SELECTED FINANCIAL DATA
The following comparisons highlight significant historical trends in TSYS'
results of operations and financial condition. Total revenues and net income
have grown over the last five years at compounded annual growth rates of 23.3%
and 25.0%, respectively. The balance sheet data also reflect the continued
strong financial position of TSYS, as evidenced by the current ratio of 1.7:1 at
December 31, 1999, and increased shareholders' equity. The following financial
data should be read in conjunction with the Consolidated Financial Statements
and related Notes thereto and Financial Review, included elsewhere in this
Annual Report.
- -------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------
(in thousands except per share data) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Revenues:
Bankcard data processing services $456,840 350,310 324,718 277,870 218,953
Other services 77,086 45,884 36,781 33,778 30,755
- -------------------------------------------------------------------------------------------------------------------------------
Total revenues 533,926 396,194 361,499 311,648 249,708
- -------------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 207,618 160,855 147,438 124,259 94,946
Net occupancy and equipment expense 151,964 105,658 94,685 82,118 64,549
Other operating expenses 86,052 63,312 59,447 53,368 47,291
- -------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 445,634 329,825 301,570 259,745 206,786
- -------------------------------------------------------------------------------------------------------------------------------
Equity in income of joint ventures 12,327 12,974 9,347 7,094 69
- -------------------------------------------------------------------------------------------------------------------------------
Operating income 100,619 79,343 69,276 58,997 42,991
- -------------------------------------------------------------------------------------------------------------------------------
Nonoperating income:
Gain (loss) on disposal of property and equipment, net 798 (48) (36) 31 (123)
Interest income, net of expense 2,159 2,492 2,315 1,416 839
- -------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income 2,957 2,444 2,279 1,447 716
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 103,576 81,787 71,555 60,444 43,707
Income taxes 34,983 26,956 24,077 21,007 15,977
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 68,593 54,831 47,478 39,437 27,730
- -------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .35 .28 .24 .20 .14
- -------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .35 .28 .24 .20 .14
- -------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ .040 .038 .030 .030 .030
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 194,913 194,020 193,956 193,931 193,895
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 195,479 194,669 194,239 194,177 194,123
- -------------------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Total assets $457,350 348,908 296,858 245,759 199,000
Working capital 76,414 60,472 70,899 52,274 37,687
Total long-term debt 204 342 475 676 931
Shareholders' equity 334,292 270,354 221,255 178,878 144,472
19
FINANCIAL REVIEW
This Financial Review provides a discussion of the results of operations,
financial condition, liquidity and capital resources of TSYS and creates
awareness of the factors that have affected its recent earnings, as well as
those factors that may affect its future earnings. The accompanying Consolidated
Financial Statements and related Notes and Selected Financial Data are an
integral part of this Financial Review and should be read in conjunction with
it.
BANKCARD
REVENUES
(MILLIONS OF DOLLARS)
95 $219.0
96 $277.9
97 $324.7
98 $350.3
99 $456.8
[GRAPH OMITTED]
RESULTS OF OPERATIONS
Revenues
TSYS' revenues are derived from providing bankcard data processing and related
services to banks and other institutions generally under long-term processing
contracts. TSYS' services are provided through the Company's cardholder systems,
TS2 and TS1, to financial institutions and other organizations throughout the
United States, Mexico, Canada, Honduras and the Caribbean.
Bankcard data processing revenues are generated primarily from charges
based on the number of accounts billed, transactions and authorizations
processed, statements mailed, credit bureau requests, credit cards embossed and
mailed, and other processing services for cardholder accounts on file.
Cardholder accounts on file include active and inactive bank, retail, debit,
stored value and commercial card accounts. Due to the expanding use of cards and
the increase in the number of cardholder accounts processed by TSYS, as well as
increases in the scope of services offered to customers, revenues relating to
bankcard data processing services have continued to grow. Processing contracts
with large customers, representing a significant portion of the Company's total
revenues, generally provide for discounts on certain services based on the size
and activity of customers' portfolios. Therefore, bankcard data processing
revenues and the related margins are influenced by the customer mix relative to
the size of customer card portfolios, as well as the number and activity of
individual cardholder accounts processed for each customer.
Due to the seasonal nature of the credit card industry, TSYS' revenues
and results of operations have generally increased in the fourth quarter of each
year because of increased transaction and authorization volumes during the
traditional holiday shopping season. Furthermore, growth in card portfolios of
existing customers, the conversion of cardholder accounts of new customers to
THE TOTAL SYSTEM, and the loss of cardholder accounts impact the results of
operations from period to period. Another factor, among others, which may affect
TSYS' revenues and results of operations from time to time is the sale by a
customer of its business, its card portfolio or a segment of its accounts to a
party which processes cardholder accounts internally or uses another third-party
processor. Consolidation in the financial services industry could favorably or
unfavorably impact TSYS' financial condition and results of operations in the
future.
The average number of cardholder accounts on file increased 78.4% to
180.4 million in 1999, compared to 101.1 million in 1998, which represented a
15.9% increase over 87.2 million in 1997. At December 31, 1999, TSYS' cardholder
accounts on file were approximately 206.2 million, up from 117.6 million and
92.8 million at December 31, 1998 and 1997, respectively. The increase in
cardholder accounts on file at December 31, 1999, as compared to December 31,
1998, included net internal growth of existing customers of approximately 7.8
million accounts, and approximately 80.8 million accounts added during 1999 were
due to new customers and portfolio acquisitions by existing customers.
TSYS had approximately 147.2 million accounts being processed on TS2 at
year-end 1999, compared to 62.8 million at year-end 1998 and 19.2 million at
year-end 1997. The increase in accounts being processed on TS2 during 1999 is
the result of converting approximately 79.0 million new accounts and net
internal growth of existing customers of approximately 5.4 million accounts.
TSYS and Visa U.S.A. Inc. formed a joint venture, known as Vital
Processing Services L.L.C. (Vital), which offers fully integrated merchant
transaction and related electronic information services to financial and
nonfinancial institutions and their merchant customers. Vital is structured with
its own management team and separate board of directors and has its corporate
headquarters in Tempe, Arizona.
Since 1994, TSYS has been providing processing services for commercial
cards which include purchasing cards, corporate cards and fleet cards for
employees. At December 31, 1999, TSYS was processing approximately 10.8 million
commercial card accounts, a 26.0% increase over the approximately 8.6 million
being processed at year-end 1998, a 72.8% increase over the 5.0 million at
year-end 1997. The increase in 1998 over 1997 is attributable to the addition of
the U.S. General Services Administration's contracts for commercial card
services.
As a result of the completion of the conversions of the account
portfolios for Sears and Nordstrom, TSYS became the leading third-party
processor of retail accounts. At December 31, 1999, TSYS was processing
approximately 88.7 million retail card accounts, a 527.8% increase over the
approximately 14.1 million being processed at year-end 1998, a 120.0% increase
over the 6.4 million at year-end 1997. On a per account basis, the processing
revenues generated by retail accounts are generally lower than the processing
revenues associated with bankcard accounts. However, TSYS realizes profit
20
margins from retail accounts similar to those it generates from bankcard
accounts.
A significant amount of the Company's revenues is derived from
long-term contracts with large customers, including certain major customers. Two
of the Company's customers, NationsBank and Bank of America, merged effective
September 30, 1998. The new parent company of these entities is Bank of America
Corporation. In September 1999, TSYS announced a new ten-year agreement with the
combined entity to continue processing its credit card portfolio until 2009. The
combination of NationsBank and Bank of America under a single processing
agreement with TSYS reduced TSYS' revenues in 1999 and will reduce the Company's
revenues in 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. Bank of America accounted for approximately 16%, 21% and
20% of total revenues for the years ended December 31, 1999, 1998 and 1997,
respectively. The loss of Bank of America, or any other major or 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 completed the sale of
Universal Card Services (UCS) to CITIBANK, a part of Citigroup. CITIBANK
accounted for approximately 13%, 13% and 15% of total revenues for the years
ended December 31, 1999, 1998 and 1997, respectively. 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. Consumer credit card accounts represented 66.6% of CITIBANK's
revenues to TSYS for the year ended December 31, 1999. TSYS' management believes
that CITIBANK will not be a major customer for the year 2000 and that the loss
of revenues from CITIBANK for the months of August through December 2000,
combined with decreased expenses from the reduction in hardware and software
costs and the redeployment of personnel, should not have a material adverse
effect on the Company's financial condition or results of operations for the
year ending December 31, 2000.
In May 1998, the Company announced the signing of a long-term
processing agreement with Sears, Roebuck and Co. to convert and process its 65
million retail accounts. TSYS successfully converted the first 7.2 million of
these accounts to TS2 in October 1998 and completed the conversion in May 1999.
In January 2000, the Company announced a one-year extension of its long-term
retail processing agreement with Sears until 2010.
Revenues from other services consist primarily of revenues generated by
TSYS' wholly owned subsidiaries, Columbus Depot Equipment Company (CDEC), TSYS
Total Solutions, Inc. (TSI), and Columbus Productions, Inc. (CPI). CDEC provides
TSYS customers with an option to lease certain equipment necessary for online
communications and for the use of TSYS applications. TSI provides TSYS customers
and others with mail and correspondence processing services, teleservicing, data
documentation capabilities, offset printing, customer service, collections and
account solicitation services. CPI provides full-service commercial printing
services to TSYS customers and others.
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. The business of PCS has become part of
TSYS' wholly owned subsidiary, TSI. During 1999, PCS generated revenues of
approximately $26.8 million.
OPERATING
INCOME
(MILLIONS OF DOLLARS)
95 $ 43.0
96 $ 59.0
97 $ 69.3
98 $ 79.3
99 $100.6
[GRAPH OMITTED]
OPERATING EXPENSES
As a percentage of revenues, operating expenses increased in 1999 to 83.5%,
compared to 83.2% and 83.4% for 1998 and 1997, respectively. Operating expenses
were $445.6 million in 1999, compared to $329.8 million in 1998 and $301.6
million in 1997. The principal increases in operating expenses in 1999 as
compared to 1998 resulted from the addition of personnel; the additional
investment in property, equipment and software; the development of global
business--including the establishment of a physical presence in the United
Kingdom; the cost of materials associated with the services provided by all
companies, particularly the supplies related to processing the increased number
of accounts; and certain costs associated with ongoing enhancements to TS2, as
well as certain costs associated with the conversion of customers to TS2.
Salaries and other personnel expense increased 29.1% in 1999 over 1998,
compared to 9.1% in 1998 over 1997. A significant portion of TSYS' operating
expenses relates to salaries and other personnel costs. During 1999, the average
number of employees increased to 4,106, compared to 3,382 in 1998 and 2,895 in
1997. The change in total employment costs consists of increases of $61.7
million, $32.8 million and $27.6 million in 1999, 1998 and 1997, respectively.
The increase in total employment costs are associated with the growth in the
number of employees--including those attributable to the acquisition of PCS,
salary increases and related employee benefits. These changes were reduced by
$14.9 million, $19.4 million and $4.4 million in 1999, 1998 and 1997,
respectively, invested in software development costs and contract acquisition
costs.
21
The following table sets forth certain revenue and expense items as a
percentage of total revenues and the percentage increase or decrease in those
items from the table of Selected Financial Data presented on page 19:
- ---------------------------------------------------------------------------------------------------------------------------
Percentage Change
in Dollar Amounts
Percentage of Total Revenues --------------------
Years Ended December 31, 1999 1998
-------------------------------- vs vs
1999 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services 85.6% 88.4 89.8 30.4 7.9
Other services 14.4 11.6 10.2 68.0 24.7
- ------------------------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0 34.8 9.6
- ------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 38.9 40.6 40.8 29.1 9.1
Net occupancy and equipment expense 28.5 26.7 26.2 43.8 11.6
Other operating expenses 16.1 15.9 16.4 35.9 6.5
- ------------------------------------------------------------------------------------------------
Total operating expenses 83.5 83.2 83.4 35.1 9.4
- ------------------------------------------------------------------------------------------------
Equity in income of joint ventures 2.3 3.2 2.6 (5.0) 38.8
- ------------------------------------------------------------------------------------------------
Operating income 18.8 20.0 19.2 26.8 14.5
- ------------------------------------------------------------------------------------------------
Nonoperating income:
Gain (loss) on disposal of property and equipment, net 0.2 (0.0) (0.0) nm nm
Interest income, net of expense 0.4 0.6 0.6 (13.4) 7.7
- ------------------------------------------------------------------------------------------------
Total nonoperating income 0.6 0.6 0.6 21.0 7.2
- ------------------------------------------------------------------------------------------------
Income before income taxes 19.4 20.6 19.8 26.6 14.3
Income taxes 6.6 6.8 6.7 29.8 12.0
- ------------------------------------------------------------------------------------------------
Net income 12.8% 13.8 13.1 25.1 15.5
- ------------------------------------------------------------------------------------------------
nm = not meaningful
Due to the importance of technology to its business, a large portion of
TSYS' employees are programmers--approximately 22.7% in 1999, compared to 26.0%
and 31.1% in 1998 and 1997, respectively. The decrease in the percentage of
programmers in 1999 is primarily the result of the increased number of
nonprogramming personnel attributable to the PCS acquisition. Although TSYS has
not experienced any difficulty in recruiting programming personnel, there can be
no assurance that TSYS will be able to continue to recruit, hire and retain
sufficient numbers of technical personnel necessary to support its continued
growth.
The Company participates in the state of Georgia's incentive program
called Intellectual Capital Partnership Program (ICAPP). ICAPP is a commitment
by the state of Georgia for classrooms, teachers, computer equipment and
high-tech training designed to meet Georgia businesses' needs for technical
analysts, computer systems personnel and mainframe programmers. As of December
31, 1999, approximately 641 graduates of these classes had become full-time
employees of TSYS. The Company plans to continue to utilize ICAPP in the future
to fulfill programming positions.
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 21 programmers who are providing
support and assistance with the conversion of card portfolios to TS2.
Net occupancy and equipment expense increased 43.8% in 1999 over 1998,
compared to 11.6% in 1998 over 1997. Computer equipment and software rentals,
which represent the largest component of net occupancy and equipment expense,
increased $27.5 million, or 51.5%, in 1999 compared to 1998, and $3.1 million,
or 6.2%, in 1998 compared to 1997. Due to rapidly changing technology in
computer equipment and software, TSYS' equipment needs and software needs are
achieved primarily through operating leases. During 1999 and the last half of
1998, the Company made significant investments in computer software licenses
related to the new East Center data center to accommodate increased volumes and
expected growth in the number of accounts associated with new and existing
customers.
22
TSYS continues to monitor and assess its building and equipment needs
as it positions itself for future growth and expansion. In 1997, construction
began on a campus-type facility which now serves as the Company's corporate
headquarters and houses administrative, client contact and programming team
members. The Company has entered into an operating lease agreement relating to
the new corporate campus. Under the agreement, the lessor has purchased the
properties, paid the construction and development costs and leased the
facilities to the Company. The lease provides for substantial residual value
guarantees 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 the obligations of the Company. The Company began moving
personnel into the new campus facility in December 1998, and had completed the
move of a substantial number of its personnel to this facility at the end of the
third quarter of 1999. With the move to the corporate campus, the Company did
not renew leases on certain facilities. The increase in net occupancy and
equipment expenses related to occupying the campus was $6.4 million in 1999, and
is expected to be $7.6 million in 2000, net of the relinquished lease
obligations.
In addition, TSYS began an expansion of its operations center in north
Columbus during 1997, which was completed in 1998. The Company moved its card
production services from downtown Columbus into the new addition in December
1998. A separate building was completed on the North Center property in 1997 to
serve as TSI's headquarters.
In 1998, TSYS also purchased 18 acres of land containing a 104,000
square-foot building in east Columbus. The building was prepared as an
additional data center (East Center) and placed in service during the fourth
quarter of 1998.
Other operating expenses increased 35.9% in 1999 compared to 1998 and
6.5% in 1998 compared to 1997. The increase in the growth rate of other
operating expenses in 1999 is primarily due to amortization of increased
contract acquisition costs which were $12.3 million, $6.9 million and $4.4
million in 1999, 1998 and 1997, respectively; increased transaction processing
provisions; increased travel and other business development costs associated
with exploring both domestic and international business opportunities, including
the establishment of an international office in the United Kingdom.
OPERATING INCOME
Operating income increased 26.8% to $100.6 million in 1999, compared to $79.3
million in 1998, an increase of 14.5% over 1997 operating income of $69.3
million. Excluding equity in income of joint ventures, operating income
increased 33.0% to $88.3 million, compared to $66.4 million in 1998, and
increased 10.7% over the amount for 1997 of $59.9 million. The operating income
margin decreased to 18.8% in 1999, compared to 20.0% and 19.2% in 1998 and 1997,
respectively. The decrease in the operating margin was a result of operating
expenses increasing at a faster rate than revenues in 1999.
NONOPERATING INCOME
Nonoperating income increased in 1999 over 1998 due to the gain on the sale of
two of the Company's buildings related to the Company's move to the new
corporate campus. Interest income for 1999 was $2.2 million, a 13.0% decrease
compared to the $2.5 million in 1998, a 6.8% increase compared to $2.4 million
in 1997. Interest expense was $36,000, a 22.7% increase over the $29,000 in
1998, a 36.4% decrease compared to $46,000 in 1997. The variation in interest
income is attributable to the fluctuations in the cash available for investment.
INCOME TAXES
Income tax expense was $35.0 million, $27.0 million and $24.1 million in 1999,
1998 and 1997, respectively, representing effective income tax rates of 33.8%,
33.0% and 33.6%, respectively. The change in TSYS' effective income tax rate for
1999, as compared to 1998 and 1997, is attributable to certain state tax credits
and the establishment of a valuation allowance relating to those credits.
NET INCOME
Net income increased 25.1% to $68.6 million (basic and diluted earnings per
share of $.35) in 1999 compared to 1998. In 1998, net income increased 15.5% to
$54.8 million (basic and diluted earnings per share of $.28) compared to $47.5
million (basic and diluted earnings per share of $.24) in 1997. The increase in
net income is attributable to increased operating revenues.
FINANCIAL CONDITION, LIQUIDITY
AND CAPITAL RESOURCES
The Consolidated Statements of Cash Flows show the Company's cash flows from
operating, investing and financing activities. TSYS' primary methods for funding
its operations and growth has been cash flows generated from operations, lease
financing and the occasional use of borrowed funds to supplement financing of
capital expenditures. TSYS' net cash provided by operating activities in 1999
was $134.5 million, compared to $62.9 million in 1998 and $65.1 million in 1997.
The major uses of cash flows provided by operations have been the internal
development and purchase of computer software; the addition of property and
equipment, primarily computer equipment; investments in contract acquisition
costs associated with obtaining and serving new customers; and the payment of
cash dividends.
Capital expenditures for property and equipment were $19.8 million in
1999, compared to $37.0 million in 1998 and $18.0 million in 1997. Expenditures
for purchased computer software were $42.3 million in 1999, compared to $29.5
million in 1998 and $14.1 million in 1997. Additions to capitalized software
development costs, principally enhancements to TS2, were $11.9 million in 1999,
$10.0 million in 1998 and $997,000 in 1997. During 1998, TSYS purchased and
leased computer hardware and related equipment, including software, to establish
the East Center data center and to accommodate future growth.
23
The Company's investments in contract acquisition costs were $15.8
million in 1999, $20.1 million in 1998 and $17.6 million in 1997. These amounts
include cash payments for processing rights and other direct salary related
costs incurred in the connection with contracts.
At December 31, 1999, TSYS' carrying value in its investment in TSYS de
Mexico was $7.5 million. During the years ended December 31, 1998 and 1997, due
to Mexico's highly inflationary economy, TSYS expensed all currency translation
adjustments. The Mexican economy was removed from highly inflationary status
effective January 1, 1999. As a result, TSYS reflected currency translation
adjustments in 1999 as an adjustment to the Company's equity investment in TSYS
de Mexico and in accumulated other comprehensive income. The Company had a
currency translation adjustment of $425,000 related to TSYS de Mexico in 1999.
On January 1, 1999, TSYS acquired Partnership Card Services from its
majority shareholder, CB&T, the flagship bank of Synovus Financial Corp., in
exchange for 854,042 newly issued shares of TSYS common stock. 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. PCS has become
part of TSYS' wholly owned subsidiary, TSI. This transaction increased CB&T's
ownership of TSYS to 80.8%.
In October 1999, the Company announced a plan to purchase up to 1.5
million shares of its common stock from time to time and at various prices over
the next two years. Through December 31, 1999, the Company had purchased 77,100
shares for $1.3 million under this plan. Total dividends declared on TSYS common
stock were $7.8 million in 1999, $7.3 million in 1998 and $5.8 million in 1997.
In April 1998, the Company increased its quarterly dividend by 33.3% to $.01 per
share from $.0075 per share.
In 1997, construction was begun on a campus-type facility which now
serves as the Company's corporate headquarters. The Company entered into an
operating lease agreement relating to the new corporate campus. Under the
agreement, the lessor purchased the land, paid for construction and development
costs and leased the property to the Company. The lease provides for a
substantial residual value guarantee, up to $81.4 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.
In addition, TSYS completed two construction projects in 1998, costing
approximately $25 million--the North Center expansion and the construction of an
additional state-of-the-art data center, the new East Center.
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 economies of scale through utilization of more efficient
computer hardware and software, it can minimize the impact of inflation.
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 1.7:1. At
December 31, 1999, TSYS had working capital of $76.4 million, compared to $60.5
million in 1998 and $70.9 million in 1997.
Management believes that outside sources for capital will be available
to finance expansion projects and possible acquisitions should the Company
decide to pursue such financing. 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.
YEAR 2000 READINESS DISCLOSURE
Many computer programs were written with a two-digit date field. If these
programs were not made Year 2000 compliant, they would not be able to correctly
process date information for the year 2000 and beyond. Remediation efforts went
beyond the Company's internal computer systems and required coordination with
customers, vendors, government entities and other third parties to assure that
their systems and related interfaces were compliant. Failure to achieve timely
remediation of the Company's critical programs and computer systems for Year
2000 would have had a material adverse effect on the Company's financial
condition and results of operations.
TSYS experienced a smooth transition in passing the century date
changeover. TSYS did not experience any significant internal or external issues
concerning Y2K, and all TSYS companies, systems, facilities and clients
processed, and have continued to process, without incident. TSYS will continue
to monitor Y2K issues by overseeing critical tasks during the year 2000. The
TSYS Year 2000 Command Center and Command Posts will remain staffed during the
first quarter of 2000, but on a smaller scale than during 1999. TSYS has
executive and senior management scheduled on a rotating weekly schedule to
handle issues as they arise. Heightened coverage of month-end, leap-year and
quarter-end processing is planned, and TSYS intends to maintain its reporting
methods to evaluate any problems.
TSYS currently estimates the total cost for the Year 2000 Project will
amount to approximately $17 million of direct costs. This amount consists
primarily of the costs associated with personnel dedicated to the Year 2000
Project and hardware/software costs related to testing. During 1999, TSYS
incurred $6.8 million of direct costs associated with the Year 2000 Project and
has incurred $15.8 million since project inception.
24
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.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by TSYS with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of TSYS which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenues, 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, services or conversions; (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; (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 such
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.
LEGAL PROCEEDINGS
In November 1998, a class action complaint was filed against NationsBank of
Delaware, N.A., in the United States District Court for the Southern District of
Mississippi. On March 23, 1999, the named plaintiff amended the complaint and
named the Company and certain credit bureaus as defendants in the case. The
named plaintiff alleges, among other things, that the defendants failed to
report properly the credit standing of each member of the putative class. The
named plaintiff has defined the class as all persons and entities within the
United States who obtained credit cards from NationsBank and whose accounts were
purchased by or transferred to U.S. BankCard and whose accounts were reported to
credit bureaus or credit agencies incorrectly in August 1998. The amended
complaint alleges negligence, violation of the Fair Credit Reporting Act, breach
of the duty of good faith and fair dealing, and seeks declaratory relief,
injunctive relief and the imposition of punitive damages. This lawsuit seeks
unspecified damages. Though settlement negotiations have occurred, these
negotiations have to date not resulted in a definitive settlement agreement
among the parties. TSYS is not in a position to determine its possible exposure,
if any, as a result of the litigation.
25
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------
December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents (includes $54.3 million and $9.4 million
on deposit with a related party at 1999 and 1998, respectively) $ 54,903,107 9,555,760
Accounts receivable, net of allowance for doubtful accounts of
$1.3 million and $711,000 at 1999 and 1998, respectively 99,601,498 84,795,727
Prepaid expenses and other current assets (note 10) 25,171,328 25,370,604
- ----------------------------------------------------------------------------------------------------------
Total current assets 179,675,933 119,722,091
Property and equipment, net (Note 3) 96,254,657 92,619,005
Computer software, net (Note 4) 98,824,792 65,861,735
Other assets (Notes 5 and 10) 82,594,156 70,705,481
- ----------------------------------------------------------------------------------------------------------
Total assets $ 457,349,538 348,908,312
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,267,979 7,403,023
Accrued salaries and employee benefits 36,421,238 24,643,449
Current portion of long-term debt and obligations under
capital leases 44,520 130,781
Other current liabilities (includes $1.9 and $1.7 million
payable to related parties
at 1999 and 1998, respectively) (Note 10) 51,528,099 27,072,542
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 103,261,836 59,249,795
Long-term debt and obligations under capital leases,
excluding current portion 159,766 211,316
Deferred income taxes (Note 7) 19,635,880 19,093,482
- ----------------------------------------------------------------------------------------------------------
Total liabilities 123,057,482 78,554,593
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity (Notes 2 and 6):
Common stock -- $.10 par value. Authorized 300,000,000
shares; 195,079,087 and 194,225,045 issued at 1999 and
1998, respectively; 194,861,620 and 194,043,785 outstanding
at 1999 and 1998, respectively 19,507,909 19,422,504
Additional paid-in capital 6,442,300 1,882,814
Accumulated other comprehensive income (1,453,708) (1,179,337)
Treasury stock (1,529,176) (300,788)
Retained earnings 311,324,731 250,528,526
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 334,292,056 270,353,719
- ----------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Total liabilities and shareholders' equity $ 457,349,538 348,908,312
- ----------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
26
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services (includes $37.1 million, $31.7 million
and $29.2 million from related parties for the years ended
December 31, 1999, 1998 and 1997, respectively) $456,839,589 350,309,833 324,717,864
Other services (includes $5.5 million, $1.5 million
and $1.1 million from related parties for the years ended
December 31, 1999, 1998 and 1997, respectively) 77,086,422 45,884,235 36,781,535
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues (Notes 2 and 11) 533,926,011 396,194,068 361,499,399
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 207,618,319 160,854,929 147,438,458
Net occupancy and equipment expense 151,964,229 105,658,033 94,685,343
Other operating expenses (includes $13.1 million, $10.9 million
and $10.4 million to related parties for the years ended
December 31, 1999, 1998 and 1997, respectively) 86,051,059 63,312,582 59,446,283
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (Note 2) 445,633,607 329,825,544 301,570,084
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in income of joint ventures (Note 5) 12,326,609 12,974,348 9,347,183
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 100,619,013 79,342,872 69,276,498
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense):
Gain (loss) on disposal of property and equipment, net 797,916 (48,470) (35,632)
Interest income, net of expense (includes $1.9 million, $2.3 million
and $2.1 million from a related party for the years ended
December 31, 1999, 1998 and 1997, respectively) 2,159,074 2,492,725 2,315,043
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (Note 2) 2,956,990 2,444,255 2,279,411
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 103,576,003 81,787,127 71,555,909
Income taxes (Note 7) 34,983,027 26,955,984 24,077,437
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 68,592,976 54,831,143 47,478,472
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .35 .28 .24
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .35 .28 .24
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 194,912,983 194,019,689 193,956,373
Increase due to assumed issuance of shares related to stock options outstanding 565,610 649,762 282,183
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares outstanding 195,478,593 194,669,451 194,238,556
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,592,976 54,831,143 47,478,472
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in income of joint ventures (12,326,609) (12,974,348) (9,347,183)
Depreciation and amortization 50,182,601 37,473,673 29,141,073
Provision for doubtful accounts 665,500 18,000 94,000
Deferred income tax expense (benefit) 542,398 5,338,794 (1,546,790)
(Gain) loss on disposal of property and equipment, net (797,916) 48,470 35,632
(Increase) decrease in:
Accounts receivable (15,471,271) (15,362,807) (10,500,389)
Prepaid expenses and other assets (1,953,576) (5,088,094) (1,860,648)
Increase (decrease) in:
Accounts payable 7,864,956 1,002,658 1,711,896
Accrued expenses and other current liabilities 37,228,296 (2,341,598) 9,911,535
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 134,527,355 62,945,891 65,117,598
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (19,772,202) (36,998,466) (18,033,160)
Additions to computer software (54,188,928) (39,502,459) (15,106,064)
Proceeds from disposal of property and equipment 4,540,483 86,669 74,797
Dividends received from joint ventures 5,104,905 5,618,616 3,252,561
Increase in contract acquisition costs (15,812,318) (20,104,849) (17,557,631)
Purchase of short-term investments -- -- (998,228)
Redemption of short-term investments -- 998,228 5,000,000
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (80,128,060) (89,902,261) (43,367,725)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock (1,290,748) -- --
Principal payments on long-term debt and obligations
under capital leases (70,619) (132,415) (201,275)
Dividends paid on common stock (7,787,981) (6,790,492) (5,818,326)
Proceeds from exercise of stock options 97,400 99,115 109,593
- ------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (9,051,948) (6,823,792) (5,910,008)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 45,347,347 (33,780,162) 15,839,865
Cash and cash equivalents at beginning of year 9,555,760 43,335,922 27,496,057
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 54,903,107 9,555,760 43,335,922
- ------------------------------------------------------------------------------------------------------------------
Cash paid for interest (net of capitalized amounts) $ 23,934 29,399 46,691
- ------------------------------------------------------------------------------------------------------------------
Cash paid for income taxes (net of refunds received) $ 24,647,585 27,167,086 22,908,026
- ------------------------------------------------------------------------------------------------------------------
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 (Note 12).
See accompanying Notes to Consolidated Financial Statements.
28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
------------------------------ Paid-in Comprehensive
Shares Amount Capital Income
- ------------------------------------------------------------------------------------------------------------------
At December 31, 1996 194,225,283 $ 19,422,528 324,851 (1,178,182)
Net income -- -- -- --
Common stock issued from
treasury shares for exercise of
stock options (Note 6) -- -- 102,434 --
Amortization of restricted stock awards -- -- -- --
Cash dividends declared ($.030 per share) -- -- -- --
Tax benefit associated with stock awards -- -- 31,788 --
- ------------------------------------------------------------------------------------------------------------------
At December 31, 1997 194,225,283 19,422,528 459,073 (1,178,182)
Comprehensive income:
Net income -- -- -- --
Other comprehensive income (loss),
net of tax:
Foreign currency
translation adjustments -- -- -- (1,155)
- ------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- --
Common stock issued from
treasury shares for exercise of
stock options (Note 6) -- -- 91,292 --
Amortization of restricted stock awards -- -- -- --
Cash paid for fractional shares
in connection with stock split (238) (24) (4,738) --
Cash dividends declared ($.038 per share) -- -- -- --
Tax benefit associated with stock awards -- -- 1,337,187 --
- ------------------------------------------------------------------------------------------------------------------
At December 31, 1998 194,225,045 19,422,504 1,882,814 (1,179,337)
Comprehensive income:
Net income -- -- -- --
Other comprehensive income (loss),
net of tax:
Foreign currency
translation adjustments -- -- -- (274,371)
- ------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- --
Common stock issued
in acquisition (Note 12) 854,042 85,405 3,342,220 --
Common stock issued from
treasury shares for exercise of
stock options (Note 6) -- -- 79,903 --
Purchase of treasury shares -- -- -- --
Cash dividends declared ($.040 per share) -- -- -- --
Tax benefit associated with stock awards -- -- 1,137,363 --
- ------------------------------------------------------------------------------------------------------------------
At December 31, 1999 195,079,087 $ 19,507,909 6,442,300 (1,453,708)
- ------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Total
Treasury Retained Shareholders'
Stock Earnings Equity
- ---------------------------------------------------------------------------------------------------
At December 31, 1996 (473,544) 160,782,094 $ 178,877,747
Net income -- 47,478,472 47,478,472
Common stock issued from
treasury shares for exercise of
stock options (Note 6) 95,843 -- 198,277
Amortization of restricted stock awards -- 487,242 487,242
Cash dividends declared ($.030 per share) -- (5,818,770) (5,818,770)
Tax benefit associated with stock awards -- -- 31,788
- ---------------------------------------------------------------------------------------------------
At December 31, 1997 (377,701) 202,929,038 221,254,756
Comprehensive income:
Net income -- 54,831,143 54,831,143
Other comprehensive income (loss),
net of tax:
Foreign currency
translation adjustments -- -- (1,155)
- ---------------------------------------------------------------------------------------------------
Other comprehensive income (loss) -- -- (1,155)
- ---------------------------------------------------------------------------------------------------
Comprehensive income -- -- 54,829,988
Common stock issued from
treasury shares for exercise of
stock options (Note 6) 76,913 -- 168,205
Amortization of restricted stock awards -- 44,325 44,325
Cash paid for fractional shares
in connection with stock split -- -- (4,762)
Cash dividends declared ($.038 per share) -- (7,275,980) (7,275,980)
Tax benefit associated with stock awards -- -- 1,337,187
- ---------------------------------------------------------------------------------------------------
At December 31, 1998 (300,788) 250,528,526 270,353,719
Comprehensive income:
Net income -- 68,592,976 68,592,976
Other comprehensive income (loss),
net of tax:
Foreign currency
translation adjustments -- -- (274,371)
- ---------------------------------------------------------------------------------------------------
Other comprehensive income (loss) -- -- (274,371)
- ---------------------------------------------------------------------------------------------------
Comprehensive income -- -- 68,318,605
Common stock issued
in acquisition (Note 12) -- -- 3,427,625
Common stock issued from
treasury shares for exercise of
stock options (Note 6) 62,360 -- 142,263
Purchase of treasury shares (1,290,748) -- (1,290,748)
Cash dividends declared ($.040 per share) -- (7,796,771) (7,796,771)
Tax benefit associated with stock awards -- -- 1,137,363
- ---------------------------------------------------------------------------------------------------
At December 31, 1999 (1,529,176) 311,324,731 $ 334,292,056
- ----------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: Total System Services, Inc. (TSYS or the Company) is an 80.8% owned
subsidiary of Columbus Bank and Trust Company (CB&T) which is a wholly owned
subsidiary of Synovus Financial Corp. (Synovus). Synovus' stock is traded on the
NYSE under the symbol "SNV." TSYS provides bankcard data processing and related
services to banks and other card-issuing institutions throughout the United
States, Mexico, Canada, Honduras and the Caribbean.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The accompanying
consolidated financial statements of Total System Services, Inc. include the
accounts of TSYS and its wholly owned subsidiaries, Columbus Depot Equipment
Company, TSYS Total Solutions, Inc., Columbus Productions, Inc. and TSYS Canada,
Inc. Significant intercompany accounts and transactions have been eliminated in
consolidation.
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the reported
periods to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
INVESTMENTS IN JOINT VENTURES: TSYS' 49% investment in Total System Services de
Mexico, S.A. de C.V. (TSYS de Mexico), a bankcard data processing operation
located in Mexico, is accounted for using the equity method of accounting, as is
TSYS' 50% investment in Vital Processing Services L.L.C. (Vital), a merchant
processing operation headquartered in Tempe, Arizona.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation expense is computed
using the straight-line method over the estimated useful lives of the assets.
Buildings and improvements are depreciated over 5-40 years, computer equipment
over 2-4 years, and furniture and other equipment over 3-15 years.
COMPUTER SOFTWARE: The Company capitalizes software development costs incurred
from the time technological feasibility of the software product or enhancement
is established until the software is ready for use in licensing to or providing
processing services to customers. Research and development costs and computer
software maintenance costs are expensed as incurred. Software development costs
related to the TS2 processing system are amortized using the greater of (1) the
straight-line method over the estimated useful life of 10 years or (2) the ratio
of current revenues to current and anticipated revenues. All other software
development costs and costs of purchased computer software are amortized using
the greater of (1) the straight-line method over the estimated useful life (3-5
years) or (2) the ratio of current revenues to current and anticipated revenues.
The carrying value of computer software costs is reviewed for
impairment by the Company, and impairments are recognized when the expected
undiscounted net operating cash flows derived from such intangible assets are
less than their carrying value. If such review indicates impairment, the Company
uses fair value in determining the amount that should be written off.
REVENUE RECOGNITION: The Company's bankcard data processing revenues are derived
from long-term processing contracts with banks and other institutions and are
recognized as revenues at the time the services are performed. The Company's
bankcard data processing service contracts generally contain original terms
ranging from three to ten years. The Company's other service revenues are
recognized as those services are performed.
CONTRACT ACQUISITION COSTS: The Company capitalizes contract acquisition costs
related to signing or renewing long-term contracts. These costs, which primarily
consist of cash payments for rights to provide processing services, incremental
internal conversion and software development costs, and third-party software
development costs, are amortized using the straight-line method over the
contract term beginning when the customer's cardholder accounts are converted to
the Company's processing system. The Company evaluates the carrying value of
contract acquisition costs for impairment on the basis of whether these costs
are fully recoverable from expected undiscounted net
30
operating cash flows of the related contract. If such review indicates
impairment, the Company uses fair value in determining the amount that should be
written off. All costs incurred prior to contract execution are expensed as
incurred.
GOODWILL: Goodwill results from the excess of cost over the fair value of net
assets of businesses acquired and is being amortized using the straight-line
method over periods of five to 15 years. The Company reviews goodwill for
impairment on the basis of whether the goodwill is fully recoverable from
expected undiscounted net operating cash flows of the related business units. If
such review indicates impairment, the Company uses fair value in determining the
amount that should be written off.
INCOME TAXES: Income tax expense reflected in TSYS' consolidated financial
statements is computed based on the taxable income of TSYS as a separate entity.
A consolidated federal income tax return is filed for Synovus and its majority
owned subsidiaries, including TSYS.
The Company accounts for income taxes in accordance with the asset and
liability method. Under the asset and liability method, deferred income tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred income
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
CASH FLOW REPORTING: Investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
EARNINGS PER SHARE: Basic earnings per share (EPS) is calculated as income
available to common stockholders divided by the weighted average number of
common shares outstanding during the period. Diluted EPS is calculated to
reflect the potential dilution that would occur if stock options or other
contracts to issue common stock were exercised and resulted in additional common
stock that would share in the earnings of the Company.
FAIR VALUES OF FINANCIAL INSTRUMENTS: The Company uses financial instruments in
the normal course of its business. The carrying values of cash equivalents,
accounts receivable, accounts payable, accrued salaries and employee benefits,
and other current liabilities approximate fair value due to the short-term
maturities of these assets and liabilities. The investments in joint ventures
are accounted for by the equity method and pertain to privately held companies
for which a fair value is not readily available. The Company believes the fair
values of its investments in joint ventures exceed their respective carrying
values.
TREASURY STOCK: The Company uses the cost method when it purchases its own
common stock as treasury shares, and displays treasury stock as a reduction of
shareholders' equity.
FOREIGN CURRENCY TRANSLATION: Foreign currency financial statements of the
Company's Mexican joint venture and the Company's wholly owned subsidiary with
an operation in Canada are translated into U.S. dollars at current exchange
rates, except for revenues, costs and expenses, and net income which are
translated at the average exchange rates for each reporting period. Net exchange
gains or losses resulting from the translation of assets and liabilities of the
Canadian operation, net of tax, are accumulated in a separate section of
shareholders' equity titled accumulated other comprehensive income.
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 years ended December
31, 1998 and 1997, were expensed. The Mexican economy was removed from highly
inflationary status effective January 1, 1999; thus, net exchange gains or
losses resulting from the translation of assets and liabilities of the Company's
Mexican joint venture, net of tax, are accumulated in a separate section of
shareholders' equity titled accumulated other comprehensive income.
31
COMPREHENSIVE INCOME: Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," requires companies to display, with the same
prominence as other financial statements, the components of comprehensive
income. TSYS displays the items of other comprehensive income in its
consolidated statements of shareholders' equity and comprehensive income.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1998 and 1997
financial statements to conform to the presentation adopted in 1999.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under the standard, entities
are required to carry all derivative instruments in the balance sheet at fair
value. The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows or
foreign currencies. If the hedged exposure is a fair value exposure, the gain or
loss on the derivative instrument is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged item attributable
to the risk being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss is reported in earnings
immediately. If the derivative instrument is not designated as a hedge, the gain
or loss is recognized in earnings in the period of change.
For TSYS, SFAS 133, as amended by SFAS 137, is effective January 1,
2001. On adoption, the provisions of SFAS 133 must be applied prospectively.
TSYS is in the process of assessing the impact that SFAS 133 will have on its
financial statements.
NOTE 2 RELATIONSHIPS WITH AFFILIATED COMPANIES
At December 31, 1999, CB&T owned 157,455,980 shares (approximately 80.8%) of
TSYS common stock.
TSYS has entered into agreements with CB&T and certain of its
affiliates, pursuant to which TSYS performs bankcard data processing services.
Such bankcard data processing service revenues were $8,049,915, $4,225,439 and
$2,609,762 during the years ended December 31, 1999, 1998 and 1997,
respectively. Miscellaneous data processing services performed by TSYS for
certain Synovus nonbanking affiliates generated revenues of $221,844, $175,801
and $148,036 during the years ended December 31, 1999, 1998 and 1997,
respectively; these revenues are included in bankcard data processing services.
Bankcard data processing revenues related to TSYS de Mexico, the Company's
Mexican joint venture, were $15,954,155, $17,362,650 and $18,365,224 for the
years ended December 31, 1999, 1998 and 1997, respectively. Merchant processing
revenues, included in bankcard data processing revenues, related to Vital, the
Company's joint venture with Visa, were $12,898,723, $9,873,293 and $8,115,010
for the years ended December 31, 1999, 1998 and 1997.
Revenues from other services provided by TSYS to Synovus and its
affiliates were $5,483,784, $1,539,009 and $1,110,899 during the years ended
December 31, 1999, 1998 and 1997, respectively.
TSYS maintains an unsecured credit agreement with CB&T. The credit
agreement has a maximum available principal balance of $5.0 million, with
interest at prime. TSYS did not use the credit facility during 1999 or 1998.
In 1999, 1998 and 1997, TSYS received interest income of $1,865,621,
$2,342,416 and $2,075,315, respectively from CB&T. In 1997, TSYS paid CB&T
interest of $123,420 on a short-term construction loan, all of which was
capitalized.
During 1999, 1998 and 1997, Synovus Technologies, Inc.(STI) paid TSYS
$143,405, $248,187 and $224,154, respectively, for data links, network services
and other miscellaneous items.
32
TSYS leases a portion of its facilities from STI and CB&T, and leases
portions of the buildings it owns to CB&T. TSYS made lease payments for
facilities to STI of $220,000 in 1998 and $240,000 in 1997. Lease payments made
to CB&T amounted to $36,308 in 1999, $72,515 in 1998 and $53,790 in 1997. Lease
payments received from CB&T amounted to $18,411 in 1998 and $11,628 in 1997.
TSYS has entered into a management agreement with Synovus pursuant to
which TSYS pays for management, legal and tax services provided by Synovus. Such
management fees amounted to $1,524,780 in 1999, $1,283,494 in 1998 and
$1,216,089 in 1997.
TSYS maintains an agreement with Synovus Service Corp. (SSC) to provide
human resource, payroll, security, maintenance and other administrative services
to TSYS and its subsidiaries. TSYS paid SSC $10,639,179, $9,892,790 and
$9,232,001 for these services in 1999, 1998 and 1997, respectively. TSYS
received $51,594 in 1999 and $26,169 in 1998 and in 1997 in rent from SSC. TSYS
also received $382,840 and $199,492 in 1999 and 1998, respectively, for data
processing provided to SSC. TSYS made lease payments to SSC for $27,690 in 1998
and $31,274 in 1997.
Due to the addition of Partnership Card Services, TSYS paid CB&T
$345,893 in 1999 for marketing rights. TSYS also paid STI $765,741 in 1999 for
fees associated with lockbox services.
TSYS maintains deposit accounts with CB&T, the majority of which are
interest-earning and on which TSYS receives market rates of interest. Included
in cash and cash equivalents are deposit balances with CB&T of $54.3 million and
$9.4 million at December 31, 1999 and 1998, respectively.
Certain officers of TSYS and other TSYS employees participate in the
Synovus Incentive Plans. Nonqualified options to acquire Synovus common stock
were granted in 1999, 1998 and 1997 as follows:
- -------------------------------------------------------------------------------
Number of Shares
1999 1998 1997
- -------------------------------------------------------------------------------
Stock options 948,683 849,431 545,875
- -------------------------------------------------------------------------------
The stock options were granted with an exercise price equal to the fair
market value of Synovus common stock at the date of grant. The options vest and
become exercisable over two to three years and expire eight to ten years from
date of grant.
In 1996, certain officers were also granted restricted stock awards
valued at the price paid for the Synovus shares at the date of grant of
$764,422, which is being amortized as compensation expense over the five-year
vesting period.
The Company believes the terms and conditions of transactions between
TSYS, CB&T, Synovus and other affiliated companies are comparable to those which
could have been obtained in transactions with unaffiliated parties.
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment balances at December 31 are as follows:
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Land $ 6,092,433 2,784,807
Buildings and improvements 66,758,819 69,956,718
Computer equipment 57,105,222 49,738,864
Furniture and other equipment 48,643,289 46,883,429
Construction in progress 644,345 239,939
- --------------------------------------------------------------------------------
179,244,108 169,603,757
Less accumulated depreciation
and amortization 82,989,451 76,984,752
- --------------------------------------------------------------------------------
Property and equipment, net $ 96,254,657 92,619,005
- --------------------------------------------------------------------------------
Depreciation and amortization of property and equipment was
$15,637,169, $13,212,897 and $11,935,776 for the years ended December 31, 1999,
1998 and 1997, respectively.
NOTE 4 COMPUTER SOFTWARE
Computer software at December 31 is summarized as follows:
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Purchased computer software $111,331,549 68,636,125
TS2 33,048,872 33,048,872
Other capitalized software
development costs 26,786,646 14,853,415
- -----------------------------------------------------------------------------
171,167,067 116,538,412
Less accumulated amortization 72,342,275 50,676,677
- -----------------------------------------------------------------------------
Computer software, net $ 98,824,792 65,861,735
- -----------------------------------------------------------------------------
33
Amortization expense related to purchased computer software costs was
$16,153,985, $12,057,582 and $7,212,571 for the years ended December 31, 1999,
1998 and 1997, respectively. Amortization of TS2 and capitalized software
development costs was $5,472,776, $4,716,278 and $4,455,148 for the years ended
December 31, 1999, 1998 and 1997, respectively.
NOTE 5 INVESTMENT IN JOINT VENTURE
TSYS holds a 50% equity interest in Vital, a joint venture with Visa U.S.A.,
which combines the front-end authorization and back-end accounting and
settlement processing of merchants. The condensed financial information for this
joint venture as of December 31, 1999 and 1998, and for the years ended December
31, 1999, 1998 and 1997, is summarized as follows:
- ---------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------
BALANCE SHEET DATA:
Current assets $ 63,066,000 45,761,000
Total assets 86,337,000 63,586,000
Liabilities (all current) 30,412,000 21,036,000
- ---------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Revenues $151,581,000 127,222,000 111,322,000
Operating income 19,234,000 19,526,000 13,054,000
Net income* 20,065,000 20,725,000 13,957,000
- ---------------------------------------------------------------------------
*Vital is a limited liability company and is taxed in a manner similar
to a partnership; therefore, net income related to Vital does not include income
tax expense.
NOTE 6 SHAREHOLDERS' EQUITY
STOCK SPLIT: In May 1998, a three-for-two common stock split was effected in the
form of a stock dividend. All share and shareholders' equity amounts included
herein have been restated to reflect the split for all periods presented.
TREASURY STOCK: In October 1999, the Company announced a plan to purchase up to
1.5 million shares of its common stock from time to time and at various prices
over the next two years. Through December 31, 1999, the Company had purchased
77,100 shares for $1.3 million under this plan. At December 31, 1999, 217,467
shares were held as treasury shares at a cost of $1,529,176. At December 31,
1998 and 1997, 181,260 shares at a cost of $300,788 and 229,946 shares at a cost
of $377,701, respectively, were held as treasury shares.
During 1999, certain employees of the Company exercised options for
41,100 shares of common stock that were issued from treasury shares. During 1998
and 1997, employees exercised options for 48,925 and 63,975 shares of common
stock, respectively.
LONG-TERM INCENTIVE PLAN: Total System Services, Inc. maintains a Long-Term
Incentive Plan (LTI Plan) to attract, retain, motivate and reward employees who
make a significant contribution to the Company's long-term success and to enable
such employees to acquire and maintain an equity interest in the Company. The
LTI Plan is administered by the Compensation Committee of the Company's Board of
Directors and enables the Company to grant stock options, stock appreciation
rights, restricted stock and performance awards; 2.4 million shares of common
stock were reserved for distribution under the LTI Plan. Options granted under
the LTI Plan may be incentive stock options or nonqualified stock options as
determined by the Committee at the time of grant. Incentive stock options are
granted at a price not less than 100% of the fair market value of the stock on
the grant date, and nonqualified options are granted at a price to be determined
by the Committee. Option vesting terms are established by the Committee at the
time of grant and presently range from one to five years. The expiration date of
options granted under the LTI Plan is determined at the time of grant and may
not exceed ten years from the date of the grant. At December 31, 1999, there
were options outstanding under the LTI Plan to purchase 1,599,500 shares of the
Company's common stock, of which 423,500 shares were exercisable. There were no
shares available for grant at December 31, 1999, under the LTI Plan.
Additionally, options (not issued under the LTI Plan) to purchase 37,500 shares
of the Company's common stock were outstanding at December 31, 1999, of which
25,000 were exercisable.
34
A summary of the status of the Company's options granted as of December
31, 1999, 1998 and 1997, and changes during the years ended on those dates is
presented below:
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
Options:
Outstanding at beginning of year 1,678,100 $ 12.15 1,727,025 $ 11.86 283,500 $ 2.00
Granted -- -- -- -- 1,507,500 13.30
Exercised (41,100) 2.00 (48,925) 2.00 (63,975) 2.00
Forfeited/canceled -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,637,000 $ 12.41 1,678,100 $ 12.15 1,727,025 $ 11.86
- -----------------------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 448,500 $ 10.24 330,100 $ 7.60 219,525 $ 2.00
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of options
granted during the year $ -- $ -- $ 5.31
- -----------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at December 31, 1999:
- ------------------------------------------------------------------------------------------------------------
Number Weighted Number
Outstanding at Average Remaining Weighted Average Exercisable at Weighted Average
December 31, 1999 Contractual Life in Years Exercise Price December 31, 1999 Exercise Price
- ------------------------------------------------------------------------------------------------------------
129,500 2.50 $ 2.00 129,500 $ 2.00
37,500 9.03 18.50 25,000 18.50
1,470,000 7.84 13.17 294,000 13.17
- ------------------------------------------------------------------------------------------------------------
1,637,000 7.44 $ 12.41 448,500 $ 10.24
- ------------------------------------------------------------------------------------------------------------
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its plans. Had compensation cost for
the Company's stock-based compensation plans been determined consistent with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced to the unaudited pro forma amounts indicated below:
- ----------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------
Net income applicable to
common shareholders
As reported $ 68,592,976 54,831,143 47,478,472
Pro forma 67,411,857 53,156,712 47,150,775
Basic earnings per share:
As reported .35 .28 .24
Pro forma .35 .27 .24
Diluted earnings per share:
As reported .35 .28 .24
Pro forma .34 .27 .24
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used: dividend yield of 0.0%; expected volatility of 41.6%;
risk-free interest rate of 5.87%; and expected lives of 3.95 years for all
options.
35
ACCUMULATED OTHER COMPREHENSIVE INCOME: Comprehensive income for TSYS consists
of net income and foreign currency translation adjustments recorded as a
component of shareholders' equity. The income tax effects allocated to and the
cumulative balance of each component of other comprehensive income are as
follows:
- ---------------------------------------------------------------------------------------------------------------
Balance at Balance at
December 31, 1998 Pretax Amount Tax Benefit December 31, 1999
- ---------------------------------------------------------------------------------------------------------------
Currency translation adjustments $(1,179,337) (433,795) 159,424 $(1,453,708)
- ---------------------------------------------------------------------------------------------------------------
Balance at Balance at
December 31, 1997 Pretax Amount Tax Benefit December 31, 1998
- ---------------------------------------------------------------------------------------------------------------
Currency translation adjustments $(1,178,182) (1,155) -- $(1,179,337)
- ---------------------------------------------------------------------------------------------------------------
NOTE 7 INCOME TAXES
The provision for income taxes includes income taxes currently payable and those
deferred because of temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities.
The components of income tax expense included in the Consolidated
Statements of Income were as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Current income tax expense:
Federal $ 32,816,025 20,669,630 24,267,412
State 1,624,604 947,560 1,356,815
- ---------------------------------------------------------------------------------------------------------------------------------
Total current income tax expense 34,440,629 21,617,190 25,624,227
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred income tax expense (benefit):
Federal 512,265 5,042,194 (1,460,857)
State 30,133 296,600 (85,933)
- ---------------------------------------------------------------------------------------------------------------------------------
Total deferred income tax expense (benefit): 542,398 5,338,794 (1,546,790)
- ---------------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 34,983,027 26,955,984 24,077,437
- ---------------------------------------------------------------------------------------------------------------------------------
Income tax expense differed from the amounts computed by applying the
statutory U.S. federal income tax rate of 35% to income before income taxes as a
result of the following:
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Computed "expected" income tax expense $ 36,251,600 28,625,494 25,044,568
Increase (decrease) in income tax expense resulting from:
State income tax expense, net of federal income tax benefit 1,075,579 808,704 826,073
Foreign tax credits (969,000) (1,473,788) (1,335,483)
Other, net (1,375,152) (1,004,426) (457,721)
- ---------------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 34,983,027 26,955,984 24,077,437
- ---------------------------------------------------------------------------------------------------------------------------------
The tax effects of the significant components of deferred income tax
assets and liabilities are presented in the following table:
- ---------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Primarily accruals not deductible until paid $ 8,200,673 6,016,675
State income tax credits 2,621,530 --
- ---------------------------------------------------------------------------------------------------------------------------------
Gross deferred income tax assets 10,822,203 6,016,675
Less valuation allowance (1,400,000) --
- ---------------------------------------------------------------------------------------------------------------------------------
Net deferred income tax assets 9,422,203 6,016,675
- ---------------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Computer software development costs (18,310,745) (20,029,964)
Excess tax over financial statement depreciation (6,306,942) (1,961,901)
Other, net (4,440,396) (3,118,292)
- ---------------------------------------------------------------------------------------------------------------------------------
Gross deferred income tax liability (29,058,083) (25,110,157)
- ---------------------------------------------------------------------------------------------------------------------------------
Net deferred income tax liability $(19,635,880) (19,093,482)
- ---------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999, TSYS had state income tax credit carryforwards
of $2,621,530. In assessing the realizability of deferred income tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred income tax assets will not be realized. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. At December 31, 1999, based upon the level of historical
taxable income and projections for future taxable income over the periods in
which the deferred income tax assets are deductible, management believes that it
is more likely than not that TSYS will realize the benefits of these deductible
differences, net of existing valuation allowances. The valuation allowance for
deferred tax assets as of December 31, 1999, was $1,400,000. There was no
valuation allowance at December 31, 1998.
36
NOTE 8 EMPLOYEE BENEFIT PLANS
The Company provides benefits to its employees by allowing employees to
participate in certain defined contribution plans. These employee benefit plans
are described as follows:
PROFIT SHARING PLAN: The Company's employees are eligible to participate in the
Synovus Financial Corp./Total System Services, Inc. (Synovus/TSYS) Profit
Sharing Plan. The Company's contributions to the plan are contingent upon
achievement of certain financial goals. The terms of the plan limit the
Company's contribution to 9% of participant compensation, as defined, not to
exceed the maximum allowable deduction under Internal Revenue Service
guidelines. TSYS' annual contributions to the plan charged to expense are as
follows:
--------------------------------------
1999 $10,992,344
1998 8,365,937
1997 6,828,175
--------------------------------------
MONEY PURCHASE PLAN: The Company's employees are eligible to participate in the
Synovus/TSYS Money Purchase Pension Plan, a defined contribution pension plan.
The terms of the plan provide for the Company to make annual contributions to
the plan equal to 7% of participant compensation, as defined. The Company's
contributions to the plan charged to expense are as follows:
-------------------------------------
1999 $8,413,213
1998 6,438,388
1997 5,294,540
-------------------------------------
401(K) PLAN: The Company's employees are eligible to participate in the
Synovus/TSYS 401(k) Plan. The terms of the plan allow employees to contribute up
to 10% of pretax compensation with a discretionary company contribution up to a
maximum of 5% of participant compensation, as defined, based upon the Company's
attainment of certain financial goals. The Company's contributions to the plan
charged to expense are as follows:
-------------------------------------
1999 $5,443,934
1998 1,142,828
1997 21,861
-------------------------------------
Stock Purchase Plan: The Company maintains stock purchase plans for directors
and employees, whereby TSYS makes contributions equal to one-half of employee
and director voluntary contributions. The funds are used to purchase presently
issued and outstanding shares of TSYS common stock for the benefit of
participants. TSYS' contributions to these plans charged to expense are as
follows:
-------------------------------------
1999 $2,352,505
1998 1,862,698
1997 1,588,618
-------------------------------------
POSTRETIREMENT MEDICAL BENEFITS PLAN: TSYS provides certain medical benefits to
qualified retirees through a postretirement medical benefits plan. The benefit
expense and accrued benefit cost associated with the plan are not significant to
the Company's consolidated financial statements.
NOTE 9 COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS: TSYS is obligated under noncancelable operating leases for
computer equipment and facilities. Management expects that, as these leases
expire, they will be renewed or replaced by similar leases. In 1997, the Company
entered into an operating lease agreement for the Company's new corporate
campus. Under the agreement, which is guaranteed by Synovus Financial Corp., the
lessor paid for the construction and development costs and has leased the
facilities to the Company for a term of three years beginning in November 1999.
The lease provides for substantial residual value guarantees and includes
purchase options at original cost of the property. The amount of the residual
value guarantees relative to the assets under this lease is projected to be
$81.4 million. The terms of this lease financing arrangement require, among
other things, that the Company maintain certain minimum financial ratios and
provide certain information to the lessor.
The future minimum lease payments under noncancelable operating leases
with remaining terms greater than one year for the next five years and
thereafter and in the aggregate as of December 31, 1999, are as follows:
------------------------------------------------
2000 $ 96,739,240
2001 99,353,493
2002 85,029,844
2003 44,741,177
2004 and thereafter 35,354,852
------------------------------------------------
$361,218,606
------------------------------------------------
Total rental expense under all operating leases in 1999, 1998 and 1997
was $85,928,317, $55,926,412 and $52,765,480, respectively.
37
CONTRACTUAL COMMITMENTS: In the normal course of its business, the Company
maintains processing contracts with its customers. These processing contracts
contain commitments, including, but not limited to, minimum standards and time
frames against which the Company's performance is measured. In the event the
Company does not meet its contractual commitments with its customers, the
Company may incur penalties and/or certain customers may have the right to
terminate their contracts with the Company. The Company does not believe that it
will fail to meet its contractual commitments to an extent that will result in a
material adverse effect on its financial condition or results of operations.
CONTINGENCIES: The Company is subject to lawsuits, claims and other complaints
arising out of the ordinary conduct of its business. In the opinion of
management, based in part upon the advice of legal counsel, all matters are
adequately covered by insurance, or if not covered, are without merit or are of
such kind or involve such amounts that would not have a material adverse effect
on the financial condition or results of operations of the Company if disposed
of unfavorably.
In November 1998, a class action complaint was filed against
NationsBank of Delaware, N.A., in the United States District Court for the
Southern District of Mississippi. On March 23, 1999, the named plaintiff amended
the complaint and named the Company and certain credit bureaus as defendants in
the case. The named plaintiff alleges, among other things, that the defendants
failed to report properly the credit standing of each member of the putative
class. The named plaintiff has defined the class as all persons and entities
within the United States who obtained credit cards from NationsBank and whose
accounts were purchased by or transferred to U.S. BankCard and whose accounts
were reported to credit bureaus or credit agencies incorrectly in August 1998.
The amended complaint alleges negligence, violation of the Fair Credit Reporting
Act, breach of the duty of good faith and fair dealing, and seeks declaratory
relief, injunctive relief and the imposition of punitive damages. This lawsuit
seeks unspecified damages. Though settlement negotiations have occurred, these
negotiations have to date not resulted in a definitive settlement agreement
among the parties. TSYS is not in a position to determine its possible exposure,
if any, as a result of the litigation.
NOTE 10 SUPPLEMENTARY BALANCE SHEET INFORMATION
Significant components of prepaid expenses and other current assets
are summarized as follows:
- --------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------
Contract acquisition costs, net $ 7,861,069 9,900,416
Prepaid expenses 9,709,740 7,643,395
Other 7,600,519 7,826,793
- --------------------------------------------------------------------------
Total $25,171,328 25,370,604
- --------------------------------------------------------------------------
Significant components of other noncurrent assets are summarized as
follows:
- --------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------
Contract acquisition costs, net $43,001,304 36,780,395
Investment in joint venture 35,101,217 28,304,322
Other 4,491,635 5,620,764
- --------------------------------------------------------------------------
Total $82,594,156 70,705,481
- --------------------------------------------------------------------------
Significant components of other current liabilities are summarized as
follows:
- --------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------
Customer postage deposits $14,913,211 14,753,284
Transaction processing provisions 5,445,862 3,941,318
Other 31,169,026 8,377,940
- --------------------------------------------------------------------------
Total $51,528,099 27,072,542
- --------------------------------------------------------------------------
NOTE 11 SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information." SFAS 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.
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 more than 85% of
financial activity in all of the quantitative thresholds required to be measured
under SFAS 131. One subsidiary, whose sole business activity is to provide
programming support services to the parent company, was aggregated into
transaction processing services.
38
- -------------------------------------------------------------------------------------------------------
Transaction Support
OPERATING SEGMENTS Processing Services Services Consolidated
- -------------------------------------------------------------------------------------------------------
1999
Total revenue $ 465,243,321 71,319,006 $ 536,562,327
Intersegment revenue (779,800) (1,856,516) (2,636,316)
- -------------------------------------------------------------------------------------------------------
Revenue from external customers $ 464,463,521 69,462,490 $ 533,926,011
- -------------------------------------------------------------------------------------------------------
Equity in income of joint ventures $ 12,326,609 -- $ 12,326,609
- -------------------------------------------------------------------------------------------------------
Segment operating income $ 88,697,914 11,921,099 $ 100,619,013
- -------------------------------------------------------------------------------------------------------
Income tax expense $ 30,473,569 4,509,458 $ 34,983,027
- -------------------------------------------------------------------------------------------------------
Net income $ 61,159,112 7,433,864 $ 68,592,976
- -------------------------------------------------------------------------------------------------------
Identifiable assets $ 445,504,370 47,704,132 $ 493,208,502
Intersegment eliminations (35,704,897) (154,067) (35,858,964)
- -------------------------------------------------------------------------------------------------------
Total assets $ 409,799,473 47,550,065 $ 457,349,538
- -------------------------------------------------------------------------------------------------------
1998
Total revenue $ 356,744,792 41,330,147 $ 398,074,939
Intersegment revenue (502,069) (1,378,802) (1,880,871)
- -------------------------------------------------------------------------------------------------------
Revenue from external customers $ 356,242,723 39,951,345 $ 396,194,068
- -------------------------------------------------------------------------------------------------------
Equity in income of joint ventures $ 12,974,348 -- $ 12,974,348
- -------------------------------------------------------------------------------------------------------
Segment operating income $ 72,722,361 6,620,511 $ 79,342,872
- -------------------------------------------------------------------------------------------------------
Income tax expense $ 24,488,076 2,467,908 $ 26,955,984
- -------------------------------------------------------------------------------------------------------
Net income $ 50,980,990 3,850,153 $ 54,831,143
- -------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------
1997
Total revenue $ 330,137,416 31,988,727 $ 362,126,143
Intersegment revenue (76,038) (550,706) (626,744)
- -------------------------------------------------------------------------------------------------------
Revenue from external customers $ 330,061,378 31,438,021 $ 361,499,399
- -------------------------------------------------------------------------------------------------------
Equity in income of joint ventures $ 9,347,183 -- $ 9,347,183
- -------------------------------------------------------------------------------------------------------
Segment operating income $ 64,495,841 4,780,657 $ 69,276,498
- -------------------------------------------------------------------------------------------------------
Income tax expense $ 22,186,324 1,891,113 $ 24,077,437
- -------------------------------------------------------------------------------------------------------
Net income $ 44,584,665 2,893,807 $ 47,478,472
- -------------------------------------------------------------------------------------------------------
Identifiable assets $ 289,094,906 32,158,029 $ 321,252,935
Intersegment eliminations (24,333,886) (61,112) (24,394,998)
- -------------------------------------------------------------------------------------------------------
Total assets $ 264,761,020 32,096,917 $ 296,857,937
- -------------------------------------------------------------------------------------------------------
GEOGRAPHIC AREA DATA: The following geographic data represent revenues based on
the geographic locations of customers. Substantially all property and equipment
is located in the United States.
- -------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
United States $ 493,231,724 376,303,345 341,901,236
Mexico 15,954,041 17,362,650 18,365,222
Canada 22,531,042 1,838,322 659,783
Other 2,209,204 689,751 573,158
- -------------------------------------------------------------------------------------------------------
Totals $ 533,926,011 396,194,068 361,499,399
- -------------------------------------------------------------------------------------------------------
39
MAJOR CUSTOMERS: For the years ended December 31, 1999, 1998 and 1997, two major
customers accounted for approximately 29%, 34% and 35% of total revenues,
respectively. One of these customers provided 16%, or $86.9 million, of total
revenues in 1999; 21%, or $82.3 million, in 1998; and 20%, or $70.3 million, in
1997. The other major customer accounted for 13%, or $69.3 million, of total
revenues in 1999; 13%, or $53.1 million, in 1998; and 15%, or $55.0 million, in
1997. Revenues from major customers for the years reported are attributable to
all reporting segments.
NOTE 12 ACQUISITION
Effective January 1, 1999, TSYS acquired Partnership Card Services (PCS) from
its majority shareholder, Columbus Bank and Trust Company, 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 the
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, TSI.
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 years 1998 and 1997, as though the acquisition of PCS had
occurred at the beginning of 1997, compared to TSYS' actual consolidated results
of operations for 1999.
- ------------------------------------------------------------------------------------
Years Ended December 31,
1999 1998 1997
- ------------------------------------------------------------------------------------
Revenues $533,926,011 410,417,905 367,244,690
- ------------------------------------------------------------------------------------
Net Income 68,592,976 56,408,790 48,395,247
- ------------------------------------------------------------------------------------
Earnings per share -
basic and diluted .35 .29 .25
- ------------------------------------------------------------------------------------
40
REPORT OF INDEPENDENT AUDITORS
[KPMG LOGO] 303 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30308
The Board of Directors
Total System Services, Inc.:
We have audited the accompanying consolidated balance sheets of Total
System Services, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, cash flows and shareholders' equity
and comprehensive income for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Total System
Services, Inc. and subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
January 11, 2000
41
REPORT OF FINANCIAL RESPONSIBILITY
The management of Total System Services, Inc. is responsible for the
integrity and objectivity of the consolidated financial statements and other
financial information presented in this report. These statements have been
prepared in accordance with generally accepted accounting principles and
necessarily include amounts based on judgements and estimates by management.
TSYS maintains internal accounting control policies and related
procedures designed to provide reasonable assurance that assets are safeguarded,
that transactions are executed in accordance with management's authorization and
properly recorded, and that accounting records may be relied upon for the
preparation of reliable published annual and interim financial statements and
other financial information. The design, monitoring and revision of internal
accounting control systems involve, among other things, management's judgement
with respect to the relative cost and expected benefits of specific control
measures. The Company also maintains an internal auditing function which
evaluates and reports on the adequacy and effectiveness of internal accounting
controls and policies and procedures.
The Company's consolidated financial statements have been audited by
independent auditors who have expressed their opinion with respect to the
fairness of these statements.
The Audit Committee of the Board of Directors, composed solely of
outside directors, meets periodically with TSYS' management, internal auditors
and independent auditors to review matters relating to the quality of financial
reporting and internal accounting controls. Both the internal auditors and the
independent auditors have unrestricted access to the Committee.
/s/ Richard W. Ussery /s/ James B. Lipham
- --------------------------------------------------- -----------------------------------
Richard W. Ussery James B. Lipham
Chairman of the Board & Chief Executive Officer Executive Vice President & Chief Financial
Officer
/s/ Dorenda K. Weaver /s/ Ronald L. Barnes
- --------------------------------------------------- -----------------------------------
Dorenda K. Weaver Ronald L. Barnes
Senior Vice President & Controller Senior Vice President & General Auditor
42
QUARTERLY FINANCIAL DATA, STOCK PRICE, DIVIDEND INFORMATION
TSYS' common stock trades on the New York Stock Exchange (NYSE) under the symbol
"TSS." Price and volume information appears under the abbreviation "TotlSysSvc"
in NYSE daily stock quotation listings. As of February 11, 2000, there were
10,404 holders of record of TSYS common stock, some of whom are holders in
nominee name for the benefit of different shareholders.
The fourth quarter dividend of $.01 per share was declared on December
13, 1999, and was paid January 3, 2000, to shareholders of record on December
23, 1999. Total dividends declared in 1999 and in 1998 amounted to $7.8 million
and $7.3 million, respectively. It is the present intention of the Board of
Directors of TSYS to continue to pay cash dividends on its common stock.
PRESENTED HERE IS A SUMMARY OF THE UNAUDITED QUARTERLY FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998.
REVENUES NET INCOME
(Millions of Dollars) (Millions of Dollars)
1999 1998 1999 1998
QTR 1 $115.3 $ 96.3 QTR 1 $12.9 $10.3
QTR 2 $137.0 $ 91.5 QTR 2 $18.4 $11.7
QTR 3 $137.8 $ 99.4 QTR 3 $16.9 $15.2
QTR 4 $143.8 $109.0 QTR 4 $20.3 $17.8
[GRAPH OMITTED] [GRAPH OMITTED]
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First Second Third Fourth
(in thousands except per share data) Quarter Quarter Quarter Quarter
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1999 Revenues .............................. $115,311 136,992 137,827 143,796
Operating income ...................... 19,242 27,636 23,881 29,860
Net income ............................ 12,949 18,436 16,934 20,274
Basic earnings per share .............. .07 .09 .09 .10
Diluted earnings per share ............ .07 .09 .09 .10
Cash dividends declared per share ..... .01 .01 .01 .01
Stock prices:
High .................................. 26 1/4 20 7/8 19 5/8 19
Low ................................... 18 1/4 17 9/16 14 1/8 15
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1998 Revenues .............................. $ 96,318 91,469 99,402 109,005
Operating income ...................... 14,580 16,433 22,139 26,191
Net income ............................ 10,250 11,650 15,172 17,759
Basic earnings per share .............. .05 .06 .08 .09
Diluted earnings per share ............ .05 .06 .08 .09
Cash dividends declared per share ..... .008 .01 .01 .01
Stock prices:
High .................................. 21 7/16 23 15/16 21 7/16 24 3/16
Low ................................... 15 18 7/16 14 13/16 14 7/16
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