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 19.2%
and 25.3%, respectively. The balance sheet data also reflect the continued
strong financial position of TSYS as evidenced by the current ratio of 1.4:1 at
December 31, 2000, 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) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Revenues:
Bankcard data processing services $ 505,935 456,840 350,310 324,718 277,870
Other services 95,358 77,086 45,884 36,781 33,778
- --------------------------------------------------------------------------------------------------------------------
Total revenues 601,293 533,926 396,194 361,499 311,648
- --------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 235,670 207,618 160,855 147,438 124,259
Net occupancy and equipment expense 162,906 151,964 105,658 94,685 82,118
Other operating expenses 90,111 86,052 63,312 59,447 53,368
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 488,687 445,634 329,825 301,570 259,745
- --------------------------------------------------------------------------------------------------------------------
Equity in income of joint ventures 15,586 12,327 12,974 9,347 7,094
- --------------------------------------------------------------------------------------------------------------------
Operating income 128,192 100,619 79,343 69,276 58,997
- --------------------------------------------------------------------------------------------------------------------
Nonoperating income:
Gain (loss) on disposal of property and
equipment, net (1,422) 798 (48) (36) 31
Interest income, net of expense 5,037 2,159 2,492 2,315 1,416
Minority interest in subsidiary's net income (99) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total nonoperating income 3,516 2,957 2,444 2,279 1,447
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 131,708 103,576 81,787 71,555 60,444
Income taxes 46,065 34,983 26,956 24,077 21,007
- --------------------------------------------------------------------------------------------------------------------
Net income $ 85,643 68,593 54,831 47,478 39,437
====================================================================================================================
Basic earnings per share $ .44 .35 .28 .24 .20
====================================================================================================================
Diluted earnings per share $ .44 .35 .28 .24 .20
====================================================================================================================
Cash dividends declared per share $ .048 .040 .038 .030 .030
====================================================================================================================
Weighted average common shares outstanding 194,785 194,913 194,020 193,956 193,931
====================================================================================================================
Weighted average common and common
equivalent shares outstanding 195,265 195,479 194,669 194,239 194,177
====================================================================================================================
- --------------------------------------------------------------------------------
December 31,
-------------------------------------------------------
(in thousands) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
Balance Sheet Data:
Total assets $604,393 466,772 354,925 300,758 250,315
Working capital 63,655 76,414 60,472 70,899 52,274
Total long-term debt -- 204 342 475 676
Shareholders' equity 409,014 334,292 270,354 221,255 178,878
TSYS ANNUAL REPORT 2000 19
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 2000 1999
Years Ended December 31, vs vs
----------------------------
2000 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services 84.1% 85.6 88.4 10.7 30.4
Other services 15.9 14.4 11.6 23.7 68.0
- ---------------------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0 12.6 34.8
- ---------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 39.2 38.9 40.6 13.5 29.1
Net occupancy and equipment expense 27.1 28.5 26.7 7.2 43.8
Other operating expenses 15.0 16.1 15.9 4.7 35.9
- ---------------------------------------------------------------------------------------------
Total operating expenses 81.3 83.5 83.2 9.7 35.1
- ---------------------------------------------------------------------------------------------
Equity in income of joint ventures 2.6 2.3 3.2 26.4 (5.0)
- ---------------------------------------------------------------------------------------------
Operating income 21.3 18.8 20.0 27.4 26.8
- ---------------------------------------------------------------------------------------------
Nonoperating income:
Gain (loss) on disposal of property and equipment, net (0.2) 0.2 (0.0) nm nm
Interest income, net of expense 0.8 0.4 0.6 133.3 (13.4)
Minority interest in subsidiary's net income (0.0) -- -- nm --
- ---------------------------------------------------------------------------------------------
Total nonoperating income 0.6 0.6 0.6 18.9 21.0
- ---------------------------------------------------------------------------------------------
Income before income taxes 21.9 19.4 20.6 27.2 26.6
Income taxes 7.7 6.6 6.8 31.7 29.8
- ---------------------------------------------------------------------------------------------
Net income 14.2% 12.8 13.8 24.9 25.1
=============================================================================================
nm = not meaningful
Financial Review
This Financial Review provides a discussion of the results of operations,
financial condition, liquidity and capital resources of TSYS and outlines 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.
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. TSYS will begin
offering its services to financial institutions in Europe in 2001. The Company
currently offers merchant services to financial institutions and other
organizations in Japan.
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 consumer credit, retail,
debit, stored value and commercial card accounts. Due to the number of
cardholder accounts processed by TSYS and the expanding use of cards, as well as
increases in the scope of services offered to clients, revenues relating to
bankcard data processing services have continued to grow. Processing contracts
with large clients, representing a significant portion of the Company's total
revenues, generally provide for discounts on certain services based on the size
and activity of clients' portfolios. Therefore, bankcard data processing
revenues and the related margins are influenced by the client mix relative to
the size of client card portfolios, as well as the number and activity of
individual cardholder accounts processed for each client.
Due to the somewhat 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 clients, the conversion of cardholder accounts of new
clients to the Company's processing platforms, 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 client 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 Company's revenues are also impacted by the use of value added products
and services of TSYS' processing systems by clients. Value added products and
services are optional features each client can choose to subscribe to in order
to increase the financial performance of its portfolio. For the years ended
December 31,
20
2000, 1999 and 1998, value added products and services represented 12.4%, 11.5%
and 10.9% of total revenues, respectively. Revenues from these products and
services were up 22.2%, or $13.6 million, for 2000, compared to 1999, and were
up 43.9%, or $18.9 million, for 1999 compared to 1998.
The average number of cardholder accounts on file increased 7.9% to 194.6
million in 2000, compared to 180.4 million in 1999, which represented a 78.4%
increase over 101.1 million in 1998. At December 31, 2000, TSYS' cardholder
accounts on file were approximately 195.2 million, compared to 206.2 million and
117.6 million at December 31, 1999 and 1998, respectively. The change in
cardholder accounts on file at December 31, 2000, as compared to December 31,
1999, included the deconversion of 36.9 million accounts of Universal Card
Services (UCS) and others, the purging of inactive accounts, the addition of
approximately 24.8 million accounts attributable to the internal growth of
existing clients, and approximately 1.1 million accounts added for new clients.
The Company provides card processing services to its clients including
debit, commercial, retail, stored value and consumer cards. Commercial cards
include purchasing cards, corporate cards and fleet cards for employees. Retail
cards include private label and gift cards. Consumer cards include Visa and
MasterCard bank and debit cards as well as stored value cards. The following
table summarizes TSYS' accounts on file by portfolio type:
Percent Percent
Accounts on Change Change
File by Type 2000 vs 1999 vs
(in millions) 2000 1999 1998 1999 1998
- -------------------------------------------------------------------------
Consumer 90.7 106.7 94.9 (15.0) 12.4
Retail 90.1 88.7 14.1 1.5 527.8
Commercial 14.4 10.8 8.6 33.2 26.0
- --------------------------------------------------
Total 195.2 206.2 117.6 (5.3) 75.4
==============================
Based upon its available market share data, the Company estimated it has a
25% market share of the domestic consumer card processing arena; an 87% share of
the Visa and MasterCard domestic commercial card processing market; a 17% share
of the domestic retail card processing market; and a 2% market share of the U.S.
off-line debit processing market at the end of 2000. TSYS competes with other
third-party bankcard processors, as well as "in-house" processors. The Company
believes its areas for continued growth will be realized as in-house processors
discover the overall cost benefits of outsourcing the processing of their owned
portfolios to third-party processors.
At December 31, 2000, TSYS was processing approximately 90.7 million
consumer card accounts, a 15.0% decrease from the approximately 106.7 million
being processed at year-end 1999, which was a 12.4% increase over the 94.9
million at year-end 1998. Future growth in consumer card revenue is dependent
upon increased card activity--primarily debit cards--and continued internal
growth in clients' portfolios.
In 1999, as a result of the completion of the conversions of the account
portfolios for Sears and Nordstrom, TSYS became a leading third-party processor
of retail accounts. At December 31, 2000, TSYS was processing approximately 90.1
million retail card accounts, a 1.5% increase over the approximately 88.7
million being processed at year-end 1999, which represented a 527.8% increase
over the 14.1 million at year-end 1998. The 1.4 million increase in retail
accounts in 2000 was net of seven million inactive Sears accounts converted to a
MasterCard portfolio. Traditional retail card operations are beginning to
increase the activity of their portfolios by converting inactive accounts to
Visa/MasterCard bankcards. TSYS is able to provide its extensive bankcard
processing tools and techniques, as well as value-added functionality, to
traditional retail card operations allowing better segmentation and potentially
increased profitability for clients. In November 2000, TSYS announced a
multiyear agreement with Target Stores to process the retailer's new consumer
Visa Card.
Since 1994, TSYS has provided processing services for commercial cards. At
December 31, 2000, TSYS was processing approximately 14.4 million commercial
card accounts, a 33.2% increase over the approximately 10.8 million being
processed at year-end 1999, which was a 26.0% increase over the 8.6 million at
year-end 1998. In 1998, TSYS added the U.S. General Services Administration's
contracts for commercial card services. Future growth in commercial card revenue
will mainly result from increased card activity as more business purchasing is
transacted electronically and as additional firms realize the benefits of
converting their paper-based purchasing systems to electronic transactions.
TSYS provides processing services to its clients worldwide. TSYS plans to
continue to expand its service offerings to other countries in the future. In
2000, the Company announced the signing of The Royal Bank of Scotland Group plc
(Royal Bank) and Allied Irish Banks plc (AIB) to multiyear processing
agreements. The portfolios of both clients, approximately seven million
accounts, are expected to be fully converted by the third quarter of 2001. The
following table summarizes TSYS accounts on file by region:
Percent Percent
Accounts on File Change Change
by Region 2000 vs 1999 vs
(in millions) 2000 1999 1998 1999 1998
- -------------------------------------------------------------------------
Domestic 178.4 190.4 113.8 (6.3) 67.3
International 16.8 15.8 3.8 6.1 316.0
- --------------------------------------------------
Total 195.2 206.2 117.6 (5.3) 75.4
==============================
A significant amount of the Company's revenues is derived from long-term
contracts with large clients, including certain major customers. Two of the
Company's clients, 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 volume-based discounts than either would be
entitled to receive standing alone. Bank of America accounted for approximately
15%, 16% and 21% of total revenues for the years ended December 31, 2000, 1999
and 1998, respectively. The loss of Bank of America, or any other major or
significant clients, 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 UCS
to CITIBANK, a part of Citigroup. CITIBANK accounted for approximately 13% of
total revenues for each of the years ended December 31, 1999 and 1998. 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. Although it remains a client, CITIBANK was
not a major customer of the Company for the year ended December 31, 2000.
The Company has a long-term processing relationship with Providian
Financial Corporation (Providian), considered one of the largest bankcard
providers in the nation. In August 1998, the Company and Providian agreed to an
extension of their processing agreement until 2004. Providian accounted for
approximately
TSYS ANNUAL REPORT 2000 21
11% of total revenues for the year ended December 31, 2000. Providian was not a
major customer in 1999 and 1998.
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. Sears accounted for approximately
10% of total revenues for the year ended December 31, 2000. Sears was not a
major customer in 1999 and 1998.
In March 2000, the Company announced its intention to launch a new, wholly
owned subsidiary, DotsConnect, Inc. (DotsConnect), to focus exclusively on the
electronic payments (e-payments) market. DotsConnect delivers premier e-payments
software that allows buyers and sellers to conduct commerce electronically.
DotsConnect is headquartered in Columbus, Georgia, with an additional office in
Atlanta, Georgia. DotsConnect commenced operations on May 1, 2000, with
approximately 30 team members comprising the initial DotsConnect team.
In August 2000, the Company announced that it had entered the Asian card
market by purchasing a controlling equity interest in GP Network Corporation (GP
Net), an established electronics payment company for more than 100,000 merchants
in Japan. TSYS also announced the opening of a branch office in Japan to
facilitate its marketing of processing services for card-issuing financial
institutions and retailers. GP Net's revenues are included in bankcard
processing revenues.
Revenues from other services consist primarily of revenues generated by
TSYS' wholly owned subsidiaries, Columbus Depot Equipment Company (CDEC), TSYS
Total Solutions, Inc. (TSI), and Columbus Productions, Inc. (CPI). CDEC provides
TSYS clients with an option to lease certain equipment necessary for online
communications and for the use of TSYS applications. TSI provides TSYS clients
and others with mail and correspondence processing services, teleservicing, data
documentation capabilities, offset printing, client service, collections and
account solicitation services. CPI provides full-service commercial printing
services to TSYS clients 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. (Synovus). The business of PCS has
become part of TSYS' wholly owned subsidiary, TSI.
Revenues from other services increased $18.3 million, or 23.7%, in 2000,
compared to 1999, which increased $31.2 million, or 68.0%, compared to 1998. The
majority of revenues from other services are generated by TSI.
[Omitted Bankcard Revenues Graph is represented by the following table.]
BANKCARD REVENUES
(Millions of Dollars)
96 $277.9
97 324.7
98 350.3
99 456.8
00 505.9
Operating Expenses
As a percentage of revenues, operating expenses decreased in 2000 to 81.3%,
compared to 83.5% and 83.2% for 1999 and 1998, respectively. The principal
decreases in operating expenses as a percentage of revenue in 2000 as compared
to 1999 resulted from a concerted emphasis on expense control, the focus on
improved processes and reduction in contract acquisition costs. Operating
expenses were $488.7 million in 2000, compared to $445.6 million in 1999 and
$329.8 million in 1998.
Salaries and other personnel expense increased 13.5% in 2000 over 1999,
which is a reduced rate when compared to an increase of 29.1% in 1999 over 1998.
A significant portion of TSYS' operating expenses relates to salaries and other
personnel costs. During 2000, the average number of employees increased to
4,606, compared to 4,106 in 1999 and 3,382 in 1998. The change in total
employment costs consists of increases of $37.2 million, $61.7 million and $32.8
million in 2000, 1999 and 1998, respectively. The increase in total employment
costs is associated with the growth in the number of employees, normal salary
increases and related employee benefits. These increases were reduced by $9.1
million, $14.9 million and $19.4 million in 2000, 1999 and 1998, respectively,
invested in software development costs and contract acquisition costs.
Due to the importance of technology to its business, a significant portion
of TSYS' employees are programmers - approximately 20.2% in 2000, compared to
22.7% and 26.0% in 1999 and 1998, respectively. The decrease in the percentage
of programmers is primarily the result of the increased number of nonprogramming
personnel through the Company's wholly owned subsidiary, TSI.
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, 2000,
approximately 648 graduates of ICAPP had become full-time employees of TSYS. The
Company considers ICAPP to be a very successful program and plans to continue to
utilize ICAPP in the future to fulfill entry-level programming and other
technical positions. 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.
Net occupancy and equipment expense increased 7.2% in 2000 over 1999,
compared to 43.8% in 1999 over 1998. Computer equipment and software rentals,
which represent the largest component of net occupancy and equipment expense,
remained the same in 2000 compared to 1999, and increased $27.5 million, or
51.5%, in 1999 compared to 1998. Due to rapidly changing technology in computer
equipment and software, TSYS' equipment and software needs are fulfilled
primarily through operating leases. In anticipation of the deconversion of a
significant client in 2000, TSYS made a concerted effort to improve processing
productivity and implemented significant cost controls. During 1999 and the last
half of 1998, the Company made significant investments in computer software
licenses related to the new data center located in east Columbus to accommodate
increased volumes and expected growth in the number of accounts associated with
new and existing clients. As additional software licenses are acquired, net
occupancy and equipment expense may increase as a result of the amortization of
these new licenses.
TSYS continues to monitor and assess its building and equipment needs as it
positions itself for future growth and expansion. The Company has entered into
an operating lease agreement relating to its corporate campus. Under the
agreement, the lessor 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 campus facility in December
1998, and had completed the move of a substantial number of its personnel by 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 occu-
22
pying the campus was $9.6 million in 2000 and $6.4 million in 1999, 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.
In 1999, TSYS opened an office in London which currently serves as the
headquarters for TSYS' European operations. During the second quarter of 2000,
TSYS announced its intention to open a European data center in the United
Kingdom. TSYS signed an agreement with InTechnology plc for data center services
in Europe.
In December 2000, TSYS purchased a 40,000 square-foot building and
equipment in York, England for approximately $13.0 million. The building will
house client service personnel for TSYS Europe. The Company has leased back
17,000 of the 40,000 square-foot building to the previous owner.
Other operating expenses increased 4.7% in 2000 compared to 1999 and 35.9%
in 1999 compared to 1998. The decrease in the growth rate of other operating
expenses in 2000 is primarily due to a decline in the amortization of contract
acquisition costs which were $7.5 million, $12.3 million and $6.9 million in
2000, 1999 and 1998, respectively.
Equity in Income of Joint Ventures
TSYS' share of income from its equity in joint ventures was $15.6 million, $12.3
million and $13.0 million for 2000, 1999 and 1998, respectively. The increase in
2000 is primarily the result of Vital's improved operating results in 2000 and
an increase in operating results in 2000 from Total System Services de Mexico,
S.A. de C.V. (TSYS de Mexico). There remains uncertainty in the Mexican economy
which management continues to monitor.
The Company is restructuring its Mexican joint venture agreement whereby
TSYS will process for the member banks directly instead of processing through
the joint venture. The joint venture will continue to print statements and
provide card-issuing services to the joint venture clients. The new restructured
arrangement is expected to take place during the first quarter of 2001. The net
effect of the restructuring will be minimal and should result in a decrease in
equity in income of joint ventures while bankcard processing revenues should
increase.
Operating Income
Operating income increased 27.4% to $128.2 million in 2000, compared to $100.6
million in 1999, an increase of 26.8% over 1998 operating income of $79.3
million. Excluding equity in income of joint ventures, operating income
increased 27.5% to $112.6 million, compared to $88.3 million in 1999, an
increase of 33.0% over the amount for 1998 of $66.4 million. The operating
income margin increased to 21.3% in 2000, compared to 18.8% and 20.0% in 1999
and 1998, respectively. The increase in the operating margin was the result of
revenues increasing at a faster rate than operating expenses in 2000.
Nonoperating Income
Nonoperating income increased in 2000 over 1999 primarily due to the amount of
interest the Company earned on its cash investments. Interest income for 2000
was $5.1 million, a 131.7% increase compared to $2.2 million in 1999, which was
a 13.0% decrease compared to $2.5 million in 1998. The variation in interest
income is primarily attributable to the fluctuations in the cash available for
investment.
Income Taxes
Income tax expense was $46.1 million, $35.0 million and $27.0 million in 2000,
1999 and 1998, respectively, representing effective income tax rates of 35.0%,
33.8% and 33.0%, respectively. The Company expects its tax rates in the future
to increase slightly primarily as a result of federal and state tax credits
being relatively fixed in amount while pretax income is expected to grow.
Net Income
Net income increased 24.9% to $85.6 million (basic and diluted earnings per
share of $.44) in 2000, compared to 1999. In 1999, net income increased 25.1% to
$68.6 million (basic and diluted earnings per share of $.35), compared to $54.8
million (basic and diluted earnings per share of $.28) in 1998.
Projected Outlook 2001
TSYS expects an increase in net income for 2001 over 2000 of approximately 20%.
This anticipated increase in net income is based in part upon the following
assumptions: a 10-12% internal growth rate for existing Visa and MasterCard
consumer card clients; an approximately 50% increase in international revenues
on an annualized basis; an aggressive focus on expense control and productivity
improvement; the successful implementation and market acceptance of new product
offerings, including stored value and e-commerce; and an increase in the total
cardholder base to approximately 220 million accounts.
TSYS expects the second half of 2001 to be more robust than the first half
of 2001 due, in part, to the scheduled conversions of Royal Bank's and AIB's
portfolios. There are some events that will dilute the first half's earnings,
including:
. Infrastructure costs of global expansion. TSYS will incur personnel and
equipment costs associated with establishing its international processing center
in England, as well as initiating a branch office in Japan.
. The CITIBANK deconversion of the UCS portfolio to its in-house processing
system in August 2000. On a comparative basis, revenues for the first half of
2001 will not include revenues from the UCS portfolio when compared to the first
half of 2000 which does include those revenues.
Extended Financial Outlook 2002-2003
With the continued expansion of our businesses both domestically and
internationally, market acceptance of our stored value products and e-commerce
enabling systems, and aggressive expense management, we expect to increase our
annual net income by 20-25% in each of the years 2002 and 2003. TSYS' strategic
plan has identified growth strategies that are expected to enable the Company to
achieve the following 2003 financial goals: 300 million cardholder accounts on
file and $1 billion in total revenue; 20% of total revenue derived from
international sources; 23% operating margin; and 20-25% annual increase in net
income.
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 have 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 2000
was $166.3 million, compared to $134.5 million in 1999 and $62.9 million in
1998. 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 clients; and the payment of cash
dividends.
TSYS ANNUAL REPORT 2000 23
Capital expenditures for property and equipment were $31.8 million in 2000,
compared to $19.8 million in 1999 and $37.0 million in 1998. Expenditures for
purchased computer software were $66.8 million in 2000, compared to $42.3
million in 1999 and $29.5 million in 1998. Additions to capitalized software
development costs, including enhancements to and development of TS2 processing
systems, were $5.9 million in 2000, $11.9 million in 1999 and $10.0 million in
1998. 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.
The Company's investments in contract acquisition costs were $41.7 million
in 2000, $15.8 million in 1999 and $20.1 million in 1998. These amounts include
cash payments for processing rights and other direct salary related costs
incurred in connection with contracts. In the fourth quarter of 1999, the
Company made a payment representing a contract acquisition cost of $10.0 million
to a prospective client. Under the terms of the arrangement, the prospective
client agreed to repay the $10.0 million in the event a processing agreement was
not executed by July 1, 2000. Subsequently, the prospective client announced its
intention to exit the credit card business and completed the sale of its
accounts in 2000. In June 2000, the parent of the prospective client repaid the
$10.0 million advance by obtaining a five-year loan from CB&T. TSYS has agreed
to guarantee the loan.
At December 31, 2000, TSYS' carrying value in its investment in TSYS de
Mexico was $8.5 million. TSYS reflects currency translation adjustments for its
Mexican joint venture 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 $312,000 and $425,000 related to TSYS de
Mexico in 2000 and 1999, respectively.
On January 1, 1999, TSYS acquired PCS from its majority shareholder, CB&T,
the flagship bank of Synovus, 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 client 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 1999.
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. During 2000, the Company purchased 130,400 shares for $2.1 million,
bringing the total amount purchased to 207,500 shares for $3.4 million under
this plan. Total dividends declared on TSYS common stock were $9.3 million in
2000, $7.8 million in 1999 and $7.3 million in 1998. In April 2000, the Company
increased its quarterly dividend by 25.0% to $.0125 per share from $.01 per
share. In April 1998, the Company increased its quarterly dividend by 33.3% to
$.01 per share from $.0075 per share.
In 1997, 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 July 2000, TSYS broke ground on a 32,000 square foot childcare facility
which will be located on the northeast corner of the campus. The facility is
expected to cost approximately $5.0 million and is scheduled to open during the
third quarter of 2001.
In 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 East Center.
In September 1999, Synovus completed the acquisition of the debt collection
and bankruptcy management business offered by Wallace & de Mayo. The services
provided by Wallace & de Mayo include recovery collections work, bankruptcy
process management, legal account management and skip tracing. These services
are being marketed under the name TSYS Total Debt Management, Inc. through the
Company and its wholly owned subsidiary, TSI, for which Synovus paid TSYS a
management fee of $505,000 for 2000.
In May 2000, Synovus completed the acquisition of ProCard, Inc., a provider
of software and Internet tools designed to assist organizations with the
management of purchasing, travel and fleet card programs. Synovus' acquisition
of ProCard offers TSYS the opportunity to further expand its services to
ProCard's clients. ProCard's software solutions will be integrated into TSYS'
processing solutions. The Company is assisting in managing ProCard, for which
the Company was paid a management fee of $177,000 by Synovus in 2000.
In the third quarter of 2000, TSYS signed a ten-year contract with Royal
Bank. In conjunction with the requirements of its contract, TSYS paid $37.8
million in contract acquisition costs to Royal Bank. In anticipation of the
signing of a contract, TSYS entered into a forward exchange contract in June
2000 which provided for $20 million to be converted into British Pounds Sterling
at a rate of 1.5187 any time between July 3, 2000 and September 29, 2000. In
July 2000, TSYS exercised the forward exchange contract. TSYS accounted for the
forward exchange contract as a hedge under Financial Accounting Standards No.
52, "Foreign Currency Translation" (SFAS 52).
In December 2000, TSYS purchased a facility in England for approximately
$13.0 million, which included building and equipment. In anticipation of the
signing of a contract, TSYS entered into a forward exchange contract in October
2000 which provided for the purchase of (pound)10 million at a rate of 1.4315
any time between November 15, 2000 and December 15, 2000. In December 2000, TSYS
exercised the forward exchange contract. TSYS also accounted for the forward
exchange contract as a hedge under SFAS 52.
At present, the Company does not have a material currency translation risk.
The Company has determined that once it begins processing services for its new
European clients, the Company may explore potential hedging instruments to
safeguard it from significant currency translation risks.
Due to the complexity of the differences between the English language and
Asian languages, computer systems require two bytes to store an Asian character
compared to one byte in the English language. With its entrance into the Asian
card processing market, TSYS will begin modifying its current TS2 processing
system to be able to accommodate language and currency differences with Asia,
commonly referred to as the "double byte project." TSYS is in the planning
stages of this project. Management expects to spend $10-15 million on the
project.
Although the impact of inflation on its operations cannot be precisely
determined, the Company believes that by controlling its operating expenses and
by taking advantage of 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 1.4:1. At December 31, 2000,
TSYS had working capital of $63.7 million, compared to $76.4 million in 1999 and
$60.5 million in 1998.
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 and/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 (Y2K) compliant, they would not be able to
correctly
24
process date information for the year 2000 and beyond. Remediation efforts went
beyond the Company's internal computer systems and required coordination with
clients, 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 continued to
monitor Y2K issues by overseeing critical tasks during the year 2000. The TSYS
Year 2000 Command Center and Command Posts remained staffed during the first
quarter of 2000, but on a smaller scale than during 1999.
The total cost for the Year 2000 Project amounted to approximately $17
million of direct costs since project inception. This amount consists primarily
of the costs associated with personnel dedicated to the Year 2000 Project and
hardware/software costs related to testing. During 2000, TSYS incurred $1.0
million of direct costs associated with the Year 2000 Project.
Euro Conversion Readiness Disclosure
The Company has announced the signing of Royal Bank and AIB as processing
clients beginning in 2001. The United Kingdom is not a "participating country"
with respect to January 1, 1999, "Euro" currency conversion, and it currently is
not known when or if the United Kingdom will elect to convert to the Euro.
However, Ireland is a participating country. Nonetheless, as of October 2000,
TSYS' TS2 processing system is capable of processing Euro-denominated
transactions and is now in the client acceptance testing mode. TSYS' costs in
connection with the Euro conversion were not material.
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). These forward-looking
statements include, among others, statements regarding TSYS' expected growth in
net income for 2001 over 2000, the expected increase in net income for 2002 and
2003, TSYS' expected expenditures on its double byte project and the assumptions
underlying such statements. 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.
Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. A number of important factors
could cause actual results to differ materially from those contemplated by the
forward-looking statements in this Annual Report. Many of these factors are
beyond TSYS' ability to control or predict. The factors include, but are not
limited to: (i) lower than anticipated internal growth rates for TSYS' existing
clients; (ii) TSYS' inability to control expenses and increase market share;
(iii) TSYS' inability to successfully bring new products to market, including,
but not limited to, stored value and e-commerce products; (iv) the inability of
TSYS to grow its business through acquisitions; (v) TSYS' inability to increase
the revenues derived from international sources; (vi) adverse developments with
respect to entering into contracts with new clients and retaining current
clients; (vii) the merger of TSYS clients with entities that are not TSYS
clients; (viii) TSYS' inability to anticipate and respond to technological
changes, particularly with respect to e-commerce; (ix) adverse developments with
respect to the successful conversion of clients; (x) the absence of significant
changes in foreign exchange spreads between the United States and the countries
TSYS transacts business in, to include Mexico, United Kingdom, Japan, Canada and
the European Union; (xi) changes in consumer spending, borrowing and saving
habits, including a shift from credit to debit cards; (xii) changes in laws,
regulations, credit card association rules or other industry standards affecting
TSYS' business which require significant product redevelopment efforts; (xiii)
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; (xiv) the costs and effects of litigation; (xv) adverse developments
with respect to the credit card industry in general; and (xvi) overall market
conditions.
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
On November 10, 1998, a class action complaint was filed against NationsBank of
Delaware, N.A., in the United States District Court for the Southern District of
Mississippi. On March 23, 1999, the named plaintiff amended the complaint and
named the Company and certain credit bureaus as defendants in the case. The
named plaintiff alleges, among other things, that the defendants failed to
report properly the credit standing of each member of the putative class. The
named plaintiff has defined the class as all persons and entities within the
United States who obtained credit cards from NationsBank and whose accounts were
purchased by or transferred to U.S. BankCard and whose accounts were reported to
credit bureaus or credit agencies incorrectly in August 1998. The amended
complaint alleges negligence, violation of the Fair Credit Reporting Act, breach
of the duty of good faith and fair dealing, and seeks declaratory relief,
injunctive relief and the imposition of punitive damages. The parties have
reached a settlement of this litigation, which settlement is subject to court
approval under Rule 23(e) of the Federal Rules of Civil Procedure. Payments by
TSYS to settle the litigation are not expected to be material to TSYS' financial
condition or results of operations, and management expects the settlement to be
substantially covered by insurance.
TSYS ANNUAL REPORT 2000 25
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (includes $74.6 million and $54.3 million
on deposit with a related party at 2000 and 1999, respectively) $ 80,071,895 54,903,107
Accounts receivable, net of allowance for doubtful accounts of
$2.7 million and $1.3 million at 2000 and 1999, respectively 100,691,083 99,601,498
Prepaid expenses and other current assets (Note 10) 30,192,248 25,171,328
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 210,955,226 179,675,933
Property and equipment, net (Note 3) 110,971,777 96,254,657
Computer software, net (Note 4) 145,454,042 98,824,792
Deferred income tax assets (Note 7) 11,104,254 9,422,203
Other assets (Notes 5 and 10) 125,907,383 82,594,156
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 604,392,682 466,771,741
====================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 43,935,426 15,267,979
Accrued salaries and employee benefits 45,202,518 36,421,238
Current portion of long-term debt and obligations under capital leases __ 44,520
Other current liabilities (includes $2.4 and $1.9 million payable to related parties
at 2000 and 1999, respectively) (Note 10) 58,162,646 51,528,099
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 147,300,590 103,261,836
Long-term debt and obligations under capital leases,
excluding current portion -- 159,766
Deferred income tax liabilities (Note 7) 34,841,622 29,058,083
Other long-term liabilities 10,652,600 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 192,794,812 132,479,685
- ------------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiary (Note 12) 2,583,682 --
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (Notes 2 and 6):
Common stock-- $.10 par value. Authorized 300,000,000 shares; 195,079,087 issued at
2000 and 1999, respectively; 194,738,870 and 194,861,620 outstanding at 2000
and 1999, respectively 19,507,909 19,507,909
Additional paid-in capital 6,998,100 6,442,300
Accumulated other comprehensive loss (1,613,681) (1,453,708)
Treasury stock (3,594,683) (1,529,176)
Retained earnings 387,716,543 311,324,731
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 409,014,188 334,292,056
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Total liabilities and shareholders' equity $ 604,392,682 466,771,741
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
26
CONSOLIDTED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services (includes $42.9 million, $37.1 million
and $31.7 million from related parties for the years ended
December 31, 2000, 1999 and 1998, respectively) $ 505,934,776 456,839,589 350,309,833
Other services (includes $6.6 million, $5.5 million
and $1.5 million from related parties for the years ended
December 31, 2000, 1999 and 1998, respectively) 95,357,966 77,086,422 45,884,235
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues (Notes 2 and 11) 601,292,742 533,926,011 396,194,068
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 235,670,223 207,618,319 160,854,929
Net occupancy and equipment expense 162,905,729 151,964,229 105,658,033
Other operating expenses (includes $11.0 million, $13.1 million
and $10.9 million to related parties for the years ended
December 31, 2000, 1999 and 1998, respectively) 90,111,097 86,051,059 63,312,582
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (Note 2) 488,687,049 445,633,607 329,825,544
- ------------------------------------------------------------------------------------------------------------------------------------
Equity in income of joint ventures (Note 5) 15,586,309 12,326,609 12,974,348
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 128,192,002 100,619,013 79,342,872
- ------------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense):
Gain (loss) on disposal of property and equipment, net (1,421,955) 797,916 (48,470)
Interest income, net of expense (includes $4.8 million, $1.9 million
and $2.3 million from a related party for the years ended
December 31, 2000, 1999 and 1998, respectively) 5,036,645 2,159,074 2,492,725
Minority interest in subsidiary's net income (98,750) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (Note 2) 3,515,940 2,956,990 2,444,255
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 131,707,942 103,576,003 81,787,127
Income taxes (Note 7) 46,064,561 34,983,027 26,955,984
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 85,643,381 68,592,976 54,831,143
====================================================================================================================================
Basic earnings per share $ .44 .35 .28
====================================================================================================================================
Diluted earnings per share $ .44 .35 .28
====================================================================================================================================
Weighted average common shares outstanding 194,784,981 194,912,983 194,019,689
Increase due to assumed issuance of shares related to stock options outstanding 480,371 565,610 649,762
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares outstanding 195,265,352 195,478,593 194,669,451
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
TSYS ANNUAL REPORT 2000 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 85,643,381 68,592,976 54,831,143
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in subsidiary's net income 98,750 -- --
Equity in income of joint ventures (15,586,309) (12,326,609) (12,974,348)
Depreciation and amortization 51,600,551 50,182,601 37,473,673
Provision for doubtful accounts 1,575,486 665,500 18,000
Deferred income tax expense (benefit) 4,101,488 542,398 5,338,794
(Gain) loss on disposal of property and equipment, net 1,421,955 (797,916) 48,470
(Increase) decrease in:
Accounts receivable (1,499,484) (15,471,271) (15,362,807)
Prepaid expenses and other assets (13,496,376) (1,953,576) (5,088,094)
Increase (decrease) in:
Accounts payable 28,196,771 7,864,956 1,002,658
Accrued expenses and other current liabilities 13,596,042 37,228,296 (2,341,598)
Other long-term liabilities 10,652,600 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 166,304,855 134,527,355 62,945,891
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (31,785,383) (19,772,202) (36,998,466)
Additions to computer software (72,685,206) (54,188,928) (39,502,459)
Proceeds from disposal of equipment 79,473 4,540,483 86,669
Cash acquired in acquisition of subsidiary 623,364 -- --
Dividends received from joint ventures 5,369,192 5,104,905 5,618,616
Increase in contract acquisition costs (41,713,092) (15,812,318) (20,104,849)
Refund of contract acquisition costs 10,000,000 -- --
Redemption of short-term investments -- -- 998,228
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (130,111,652) (80,128,060) (89,902,261)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Purchase of common stock (2,077,301) (1,290,748) --
Principal payments on long-term debt and
capital lease obligations (204,286) (70,619) (132,415)
Dividends paid on common stock (8,766,916) (7,787,981) (6,790,492)
Proceeds from exercise of stock options 24,088 97,400 99,115
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (11,024,415) (9,051,948) (6,823,792)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 25,168,788 45,347,347 (33,780,162)
Cash and cash equivalents at beginning of year 54,903,107 9,555,760 43,335,922
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 80,071,895 54,903,107 9,555,760
====================================================================================================================================
Cash paid for interest (net of capitalized amounts) $ 54,051 23,934 29,399
====================================================================================================================================
Cash paid for income taxes (net of refunds received) $ 42,708,816 24,647,585 27,167,086
====================================================================================================================================
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 (Notes 2 and 12).
See accompanying Notes to Consolidated Financial Statements.
28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2000, 1999 and 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other Total
----------------------- Paid-in Comprehensive Treasury Retained Shareholders'
Shares Amount Capital Loss Stock Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 194,225,283 $19,422,528 459,073 (1,178,182) (377,701) 202,929,038 $221,254,756
Comprehensive income:
Net income -- -- -- -- -- 54,831,143 54,831,143
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments -- -- -- (1,155) -- -- (1,155)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss -- -- -- -- -- -- (1,155)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- -- -- 54,829,988
Common stock issued from
treasury shares for exercise of
stock options (Note 6) -- -- 91,292 -- 76,913 -- 168,205
Amortization of restricted stock awards -- -- -- -- -- 44,325 44,325
Cash paid for fractional shares in lieu of
stock dividend (238) (24) (4,738) -- -- -- (4,762)
Cash dividends declared ($.038 per share) -- -- -- -- -- (7,275,980) (7,275,980)
Tax benefit associated with stock awards -- -- 1,337,187 -- -- -- 1,337,187
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 194,225,045 19,422,504 1,882,814 (1,179,337) (300,788) 250,528,526 270,353,719
Comprehensive income:
Net income -- -- -- -- -- 68,592,976 68,592,976
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments -- -- -- (274,371) -- -- (274,371)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss -- -- -- -- -- -- (274,371)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- -- -- 68,318,605
Common stock issued in an
acquisition (Notes 2 and 12) 854,042 85,405 3,342,220 -- -- -- 3,427,625
Common stock issued from
treasury shares for exercise of
stock options (Note 6) -- -- 79,903 -- 62,360 -- 142,263
Purchase of treasury shares -- -- -- -- (1,290,748) -- (1,290,748)
Cash dividends declared ($.040 per share) -- -- -- -- -- (7,796,771) (7,796,771)
Tax benefit associated with stock awards -- -- 1,137,363 -- -- -- 1,137,363
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999 195,079,087 19,507,909 6,442,300 (1,453,708) (1,529,176) 311,324,731 334,292,056
Comprehensive income:
Net income -- -- -- -- -- 85,643,381 85,643,381
Other comprehensive loss, net of tax:
Foreign currency translation
adjustments -- -- -- (159,973) -- -- (159,973)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss -- -- -- -- -- -- (159,973)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- -- -- 85,483,408
Common stock issued from treasury
shares for exercise of stock options
(Note 6) -- -- 15,300 -- 11,794 -- 27,094
Purchase of treasury shares -- -- -- -- (2,077,301) -- (2,077,301)
Cash dividends declared ($.048 per share) -- -- -- -- -- (9,251,569) (9,251,569)
Tax benefit associated with stock awards -- -- 540,500 -- -- -- 540,500
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000 195,079,087 $19,507,909 6,998,100 (1,613,681) (3,594,683) 387,716,543 $409,014,188
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
TSYS ANNUAL REPORT 2000 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 currently 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. (TSI), Columbus Productions, Inc., TSYS
Canada, Inc. and DotsConnect, Inc., as well as its majority owned foreign
subsidiary, GP Network Corporation (GP Net). 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 clients. 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 client'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 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. 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
30
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 Equivalents: For purposes of the statements of cash flows, 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: The Company maintains several different foreign
operations. Foreign currency financial statements of the Company's Mexican joint
venture, the Company's wholly owned subsidiary with an operation in Canada, the
Company's majority owned foreign subsidiary, GP Net, as well as the Company's
branch in Japan, 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 gains or losses
resulting from the currency translation of assets and liabilities of the
Company's foreign operations, net of tax, are accumulated in a separate section
of shareholders' equity titled accumulated other comprehensive loss.
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 those years 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 loss.
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 1999 and 1998
financial statements to conform to the presentation adopted in 2000.
Derivative Instruments and Hedging Activities: In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities." In June 2000, the FASB issued Statement of Financial Accounting
Standards No. 138 (SFAS 138), "Accounting for Certain Derivative Instruments and
Hedging Activities, an amendment of SFAS 133." SFAS 133 and SFAS 138 require
that all derivative instruments be recorded on the balance sheet at their
respective fair values. SFAS 133 and SFAS 138 are effective for all fiscal
quarters of all fiscal years beginning after June 30, 2000; the Company adopted
SFAS 133 and SFAS 138 on January 1, 2001.
The Company did not have any outstanding derivative instruments or hedging
transactions at December 31, 2000. The Company is assessing the impact of SFAS
133 and SFAS 138 on anticipated hedging instruments.
NOTE 2 Relationships with Affiliated Companies
At December 31, 2000, CB&T owned 157,455,980 shares (80.9%) 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 $12,281,914, $8,049,915 and $4,225,439
during the years ended December 31, 2000, 1999 and 1998, respectively.
Miscellaneous data processing services performed by TSYS for certain Synovus
nonbanking affiliates generated revenues of $256,126, $221,844 and $175,801
during the years ended December 31, 2000, 1999 and 1998, 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 $15,710,029, $15,954,155 and $17,362,650 for the years ended
December 31, 2000, 1999 and 1998, respectively. Merchant processing revenues,
included in bankcard data processing revenues, related to Vital,
TSYS ANNUAL REPORT 2000 31
the Company's joint venture with Visa, were $14,109,721, $12,898,723 and
$9,873,293 for the years ended December 31, 2000, 1999 and 1998, respectively.
During 2000, TSYS provided web hosting and electronic commerce processing
services to CB&T for which the Company was paid $545,507.
Revenues from other services provided by TSYS to Synovus and its affiliates
were $6,593,783, $5,483,784 and $1,539,009 during the years ended December 31,
2000, 1999 and 1998, 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 2000 or 1999.
In 2000, 1999 and 1998, TSYS received interest income of $4,772,461,
$1,865,621 and $2,342,416, respectively, from CB&T.
During 2000, 1999 and 1998, Synovus Technologies, Inc.(STI) paid TSYS
$143,222, $168,305 and $273,087, respectively, for data links, network services,
computer processing services and other miscellaneous items.
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. Lease payments made to CB&T amounted to
$36,308 in 1999 and $72,515 in 1998. Lease payments received from CB&T amounted
to $39,405 in 2000, $9,851 in 1999 and $18,411 in 1998. TSYS also leased
furnishings from Synovus Leasing Co. for $20,807 in 2000.
Synovus Trust Company (STC) serves as trustee of various employee benefit
plans of TSYS. During 2000, 1999 and 1998, STC trustee's fees were $391,414,
$317,081 and $258,184, respectively.
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 $1,703,840 in 2000, $1,524,780 in 1999 and
$1,283,494 in 1998.
Synovus has entered into a management agreement with TSYS pursuant to which
Synovus pays for management services provided to TSYS Total Debt Management and
ProCard by TSYS. Such management fees amounted to $681,511 in 2000.
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 $8,070,260, $10,639,179 and
$9,892,790 for these services in 2000, 1999 and 1998, respectively. TSYS
received $197,597 in 2000 and $51,594 in 1999 and $26,169 in 1998 in rent from
SSC. TSYS also received $63,806, $382,840 and $199,492 in 2000, 1999 and 1998,
respectively, for data processing services provided to SSC. TSYS made lease
payments to SSC for $27,690 in 1998.
Effective January 1, 1999, TSYS acquired Partnership Card Services (PCS)
from its majority shareholder, CB&T, the flagship bank of Synovus, 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 client
service to card-issuing financial institutions, including CB&T. The business of
PCS has become part of TSYS' wholly owned subsidiary, TSI.
Due to the addition of PCS, TSYS paid CB&T $345,893 in 1999 for marketing
rights. TSYS also paid STI $1,688,676 and $765,741 in 2000 and 1999,
respectively, 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 $74.6 million and
$54.3 million at December 31, 2000 and 1999, 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 2000, 1999 and 1998 as follows:
- --------------------------------------------------------------------------------
Number of shares
2000 1999 1998
- --------------------------------------------------------------------------------
Stock options 323,122 980,883 956,192
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Land $ 6,092,433 6,092,433
Buildings and improvements 80,344,434 66,758,819
Computer equipment 65,840,658 57,105,222
Furniture and other equipment 52,013,579 48,643,289
Construction in progress 1,488,817 644,345
- --------------------------------------------------------------------------------
205,779,921 179,244,108
Less accumulated depreciation
and amortization 94,808,144 82,989,451
- --------------------------------------------------------------------------------
Property and equipment, net $110,971,777 96,254,657
================================================================================
Depreciation and amortization of property and equipment was $16,553,156,
$15,637,169 and $13,212,897 for the years ended December 31, 2000, 1999 and
1998, respectively.
32
NOTE 4 Computer Software
Computer software at December 31 is summarized as follows:
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Purchased computer software $177,629,217 111,331,549
TS2 33,048,872 33,048,872
Other capitalized software
development costs 32,467,800 26,786,646
- --------------------------------------------------------------------------------
243,145,889 171,167,067
Less accumulated amortization 97,691,847 72,342,275
- --------------------------------------------------------------------------------
Computer software, net $145,454,042 98,824,792
================================================================================
Amortization expense related to purchased computer software costs was
$20,604,861, $16,153,985 and $12,057,582 for the years ended December 31, 2000,
1999 and 1998, respectively. Amortization of TS2 and other capitalized software
development costs was $5,101,047, $5,472,776 and $4,716,278 for the years ended
December 31, 2000, 1999 and 1998, respectively.
During 2000, the Company ceased development of two software projects. The
projects were evaluated to determine their utilization in a new design plan that
included expanded international functionality. Based on its review, the Company
expensed $6.1 million of costs as employment and other expenses that were
originally capitalized on those projects.
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 for merchants. The condensed financial information for
this joint venture as of December 31, 2000 and 1999, and for the years ended
December 31, 2000, 1999 and 1998, is summarized as follows:
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Balance Sheet Data:
Current assets $ 72,628,000 63,066,000
Total assets 111,459,000 86,337,000
Current liabilities 34,619,000 30,412,000
Total liabilities 38,230,000 30,412,000
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Statement of Income Data:
Revenues $176,539,000 151,581,000 127,222,000
Operating income 28,503,000 19,234,000 19,526,000
Net income* 25,655,000 20,065,000 20,725,000
*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.
Vital is an LLC company with 100 million units of ownership. In 2000, the
Vital Board of Directors approved a plan to allow its owners to set aside
2,000,000 restricted units to make awards to key management of Visa and TSYS.
These units are similar to restricted stock with a three-year vesting schedule.
During the three years, there will be no voting rights or dividend distributions
to these restricted units. The vesting accelerates at a change of control or an
initial public offering of Vital. TSYS awarded six of its key executives an
aggregate of 800,000 restricted stock units for their role in the development,
growth and success of Vital. The Company is recognizing compensation expense by
amortizing the fair value of the units on a straight-line basis.
NOTE 6 Shareholders' Equity
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. During the year ended December 31, 2000, the Company
had purchased 130,400 shares for $2.1 million under this plan, bringing the
total number of shares purchased to 207,500 shares for $3.4 million.
The following table summarizes shares held as treasury stock and treasury
stock costs:
- ------------------------------------------------------------------------------------
Number of Treasury
Treasury Shares Shares Cost
- ------------------------------------------------------------------------------------
December 31, 2000 340,217 $3,594,683
December 31, 1999 217,467 1,529,176
December 31, 1998 181,260 300,788
- ------------------------------------------------------------------------------------
During 2000, 1999 and 1998, certain employees of the Company exercised
options for 7,650, 41,100 and 48,925 shares of common stock, respectively, that
were issued from treasury shares.
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
TSYS ANNUAL REPORT 2000 33
may not exceed ten years from the date of the grant. During 2000, TSYS
granted to a key employee an option to acquire 55,000 shares of TSYS common
stock. Of the 55,000 shares, 15,450 shares were granted under the LTI plan. The
remaining 39,550 shares were granted outside the LTI plan by the Board of
Directors. At December 31, 2000, there were options outstanding under the LTI
Plan to purchase 1,607,300 shares of the Company's common stock, of which
576,600 shares were exercisable. There were no shares available for grant at
December 31, 2000, under the LTI Plan.
Additionally, options (not issued under the LTI Plan) to purchase 77,050
shares of the Company's common stock were outstanding at December 31, 2000, of
which 37,500 were exercisable.
A summary of the status of the Company's options granted as of December 31,
2000, 1999 and 1998, and changes during the years ended on those dates is
presented below:
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options:
Outstanding at beginning of year 1,637,000 $ 12.41 1,678,100 $ 12.15 1,727,025 $ 11.86
Granted 55,000 15.44 -- -- -- --
Exercised (7,650) 2.00 (41,100) 2.00 (48,925) 2.00
Forfeited/canceled -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at
end of year 1,684,350 $ 12.55 1,637,000 $ 12.41 1,678,100 $ 12.15
====================================================================================================================================
Options exercis-
able at year-end 614,100 $ 11.33 448,500 $ 10.24 330,100 $ 7.60
====================================================================================================================================
Weighted average fair value of
options granted during the year $ 5.78 $ -- $ --
====================================================================================================================================
The following table summarizes information about stock options outstanding
at December 31,2000:
Number Weighted Number
Outstanding at Average Remaining Weighted Average Exercisable at Weighted Average
December 31, 2000 Contractual Life in Years Exercise Price December 31, 2000 Exercise Price
- -----------------------------------------------------------------------------------------------------------
121,850 1.50 $ 2.00 121,850 $ 2.00
37,500 8.03 18.50 37,500 18.50
1,470,000 6.84 13.17 441,000 13.17
55,000 9.20 15.44 13,750 15.44
- -----------------------------------------------------------------------------------------------------------
1,684,350 6.47 $ 12.55 614,100 $ 11.33
===========================================================================================================
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 for 2000: dividend yield of 0.0%; expected volatility of 38.8%;
risk-free interest rate of 5.05%; and expected lives of 4.0 years for all
options.
Synovus has various stock option plans under which the Compensation
Committee of its Board of Directors has authority to grant stock options to key
Synovus employees, including TSYS. The general terms of the existing stock
option plans include vesting periods ranging from two to three years and
exercise periods ranging from five to ten years. Such stock options are granted
at exercise prices which equal the fair market value of a share of common stock
on the grant date.
During 1999 and 1998, Synovus granted options to purchase 150 shares of
stock to each employee, including TSYS and its subsidiaries. The exercise price
per share is equal to the fair market value at the grant date of $19.19 and
$22.00 for the 1999 and 1998 grants, respectively. The options are exercisable
after the price of Synovus' stock doubles or after three years, whichever comes
first.
34
A summary of the status of Synovus' stock option plans related to TSYS'
employees as of December 31, 2000, 1999 and 1998 and changes during the years
then ended is presented below:
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options:
Outstanding at beginning of year 3,389,511 $ 17.06 2,573,541 $ 14.98 1,744,086 $ 10.97
Granted 323,122 18.06 980,883 21.11 956,192 21.31
Exercised (183,869) 11.41 (146,343) 7.56 (106,242) 6.24
Forfeited/canceled (49,363) 18.35 (18,570) 17.61 (20,495) 14.54
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at
end of year 3,479,401 $ 17.43 3,389,511 $ 17.06 2,573,541 $ 14.98
====================================================================================================================================
Options exercis-
able at year-end 1,530,576 $ 13.23 1,102,180 $ 10.76 678,888 $ 7.61
====================================================================================================================================
Weighted average fair value of
options granted during the year $ 6.42 $ 5.41 $ 4.96
====================================================================================================================================
The following table summarizes information about Synovus' stock options
outstanding at December 31, 2000:
Number Weighted Number
Outstanding at Average Remaining Weighted Average Exercisable at Weighted Average
December 31, 2000 Contractual Life in Years Exercise Price December 31, 2000 Exercise Price
- -----------------------------------------------------------------------------------------------------------
328,961 3.68 $ 6.54 328,961 $ 6.54
943,343 5.04 13.49 943,343 13.49
1,885,000 6.29 21.20 258,272 20.83
322,097 7.81 18.06 -- --
- -----------------------------------------------------------------------------------------------------------
3,479,401 5.84 $ 17.43 1,530,576 $ 13.23
===========================================================================================================
The per share weighted average fair value of stock options granted during
2000, 1999 and 1998 was $6.42, $5.41 and $3.68, respectively. The fair value for
these options was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions for 2000,
1999 and 1998, respectively: risk-free interest rates of 6.4%, 5.3% and 5.4%;
expected volatility of 36%, 36% and 32%; expected life of 6.3 years, 4.3 years
and 4 years; and dividend yield of 2.3%, 1.7% and 1.3%.
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 (including the Synovus plans) been
determined consistent with Statement of Financial Accounting Standards No. 123
(SFAS 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, 2000 1999 1998
- --------------------------------------------------------------------------------
Net income applicable
to common stockholders
As reported $85,643,381 68,592,976 54,831,143
Pro forma 81,812,463 64,417,825 50,580,406
Basic earnings per share:
As reported .44 .35 .28
Pro forma .42 .33 .26
Diluted earnings per share:
As reported .44 .35 .28
Pro forma .42 .33 .26
Subsidiary Options: On May 1, 2000, TSYS formed DotsConnect as a wholly owned
subsidiary for the purpose of providing e-payment services to buyers and sellers
via the Internet. TSYS contributed $5 million and a nominal amount of fixed
assets in return for 20 million shares of common stock. DotsConnect established
the DotsConnect, Inc. 2000 Long-term Incentive Plan (the "2000 Plan"). The
purpose of the 2000 Plan is to attract and retain employees, to provide
additional incentive for each participant to work to increase the value of
DotsConnect and to enable such employees to acquire and maintain an equity
interest in DotsConnect. Any employee of DotsConnect or its affiliates
(including TSYS) is eligible to be selected to participate in the 2000 Plan. The
aggregate number of shares of DotsConnect stock which may be granted to
participants pursuant to awards granted under the 2000 Plan may not exceed
1,500,000. The 2000 Plan will be administered by the Board of Directors of
DotsConnect. The Compensation Committee of the Board of Directors of TSYS will
administer the options granted to employees of TSYS.
The options under the 2000 Plan may take the form of qualified incentive
stock options, nonqualified stock options or a combination thereof. The option
price of both nonqualified and qualified incentive stock options must be equal
to 100% of the fair market value of a share of DotsConnect stock on the date the
option is granted. Options shall expire at such times as determined at the time
of grant; however, no option shall be exercisable later than the tenth
anniversary of its grant.
DotsConnect awarded 1,496,500 options under the 2000 Plan. Of those granted
in 2000, 475,000 options were awarded to six of TSYS' key executives.
The Company is accounting for the stock options under the provisions of
SFAS 123. The 2000 Plan is a noncompensatory plan . As a result, no compensation
expense was recorded in 2000.
TSYS ANNUAL REPORT 2000 35
Accumulated Other Comprehensive Loss: 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, 1999 Pretax amount Tax benefit December 31, 2000
- ------------------------------------------------------------------------------------------------------------------
Currency translation adjustments $ (1,453,708) (248,739) 88,766 $(1,613,681)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------
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, 2000 1999 1998
- -----------------------------------------------------------------------------------------
Current income tax expense:
Federal $41,649,857 32,816,025 20,669,630
State 313,216 1,624,604 947,560
- -----------------------------------------------------------------------------------------
Total current income tax expense 41,963,073 34,440,629 21,617,190
- -----------------------------------------------------------------------------------------
Deferred income tax expense (benefit):
Federal 3,873,627 512,265 5,042,194
State 227,861 30,133 296,600
- -----------------------------------------------------------------------------------------
Total deferred income tax expense (benefit): 4,101,488 542,398 5,338,794
- -----------------------------------------------------------------------------------------
Total income tax expense $46,064,561 34,983,027 26,955,984
=========================================================================================
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, 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Computed "expected" income tax expense $ 46,097,780 36,251,600 28,625,494
Increase(decrease) in income tax expense resulting from:
State income tax expense, net of federal income tax benefit 351,700 1,075,579 808,704
Foreign tax credits (1,005,000) (969,000) (1,473,788)
Other, net 620,081 (1,375,152) (1,004,426)
- -------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 46,064,561 34,983,027 26,955,984
- -------------------------------------------------------------------------------------------------------------------
The tax effects of the significant components of deferred income tax
assets and liabilities are presented in the following table:
- ------------------------------------------------------------------------------------------
As of December 31, 2000 1999
- ------------------------------------------------------------------------------------------
Deferred income tax assets:
Primarily accruals not deductible until paid $ 8,675,956 8,200,673
State tax credits 3,828,298 2,621,530
- ------------------------------------------------------------------------------------------
Gross deferred income tax assets 12,504,254 10,822,203
Less valuation allowance (1,400,000) (1,400,000)
- ------------------------------------------------------------------------------------------
Net deferred income tax assets 11,104,254 9,422,203
- ------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Computer software development costs (17,662,312) (18,310,745)
Excess tax over financial statement depreciation (11,442,535) (6,306,942)
Other, net (5,736,775) (4,440,396)
- ------------------------------------------------------------------------------------------
Gross deferred income tax liability (34,841,622) (29,058,083)
- ------------------------------------------------------------------------------------------
Net deferred income tax liability $(23,737,368) (19,635,880)
==========================================================================================
As of December 31, 2000 and 1999, TSYS had state income tax credit
carryforwards of $3,828,298 and $2,621,530, respectively. The credits will begin
to expire in the year 2008. 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, 2000 and 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 was $1,400,000 at December 31,
2000 and 1999.
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 7% (9% in 1999 and 1998) 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:
- ----------------------------------------
2000 $ 10,024,695
1999 10,992,344
1998 8,365,937
- ----------------------------------------
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:
- ----------------------------------------
2000 $ 9,511,049
1999 8,413,213
1998 6,438,388
- ----------------------------------------
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 15% of pretax compensation with a discretionary company contribution up to a
maximum of 7% (5% in 1999 and 1998) 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:
- ----------------------------------------
2000 $ 6,774,850
1999 5,443,934
1998 1,142,828
- ----------------------------------------
Stock Purchase Plan: The Company maintains stock purchase plans for employees
and directors, 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:
- ----------------------------------------
2000 $ 2,722,035
1999 2,352,505
1998 1,862,698
- ----------------------------------------
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 which began in November
1999. The lease provides for substantial residual value guarantees and includes
purchase options at the 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, 2000, are as follows:
- ----------------------------------------
2001 $ 101,641,776
2002 105,629,526
2003 56,644,488
2004 20,430,816
2005 and thereafter 33,689,615
- ----------------------------------------
$ 318,036,221
========================================
All computer equipment lease commitments come with a renewal option or an
option to terminate the lease. Prior to lease expiration, TSYS decides which
option to choose. These lease commitments may also be replaced with new lease
commitments due to new technology.
Total rental expense under all operating leases in 2000, 1999 and 1998 was
$89,824,836, $85,928,317 and $55,926,412, respectively.
TSYS ANNUAL REPORT 2000 37
Loan Guarantee: In the fourth quarter of 1999, the Company made a payment
representing a contract acquisition cost of $10.0 million to a prospective
client. Under the terms of the arrangement, the prospective client agreed to
repay the $10.0 million in the event a processing agreement was not executed by
July 1, 2000. Subsequently, the prospective client announced its intention to
exit the credit card business through a sale of its accounts in 2000. The parent
of the prospective client repaid the $10.0 million advance in June 2000 by
obtaining a five-year loan from CB&T. TSYS has agreed to guarantee the loan.
Contractual Commitments: In the normal course of its business, the Company
maintains processing contracts with its clients. 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 clients, the Company
may incur penalties and/or certain clients 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. The parties have
reached a settlement of this litigation, which settlement is subject to court
approval under Rule 23(e) of the Federal Rules of Civil Procedure. Payments by
TSYS to settle the litigation are not expected to be material to TSYS' financial
condition or results of operations, and management expects the settlement to be
substantially covered by insurance.
NOTE 10 Supplementary Balance Sheet Information
Significant components of prepaid expenses and other current assets are
summarized as follows:
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
Contract acquisition costs, net $ 9,644,657 7,861,069
Prepaid expenses 12,377,875 9,709,740
Other 8,169,716 7,600,519
- -------------------------------------------------------------------------------
Total $30,192,248 25,171,328
===============================================================================
Significant components of other noncurrent assets are summarized as
follows:
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
Contract acquisition costs, net $ 65,434,739 43,001,304
Equity investments, net 45,631,679 35,951,632
Other 14,840,965 3,641,220
- -------------------------------------------------------------------------------
Total $125,907,383 82,594,156
===============================================================================
Significant components of other current liabilities are summarized as
follows:
- -------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------
Customer postage deposits $18,751,617 14,913,211
Transaction processing provisions 11,886,312 9,295,862
Other 27,524,717 27,319,026
- -------------------------------------------------------------------------------
Total $58,162,646 51,528,099
===============================================================================
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 approximately 86%
of financial activity in all of the quantitative thresholds required to be
measured under SFAS 131. Three subsidiaries were aggregated into transaction
processing services. One of these subsidiaries provides programming support
services solely to the parent company. Another subsidiary provides electronic
commerce activities previously performed by TSYS for its clients. The other
transaction processing subsidiary serves as a payment gateway for more than
100,000 merchants in Japan. The remaining segments were aggregated into support
services.
38
- -------------------------------------------------------------------------------------
Transaction Support
Operating Segments Processing Services Services Consolidated
- -------------------------------------------------------------------------------------
2000
Total revenue $ 517,388,440 87,530,763 $ 604,919,203
Intersegment revenue (1,087,134) (2,539,327) (3,626,461)
- -------------------------------------------------------------------------------------
Revenue from external customers $ 516,301,306 84,991,436 $ 601,292,742
=====================================================================================
Equity in income of joint ventures $ 15,586,309 -- $ 15,586,309
=====================================================================================
Segment operating income $ 115,936,333 12,255,669 $ 128,192,002
=====================================================================================
Income tax expense $ 41,359,177 4,705,384 $ 46,064,561
=====================================================================================
Net income $ 77,993,912 7,649,469 $ 85,643,381
=====================================================================================
Identifiable assets $ 590,065,183 57,738,614 $ 647,803,797
Intersegment eliminations (43,264,302) (146,813) (43,411,115)
- -------------------------------------------------------------------------------------
Total assets $ 546,800,881 57,591,801 $ 604,392,682
=====================================================================================
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 $ 454,926,573 47,704,132 $ 502,630,705
Intersegment eliminations (35,704,897) (154,067) (35,858,964)
- -------------------------------------------------------------------------------------
Total assets $ 419,221,676 47,550,065 $ 466,771,741
=====================================================================================
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 $ 347,943,328 32,895,850 $ 380,839,178
Intersegment eliminations (24,955,949) (958,242) (25,914,191)
- -------------------------------------------------------------------------------------
Total assets $ 322,987,379 31,937,608 $ 354,924,987
=====================================================================================
Geographic Area Data: The following geographic data represent revenues based on
the geographic locations of customers. The Company maintains property and
equipment in Europe and Japan; however, substantially all property and equipment
is located in the United States.
- ------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------
United States $545,940,339 493,231,610 376,303,345
Canada* 33,293,034 22,531,042 1,838,322
Mexico 15,710,029 15,954,155 17,362,650
Japan 4,941,556 -- --
Other 1,407,784 2,209,204 689,751
- ------------------------------------------------------------
$601,292,742 533,926,011 396,194,068
============================================================
*These revenues include those generated from the Caribbean accounts owned by the
Bank of Nova Scotia.
TSYS ANNUAL REPORT 2000 39
Major Customers:
- ----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Total of Total of Total
Revenue Dollars Revenues Dollars Revenues Dollars Revenues
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
One $ 93.0 15.5 % $ 86.9 16.3 % $ 82.3 20.8 %
Two 66.7 11.1 na na na na
Three 61.3 10.2 na na na na
Four na na 69.4 13.0 53.1 13.4
- ----------------------------------------------------------------------------------------------------------------------------------
Totals $221.0 36.8 % $ 156.3 29.3 % $135.4 34.2 %
==================================================================================================================================
na = not applicable. Client represented less than 10% of total revenues.
For the year ended December 31, 2000, the Company had three major customers
which accounted for approximately 37% of total revenues. For the years ended
December 31, 1999 and 1998, the Company had two major customers accounting for
approximately 29% and 34% of total revenues, respectively. Revenues from major
customers for the years reported are attributable to all reporting segments.
NOTE 12 Acquisitions
During August 2000, TSYS announced that it had purchased an equity position in
an established electronic payments company in Japan. The Company paid $4.7
million to acquire 51% of GP Net. The Company recorded $2.0 million as goodwill.
In November 2000, the Company acquired an additional 2% ownership in GP Net from
another partner for $95,310. Because it acquired controlling interest, the
Company is consolidating GP Net's financial statements. TSYS began consolidating
GP Net's financial results as of September 1, 2000.
Effective January 1, 1999, TSYS acquired PCS from its majority shareholder,
CB&T, 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 became 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.
40
REPORT OF INDEPENDENT AUDITORS
KPMG 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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/KPMG LLP
January 17, 2001
TSYS ANNUAL REPORT 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
Group Executive & Controller Group Executive &
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 15, 2001, there were
11,313 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 $.0125 per share was declared on December
11, 2000, and was paid January 2, 2001, to shareholders of record on December
21, 2000. Total dividends declared in 2000 and in 1999 amounted to $9.3 million
and $7.8 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, 2000 and 1999.
[Omitted Revenues Graph is represented by the following table.]
REVENUES
(Millions of Dollars)
2000 1999
QTR 1 $145.9 $115.3
QTR 2 150.5 137.0
QTR 3 149.0 137.8
QTR 4 156.0 143.8
[Omitted Net Income Graph is represented by the following table.]
NET INCOME
(Millions of Dollars)
2000 1999
QTR 1 $20.7 $12.9
QTR 2 24.3 18.4
QTR 3 19.1 16.9
QTR 4 21.6 20.3
- ------------------------------------------------------------------------------------------------
First Second Third Fourth
(in thousands except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------
2000 Revenues......................... $ 145,859 150,490 148,959 155,985
Operating income ................ 30,525 36,276 28,667 32,724
Net income ...................... 20,657 24,331 19,066 21,589
Basic earnings per share ........ .11 .12 .10 .11
Diluted earnings per share ...... .11 .12 .10 .11
Cash dividends declared per share .01 .013 .01 .013
Stock prices:
High ............................ 18 9/16 20 5/8 18 3/4 22 3/4
Low ............................. 15 15 3/4 16 14 7/8
- ------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------
TSYS ANNUAL REPORT 2000 43