computer equipment, TSYS' equipment needs are achieved primarily through operating leases. During 1998 and the first nine months of 1999, the Company made significant investments in computer software licenses and hardware related to the new East Center data center and to accommodate increased volumes due to the expected growth in the number of accounts associated with new customers. During the third quarter of 1999, TSYS officially opened the first phase of its Riverfront Campus, and essentially completed moving the majority of its downtown employees to the facility. TSYS continued to incur expenses related to the vacated facilities in the third quarter of 1999 as it transitioned the employees in various stages while avoiding any disruption of service. TSYS did not renew several leases at the end of September, sold one of its vacated buildings and committed to sell another. Other operating expenses increased 56.2% and 40.2% for the three months and nine months ended September 30, 1999, respectively, compared to the same periods in 1998. The growth in other operating expenses for 1999 is primarily due to increased business development costs associated with exploring new business opportunities, both domestically and internationally; the establishment of a new international office in London, and increased amortization of contract acquisition costs. The conversions of Sears, Royal Bank and CTAL, begun in March 1999 and completed early in the second quarter, contributed to the increase in amortization of contract acquisition costs. Other operating expenses of PCS in the three and nine months ending September 30, 1999, represent another factor contributing to this increase as the financial statements for the same periods in 1998 do not include PCS' results of operations. TSYS' share of income from its equity in joint ventures was $3.3 million and $3.9 million for the third quarters of 1999 and 1998, respectively. For the nine months ended September 30, - 17 - Results of Operations (continued) 1999 and 1998, the Company's equity in income of its joint ventures was $8.4 million and $8.7 million, respectively. The decrease is the result of infrastructure costs impacting the operating results of Vital Processing Services, L.L.C. (Vital) and a decline 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 expense of $5,700 and $7,300 and interest income of $572,200 and $450,000 for the third quarters of 1999 and 1998, respectively. For the nine months ended September 30, 1999 and 1998, respectively, interest expense was $19,700 and $22,300, and interest income was $1.4 million and $2.0 million. The decrease in interest income for the nine months ending September 30, 1999, as compared to the same period in 1998, was primarily the result of lower levels of cash available for investment. The increase in interest income for the third quarter of 1999, as compared to the same quarter in 1998, is the result of improved levels of cash available as a result of decreased outlays related to the purchase of equipment and software additions. Operating income increased 7.9% and 33.1% for the three months and nine months ended September 30, 1999, respectively, over the same periods in 1998. The increase for the nine month period is primarily due to growth in revenues combined with improved expense control and the operating results of PCS. The quarterly increase in operating income was adversely affected by the double occupancy expense incurred with the move to the new Campus facility. During the third quarter of 1999, PCS contributed $1.7 million in operating income. For the nine months ended September 30, 1999, PCS' operating income was approximately $4.8 million, which included a $1.4 million early termination fee recognized in the first quarter of 1999. Excluding PCS, TSYS' operating income would have increased 0.5% to $22.2 million during the third quarter of 1999, compared to $22.1 million for the same period last year. For the nine months ending September 30, 1999, operating income, excluding PCS, would have increased 24.2% to $66.0 million, compared to $53.2 million for the nine months ended September 30, 1998. Net income for the three months ended September 30, 1999, increased 11.6% to $16.9 million, or basic and diluted earnings per share of $.09, compared to $15.2 million, or basic and diluted earnings per share of $.08, for the same period in 1998. Net income for the first nine months of 1999 increased 30.3% to $48.3 million, up from $37.1 million for the same period last year. Basic and diluted earnings per share for the first nine months of 1999 increased to $.25, up from $.19 for the same period of 1998. The Company expects its 1999 net income to exceed its 1998 net income by at least 23 percent. The Company also expects its 2000 net income to exceed 1999 projected net income by at least 13-15 percent. TSYS' effective income tax rate for the third quarter of 1999 was 33.6%, compared to 32.8% for the same period in 1998. For the nine months ended September 30, 1999, the effective income tax rate was 33.7%, compared to 32.8% for the same period in 1998. Growth in pretax income at rates greater than the growth in federal and state tax credits is the cause for the increase in the Company's effective tax rate. - 18 - 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 1999 was $81.9 million, compared to $50.6 million in the same period of 1998. 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 1999, TSYS purchased property and equipment of $4.6 million for total purchases of $13.0 million for the first nine months of 1999, compared to $24.6 million for the same period in 1998. Additions to computer software during the third quarter were $12.4 million, bringing the total additions for 1999 to $42.5 million, compared to $24.5 million for the same period in 1998. Of the $12.4 million computer software additions made during the third quarter, $9.9 million was for purchased software and $2.5 million was for internally developed software, bringing the totals for the first nine months of 1999 to $32.7 million for purchased software and $9.8 million for internally developed software, compared to $18.2 million and $6.3 million, respectively, in the same period of 1998. Also, in the third quarter of 1999, $1.0 million was invested in contract acquisition costs for a total of $3.8 million invested in 1999, compared to $16.3 million in 1998. Dividends on common stock of $1.9 million were paid in the third quarter of 1999, bringing the total amount of dividends paid year to date to $5.8 million, compared to $4.9 million in 1998. 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. In 1997, construction was begun on a campus-type facility which now serves as the Company's corporate headquarters. The Company entered into an operating lease agreement relating to the new corporate campus. Under the agreement, the lessor purchased the land, paid for construction and development costs and leased the property to the Company. The lease provides for a substantial residual value guarantee, up to $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. During the third quarter of 1999, TSYS officially opened the first phase of its Riverfront Campus and essentially completed moving the majority of its downtown employees to the facility. TSYS continued to incur expenses related to the vacated facilities in the third quarter of - 19 - Liquidity and Capital Resources (continued) 1999 as it transitioned the employees in various stages while avoiding any disruption of service. TSYS did not renew several leases at the end of September, and sold two of its vacated buildings. The sale of the Annex building closed in September 1999. The commitment to sell the Depot occurred in the third quarter of 1999, but did not close until October 1999. The Company expects the increase in occupancy and equipment expense related to occupying the campus to be approximately $5.3 million in 1999, net of the relinquished lease obligations. In October 1999, Synovus Financial Corp. announced the completion of 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 will be marketed under the name TSYS Total Debt Management, Inc. through the Company and its wholly-owned subsidiary TSI, for which TSI will be compensated by Synovus Financial Corp. through a management fee, beginning in January 2000. Although the impact of inflation on its operations cannot be precisely determined, the Company believes that by controlling its operating expenses and by taking advantage of more efficient computer hardware and software, it can minimize the impact of inflation. TSYS may seek additional external sources of capital in the future. The form of any such financing will vary depending upon prevailing market and other conditions and may include short-term or long-term borrowings from financial institutions or the issuance of additional equity and/or debt securities such as industrial revenue bonds. However, there can be no assurance that funds will be available on terms acceptable to TSYS. Management expects that TSYS will continue to be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future, as evidenced by TSYS' current ratio of 2.0:1. At September 30, 1999, TSYS had working capital of $85.4 million compared to $60.5 million at December 31, 1998. Year 2000 Readiness Disclosure 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 customers, 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. TSYS has organized its Y2K remediation efforts into five phases: Awareness, Assessment, Renovation, Validation and Implementation. The first phase of TSYS' Year 2000 - 20 - Year 2000 Readiness Disclosure (continued) effort was Awareness, which included promoting the efforts and progress of the TSYS Y2K Project Office through numerous mediums to reach the widest possible audience. As of December 31, 1998, TSYS had completed the Awareness phase of the Year 2000 project. The second phase of TSYS' Year 2000 Project was Assessment which included performing a system wide scan of millions of lines of code to determine which lines of code were date impacted. As of December 31, 1998, TSYS had completed the Assessment phase of the Year 2000 project. The lines of code identified as noncompliant were earmarked for renovation. A plan for compliance, which included methodology, milestones and a timeline for verification, was placed into action. TSYS also assessed the Year 2000 readiness of its 70 vendors who provide mission critical systems. As of September 1999, all 203 products for these 70 vendors have been verified as Y2K compliant in TSYS' test region. The third phase of the Y2K Project was Renovation which included implementing code changes to all noncompliant systems. During 1998, two major renovation milestones were met. The first milestone, 100% of all critical code converted, was achieved in April 1998. The second, 100% of all noncritical code renovated, was completed in July 1998. As units were renovated they were returned to production, and, as of December 31, 1998, the Company was fully operating on Y2K compliant systems. During the Renovation phase, TSYS established a stand-alone testing environment in which code changes could be verified. The fourth phase of the Year 2000 Project was Validation which included setting up a test environment, testing core system functionality and providing test results to clients. It was during this phase that Turn of the Century, Monthly Cycling, Leap Year and Millennium Year, Month and Quarter End dates were tested. This phase concluded during October 1998, and results were sent to customers in November and December 1998. The final phase of the Y2K Project was Implementation which allowed clients the opportunity to test their specific code within a Y2K environment. During this phase, four test cycles (Turn of the Century, Monthly Cycling, Leap Year and Millennium Year, Month and Quarter End) were repeated during the three test iterations. The Implementation phase of the Year 2000 Project began in October 1998. As of September 30, 1999, all three client test iterations were completed. A significant aspect of the Year 2000 Project is Contingency Planning which is the process to ensure that TSYS can continue operations in the event that information technology systems, noninformation technology systems, or vendors are not Year 2000 compliant. In June 1999, TSYS completed its Business Resumption Contingency Plan, or Y2K Day Plan, which is based on the TSYS Disaster Recovery Plan. The plan was developed as an intranet database which, when printed, consists of over 3,600 pages. This plan sets forth processes and procedures to follow in case the Company experiences a problem with processing Year 2000 data or if mission-critical service providers suffer disruption. The plan was validated by a walk-through and a role play during June 1999. An abbreviated version of the plan was shared with clients in - 21 - Year 2000 Readiness Disclosure (continued) July 1999. A client forum to discuss the Y2K Day Plan was conducted in August 1999. The plan includes the following: TSYS programming staff will be on site 24 hours a day from December 31, 1999, to January 5, 2000, to immediately remediate any coding issues encountered. The Year 2000 Command Center will act as the nerve center during the century changeover, monitoring the processing status of over 88 business areas through 13 command posts, conveying management decisions, and deploying resources where required. If a power loss is experienced for any reason at our Data Centers which house mainframe and associated hardware, all our critical systems would be powered through battery backup and diesel generators without experiencing any downtime. This process, referred to as our Uninterrupted Power Supply system, has enough fuel for 72 hours. The Company has contracts with two separate fuel distributors to ensure that our operations could continue indefinitely. The fuel companies have backup generators to keep their fuel pumps operational in case of a power failure. TSYS has service agreements with IBM's Global Services to provide, through its business unit, Business Recovery Services, hot-site assistance and equipment for data center and network recovery in case of a natural or man-made disaster. Also, TSYS has contracts with other companies to receive immediate service and/or top priority service in an emergency situation. Additionally, vendor technicians for key equipment will be on site for the period of December 31, 1999, through January 3, 2000. Management believes that the most likely Y2K risks relate to third parties with which it has material relationships. A failure or disruption of (i) the Company's mission-critical computer systems caused by third-party hardware/software, (ii) third-party service/network/gateway providers, or (iii) significant clients for an extended period, could adversely affect the financial condition and results of operations of the Company. TSYS' Year 2000 Project Office has reviewed compliance and tested with the Company's top 11 customers defined by number of accounts on file and/or by revenues generated and found them to be Y2K ready. Management believes its internal review indicates that the Company's mission-critical systems are Y2K ready; however, failure of a mission critical third-party provider could have a material adverse effect on the Company's business, operations and financial results. However, based on currently available information, while management anticipates there could be isolated and intermittent disruptions of various services and interfaces at its business sites related to third parties with which it has material Year 2000 relationships, there is no expectation of extensive or protracted systemic failures that would have a material adverse effect on the financial condition or results of operations of the Company. TSYS currently estimates the total cost for the Year 2000 Project will amount to approximately $18 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. - 22 - Year 2000 Readiness Disclosure (continued) During the third quarter of 1999, TSYS incurred $1.3 million of direct costs associated with the Year 2000 Project and has incurred $14.0 million since project inception. Safe Harbor For Year 2000 Forward-Looking Statements All forward-looking statements regarding Y2K readiness, including estimates, forecasts and expectations, are inherently uncertain as they are based on various expectations and assumptions concerning future events and are subject to numerous risks and uncertainties which could cause actual events or results to differ materially from those projected. Important factors upon which the Company's Y2K forward-looking statements are premised include: (a) retention of employees and contractors working on Y2K projects; (b) customers' remediation of their internal systems to be Y2K ready and their cooperation in timely testing; (c) no material disruption of telecommunication, data transmission networks, payment networks, government services, utilities or other infrastructure services and no unexpected failure of third-party products; (d) no unexpected failures by third-parties providing services to the Company; (e) no undiscovered subversion of systems or program code affecting the Company's systems; and (f) no undiscovered material flaws in the Company's test processes. 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. 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. This lawsuit seeks unspecified damages. This litigation is in its initial phases, and, though settlement negotiations have occurred, these negotiations have to date been unproductive. TSYS is not in a position to determine its possible exposure, if any, as a result of the litigation. 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 - 23 - Forward-Looking Statements (continued) 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; (vii) acquisitions; (viii) the ability to increase market share and control expenses; (ix) changes in laws, regulations, credit card association rules or other industry standards affecting TSYS' business which require significant product redevelopment efforts; (x) the effect of changes in accounting policies and practices as may be adopted by the Financial Accounting Standards Board or the Securities and Exchange Commission; (xi) changes in TSYS' organization, compensation and benefit plans; (xii) the costs and effects of litigation and of unexpected or adverse outcomes in such litigation; (xiii) failure to successfully implement the Company's Year 2000 modification plans substantially as scheduled and budgeted; (xiv) lower than anticipated internal growth rates for existing customers; and (xv) the success of TSYS at managing the risks involved in the foregoing. Such forward-looking statements speak only as of the date on which statements are made, and TSYS undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. - 24 - TOTAL SYSTEM SERVICES, INC. Part II - Other Information Item 6 - Exhibits and Reports on Form 8-K a) Exhibits (27) - Financial Data Schedule (for SEC use only) b) Forms 8-K filed since June 30, 1999. 1. The report dated September 30, 1999, included the following two important events: On September 29, 1999, Total System Services, Inc. ("Registrant") announced a ten-year agreement with Bank of America to continue processing its credit card portfolio until 2009. The new agreement extends the existing agreement by two years and includes the card portfolios of Bank of America and NationsBank which merged in 1998. On September 30, 1999, Registrant announced that it expects its 1999 net income to exceed its 1998 net income by at least 23 percent and that it expects its 2000 net income to exceed its 1999 projected net income by at least 13-15 percent. 2. The report dated October 4, 1999, included the following important event: On October 4, 1999, Total System Services, Inc. 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. - 25 - TOTAL SYSTEM SERVICES, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TOTAL SYSTEM SERVICES, INC. Date: November 12, 1999 by: /s/ Richard W. Ussery -------------------------- Richard W. Ussery Chairman of the Board and Chief Executive Officer Date: November 12, 1999 by: /s/ James B. Lipham -------------------------- James B. Lipham Chief Financial Officer - 26 - EX-27 2 ARTICLE 5 FINANCIAL DATA SCHEDULE FOR 3RD QTR 10-Q
5 0000721683 TOTAL SYSTEM SERVICES, INC. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 35,423,729 0 112,930,489 1,275,030 0 173,549,995 174,544,176 80,986,113 428,509,306 88,144,439 0 0 0 19,507,909 296,664,486 428,509,306 390,130,232 390,130,232 0 327,817,408 0 0 0 72,845,755 24,527,605 48,318,150 0 0 0 48,318,150 .25 .25
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