TSYS(SM)(LOGO)
Richard W. Ussery March 8, 2002
Chairman of the Board
Dear Shareholder:
You are cordially invited to attend our Annual Meeting of Shareholders at
10:00 a.m. on Thursday, April 18, 2002, at the TSYS Riverfront Campus
Auditorium, 1600 First Avenue, Columbus, Georgia. Enclosed with this Proxy
Statement are your proxy card and the 2001 Annual Report.
We hope that you will be able to be with us and let us give you a review of
2001. Whether you own a few or many shares of stock and whether or not you plan
to attend in person, it is important that your shares be voted on matters that
come before the meeting. To make sure your shares are represented, we urge you
to vote promptly.
Thank you for helping us make 2001 a good year. We look forward to your
continued support in 2002 and another good year.
Sincerely yours,
/s/Richard W. Ussery
RICHARD W. USSERY
Total System Services, Inc. Post Office Box 2506 Columbus, Georgia 31902-2506
TOTAL SYSTEM SERVICES, INC.(R)
NOTICE OF THE 2002 ANNUAL MEETING OF SHAREHOLDERS
TIME............... 10:00 a.m. E.T.
Thursday, April 18, 2002
PLACE.............. TSYS Riverfront Campus Auditorium
1600 First Avenue
Columbus, Georgia 31901
ITEMS OF BUSINESS.. (1) To elect five directors to serve until the Annual
Meeting of Shareholders in 2005.
(2) To approve the Total System Services, Inc.
2002 Long-Term Incentive Plan.
(3) To approve the Synovus Financial Corp. 2002 Long-Term
Incentive Plan (TSYS is an 81.1% owned subsidiary
of Synovus).
(4) To transact such other business as may properly
come before the meeting and any adjournment thereof.
WHO MAY VOTE....... You can vote if you were a shareholder of record on
February 15, 2002.
ANNUAL REPORT...... A copy of the Annual Report is enclosed.
PROXY VOTING....... Your vote is important. Please vote in one of these ways:
(1) Use the toll-free telephone number shown on the proxy
card;
(2) Visit the web site listed on your proxy card;
(3) Mark, sign, date and promptly return the enclosed proxy
card in the postage-paid envelope provided; or
(4) Submit a ballot at the Annual Meeting.
/s/G. Sanders Griffith, III
G. SANDERS GRIFFITH, III
Secretary
Columbus, Georgia
March 8, 2002
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING,
PLEASE VOTE YOUR SHARES PROMPTLY.
TABLE OF CONTENTS
Voting Information.............................................................1
Election of Directors..........................................................3
Board of Directors.............................................................5
Audit Committee Report.........................................................6
Directors' Compensation........................................................7
Executive Officers.............................................................7
Stock Ownership of Directors and Executive Officers............................8
Directors' Proposal to Approve the Total System Services, Inc.
2002 Long-Term Incentive Plan.............................................9
Directors' Proposal to Approve the Synovus Financial Corp. 2002
Long-Term Incentive Plan.................................................14
Executive Compensation........................................................19
Stock Performance Graph.......................................................21
Compensation Committee Report on Executive Compensation.......................22
Compensation Committee Interlocks and
Insider Participation....................................................24
Transactions With Management..................................................25
Relationships Between TSYS, Synovus, CB&T and
Certain of Synovus' Subsidiaries.........................................25
Section 16(a) Beneficial Ownership Reporting Compliance.......................28
Independent Auditors..........................................................29
General Information:
Financial Information....................................................29
Shareholder Proposals for the 2003 Proxy Statement.......................29
Director Nominees or Other Business for Presentation
at the Annual Meeting...............................................29
Solicitation of Proxies..................................................29
Householding.............................................................30
Financial Appendix......................................................F-1
PROXY STATEMENT
VOTING INFORMATION
PURPOSE
This Proxy Statement and the accompanying proxy card are being mailed to
TSYS shareholders beginning March 8, 2002. The TSYS Board of Directors is
soliciting proxies to be used at the 2002 Annual Meeting of TSYS Shareholders
which will be held on April 18, 2002, at 10:00 a.m., at the TSYS Riverfront
Campus Auditorium, 1600 First Avenue, Columbus, Georgia. Proxies are solicited
to give all shareholders of record an opportunity to vote on matters to be
presented at the Annual Meeting. In the following pages of this Proxy Statement,
you will find information on matters to be voted upon at the Annual Meeting of
Shareholders or any adjournment of that meeting.
WHO CAN VOTE
You are entitled to vote if you were a shareholder of record of TSYS
stock as of the close of business on February 15, 2002. Your shares can be voted
at the meeting only if you are present or represented by a valid proxy.
SHARES OUTSTANDING
A majority of the outstanding shares of TSYS stock must be present, either
in person or represented by proxy, in order to conduct the Annual Meeting of
TSYS Shareholders. On February 15, 2002, 196,965,670 shares of TSYS stock were
outstanding.
COLUMBUS BANK AND TRUST COMPANY
Columbus Bank and Trust Company(R)("CB&T") owned individually 159,630,980
shares, or 81.1%, of the outstanding shares of TSYS stock on February 15,
2002. CB&T(R) is a wholly owned banking subsidiary of Synovus Financial
Corp.(R), a multifinancial services company.
PROXY CARD
The Board has designated two individuals to serve as proxies to vote the
shares represented by proxies at the Annual Meeting of Shareholders.
If you sign the proxy card but do not specify how you want your shares to
be voted, your shares will be voted by the designated proxies in favor of the
election of all of the director nominees and in accordance with the directors'
recommendations on the other proposals listed on the proxy card. The designated
proxies will vote in their discretion on any other matter that may properly come
before the meeting. At the date the Proxy Statement went to press, we did not
anticipate that any other matters would be raised at the Annual Meeting.
VOTING OF SHARES
Each share of TSYS stock represented at the Annual Meeting is entitled to
one vote on each matter properly brought before the meeting. All shares entitled
to vote and represented in person or by properly executed proxies received
before the polls are closed at the Annual Meeting, and not revoked or
superseded, will be voted at the Annual Meeting in accordance with the
instructions indicated on those proxies.
TSYS Dividend Reinvestment and Direct Stock Purchase Plan: If you
participate in this Plan, your proxy card represents shares held in the Plan, as
well as shares you hold in certificate form registered in the same name.
REQUIRED VOTES - ELECTION OF DIRECTOR NOMINEES
Directors are elected by a plurality of the votes, which means the five
nominees who receive the largest number of properly executed votes will be
elected as directors. Each share of TSYS
1
stock is entitled to one vote for each of five director nominees. Cumulative
voting is not permitted. Shares that are represented by proxies which are marked
"withhold authority" for the election of one or more director nominees will not
be counted in determining the number of votes cast for those persons.
REQUIRED VOTES - OTHER MATTERS
The affirmative vote of a majority of the shares present (in person or by
proxy and entitled to vote at the Annual Meeting) is needed to approve the
TSYS 2002 Long-Term Incentive Plan and the Synovus 2002 Long-Term Incentive
Plan.
TABULATION OF VOTES
Under certain circumstances, brokers are prohibited from exercising
discretionary authority for beneficial owners who have not returned proxies to
the brokers (so-called "broker non-votes"). In such cases, and in cases where
the shareholder abstains from voting on a matter, those shares will be counted
for the purpose of determining if a quorum is present, but will not be included
in the vote totals with respect to those matters and, therefore, will have no
effect on the vote. In addition, if a broker indicates on the proxy card that it
does not have discretionary authority on other matters considered at the
meeting, those shares will not be counted in determining the number of votes
cast with respect to those matters.
HOW YOU CAN VOTE
You may vote by proxy or in person at the meeting. To vote by proxy, you
may select one of the following options:
Vote By Telephone:
You can vote your shares by telephone by calling the toll-free telephone
number (at no cost to you) shown on your proxy card. Telephone voting is
available 24 hours a day, seven days a week. Easy-to-follow voice prompts
allow you to vote your shares and confirm that your instructions have been
properly recorded. Our telephone voting procedures are designed to
authenticate the shareholder by using individual control numbers. If you
vote by telephone, you do NOT need to return your proxy card.
Vote By Internet:
You can also choose to vote on the Internet. The web site for Internet
voting is shown on your proxy card. Internet voting is available 24 hours
a day, seven days a week. You will be given the opportunity to confirm that
your instructions have been properly recorded, and you can consent to view
future proxy statements and annual reports on the Internet instead of
receiving them in the mail. If you vote on the Internet, you do NOT need to
return your proxy card.
Vote By Mail:
If you choose to vote by mail, simply mark your proxy card, date and
sign it, and return it in the postage-paid envelope provided.
REVOCATION OF PROXY
If you vote by proxy, you may revoke that proxy at any time before it is
voted at the meeting. You may do this by (a) signing another proxy card with
a later date and returning it to us prior to the meeting, (b) voting again
by telephone or on the Internet prior to the meeting, or (c) attending the
meeting in person and casting a ballot.
2
ELECTION OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" ALL
NOMINEES.
NUMBER
The Board of Directors of TSYS consists of 16 members. As 18 board seats
have been authorized by TSYS' shareholders, TSYS has two directorships which
remain vacant. These vacant directorships could be filled in the future at the
discretion of TSYS' Board of Directors. This discretionary power gives TSYS'
Board of Directors the flexibility of appointing new directors in the periods
between TSYS' Annual Meetings should suitable candidates come to its attention.
The Board is divided into three classes whose terms are staggered so that the
term of one class expires at each Annual Meeting of Shareholders. The terms of
office of the Class I directors expire at the 2002 Annual Meeting, the terms of
office of the Class II directors expire at the 2003 Annual Meeting and the terms
of office of the Class III directors expire at the 2004 Annual Meeting. Proxies
cannot be voted at the 2002 Annual Meeting for a greater number of persons than
the number of nominees named.
NOMINEES
The following nominees have been selected by the Corporate Governance
Committee and approved by the Board for submission to the shareholders: G. Wayne
Clough, Samuel A. Nunn, H. Lynn Page, Philip W. Tomlinson and Richard W. Ussery,
each to serve a three year term expiring at the Annual Meeting in the year 2005.
The Board believes that each director nominee will be able to stand for
election. If any nominee becomes unable to stand for election, proxies in favor
of that nominee will be voted in favor of the remaining nominees and in favor of
any substitute nominee named by the Board upon the recommendation of the
Corporate Governance Committee. If you do not wish your shares voted for one or
more of the nominees, you may so indicate on the proxy.
MEMBERS OF THE BOARD OF DIRECTORS
Following is the principal occupation, age and certain other information
for each director nominee and other directors serving unexpired terms.
- -----------------------------------------------------------------------------------------------------------
TSYS Year
Director First
Classifi- Elected Principal Occupation
Name Age cation Director and Other Information
- ------------------------ ----- --------- --------- -------------------------------------------
James H. Blanchard <f1> 60 II 1982 Chairman of the Board and Chief
Executive Officer, Synovus Financial
Corp.; Chairman of the Executive
Committee, Total System Services, Inc.;
Director, BellSouth Corporation
Richard Y. Bradley 63 II 1991 Partner, Bradley & Hatcher (Law Firm);
Director, Synovus Financial Corp.
G. Wayne Clough 60 I 2000 President, Georgia Institute
of Technology
Gardiner W. Garrard, Jr. 61 II 1982 President, The Jordan Company (Real
Estate Development); Director, Synovus
Financial Corp.
Sidney E. Harris <f2> 52 III 1999 Dean, J. Mack Robinson College of
Business, Georgia State University;
Director, The ServiceMaster Company,
AirGate PCS, Inc. and Transamerica
Investors, Inc.
3
John P. Illges, III 67 II 1982 Senior Vice President and Financial
Consultant, Retired, The Robinson-Humphrey
Company, Inc. (Stockbroker); Director,
Synovus Financial Corp.
Alfred W. Jones III 44 III 2001 Chairman of the Board and Chief
Executive Officer, Sea Island Company
(Real Estate Development and Management);
Director, Synovus Financial Corp.
Mason H. Lampton 54 III 1986 Chairman of the Board and President,
The Hardaway Company and Chairman
of the Board, Standard Concrete Products
(Construction Companies); Director,
Synovus Financial Corp.
W. Walter Miller, Jr. <f3> 53 II 1993 Group Executive, Retired, Total System
Services, Inc.
Samuel A. Nunn 63 I 1997 Senior Partner, King & Spalding (Law
Firm) and Co-chairman and Chief
Executive Officer, Nuclear Threat Initiative;
Director, The Coca-Cola Company, Dell
Computer Corporation, General Electric Company,
Scientific-Atlanta, Inc.,
Internet Security Systems, Inc. and
ChevronTexaco Corporation
H. Lynn Page 61 I 1982 Director, Synovus Financial Corp.,
Columbus Bank and Trust Company and
Total System Services, Inc.
Philip W. Tomlinson <f4> 55 I 1982 President, Total System Services, Inc.
William B. Turner <f3> 79 III 1982 Chairman of the Executive Committee,
Columbus Bank and Trust Company and
Synovus Financial Corp.; Advisory
Director, W.C. Bradley Co. (Metal
Manufacturer and Real Estate)
Richard W. Ussery <f5> 54 I 1982 Chairman of the Board and Chief
Executive Officer, Total System Services,
Inc.
James D. Yancey 60 III 1982 President and Chief Operating Officer,
Synovus Financial Corp.; Chairman of the Board,
Columbus Bank and Trust Company;
Director, Shoney's, Inc.
Rebecca K. Yarbrough 64 III 1999 Private Investor
- ---------
<FN>
<f1> James H. Blanchard was elected Chairman of the Executive Committee of TSYS
in February 1992. From 1982 until 1992, Mr. Blanchard served as Chairman of
the Board of TSYS.
<f2> Sidney E. Harris was named dean of the J. Mack Robinson College of Business
at Georgia State University in July 1997. From 1991 until 1997, Mr. Harris
served as dean and/or professor of the Drucker School of Management at the
Claremont Graduate University.
<f3> W. Walter Miller, Jr.'s spouse is the niece of William B. Turner.
<f4> Philip W. Tomlinson was elected President of TSYS in February 1992. From
1982 until 1992, Mr. Tomlinson served as Executive Vice President of TSYS.
<f5> Richard W. Ussery was elected Chairman of the Board of TSYS in February
1992. From 1982 until 1992, Mr. Ussery served as President of TSYS.
</FN>
4
BOARD OF DIRECTORS
CORPORATE GOVERNANCE PHILOSOPHY
The business affairs of TSYS are managed under the direction of the Board
of Directors in accordance with the Georgia Business Corporation Code, as
implemented by TSYS' Articles of Incorporation and bylaws.
The role of the Board of Directors is to effectively govern the affairs of
TSYS for the benefit of its shareholders and other constituencies. The Board
strives to ensure the success and continuity of business through the election of
qualified management. It is also responsible for ensuring that TSYS' activities
are conducted in a responsible and ethical manner. The Corporate Governance
Committee conducts an annual review of corporate governance procedures. A
majority of TSYS' directors are independent, nonemployee directors.
SUBMISSION OF DIRECTOR CANDIDATES
Shareholders who wish to suggest qualified candidates for consideration
as directors of TSYS by the Corporate Governance Committee should write to:
Corporate Secretary, Total System Services, Inc., 901 Front Avenue, Suite 301,
Columbus, Georgia 31901, stating in detail the qualifications of such persons.
BOARD AND COMMITTEE MEETINGS
The Board of Directors held four meetings in 2001. All directors attended
at least 75% of Board and committee meetings held during their tenure during
2001. The average attendance by directors at the aggregate number of Board
and committee meetings they were scheduled to attend was 93%.
COMMITTEES OF THE BOARD
TSYS' Board of Directors has four principal standing committees -- an
Executive Committee, an Audit Committee, a Corporate Governance Committee and a
Compensation Committee. The following table shows the membership of the various
committees.
- ---------------------------------------------------------------------------------------------------------------------
Executive Audit Corporate Governance Compensation
- ---------- ----- -------------------- -------------
James H. Blanchard, Chair John P. Illges, III, Chair Richard Y. Bradley, Chair Gardiner W. Garrard, Jr., Chair
Richard Y. Bradley Sidney E. Harris Samuel A. Nunn G. Wayne Clough
Gardiner W. Garrard, Jr. H. Lynn Page Rebecca K. Yarbrough Mason H. Lampton
John P. Illges, III
Philip W. Tomlinson
William B. Turner
Richard W. Ussery
James D. Yancey
- ---------------------------------------------------------------------------------------------------------------------
Executive Committee. TSYS' Executive Committee held four meetings in 2001.
During the intervals between meetings of TSYS' Board of Directors, TSYS'
Executive Committee possesses and may exercise any and all of the powers of
TSYS' Board of Directors in the management and direction of the business and
affairs of TSYS with respect to which specific direction has not been previously
given by TSYS' Board of Directors.
Audit Committee. TSYS' Audit Committee held five meetings in 2001. Its
Report begins on page 6. The primary functions to be engaged in by TSYS' Audit
Committee include:
. Monitoring the quality and integrity of TSYS' financial reporting
process and systems of internal controls regarding finance,
accounting, regulatory and legal compliance;
. Monitoring the independence and performance of TSYS' independent
auditors and internal auditing activities; and
. Providing an avenue of communication among the independent auditors,
management, internal audit and the Board of Directors.
5
Corporate Governance Committee. TSYS' Corporate Governance Committee held
two meetings in 2001. The primary functions to be engaged in by TSYS' Corporate
Governance Committee include:
. Making recommendations to the Board regarding the governance of
TSYS as reflected in TSYS' Articles of Incorporation and bylaws;
. Making recommendations to the Board regarding Board administration,
including developing criteria for selecting and retaining Board
members, seeking qualified candidates for the Board and recommending
assignment of Board members to appropriate Board committees;
. Making recommendations to the Board regarding a policy and program
regarding director compensation and annual assessment of Board
performance;
. Establishing procedures for the Chief Executive Officer's annual
performance review; and
. Establishing procedures for annual reviews of succession planning
and management development.
Compensation Committee. TSYS' Compensation Committee held five meetings
in 2001. Its Report on Executive Compensation begins on page 21. The primary
functions to be engaged in by TSYS' Compensation Committee include:
. The design and oversight of TSYS' executive compensation program;
. The design and oversight of all compensation and benefit programs in
which employees, officers and directors of TSYS are eligible to
participate; and
. Performing an annual evaluation of the Chief Executive Officer.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors is comprised of three
directors who the Board and Audit Committee believe are independent as
defined in the New York Stock Exchange's listing standards.
In accordance with its written charter adopted by the Board of Directors,
the Audit Committee assists the Board with fulfilling its oversight
responsibility regarding the quality and integrity of TSYS' financial reporting
process. In discharging its oversight responsibilities regarding the audit
process, the Audit Committee:
. Reviewed and discussed with management TSYS' audited financial
statements as of and for the year ended December 31, 2001;
. Discussed with KPMG LLP, TSYS' independent auditors, the matters
required to be discussed by Statement on Auditing Standards No. 61
(Communication with Audit Committees); and
. Received from KPMG LLP the written disclosures and the letter required
by Independence Standards Board Standard No. 1 (Independence
Discussions with Audit Committees) and has discussed with KPMG LLP
their independence.
Based upon the review and discussions referred to in the preceding
paragraph, the Audit Committee recommended to the Board of Directors that the
audited financial statements referred to above be included in TSYS' Annual
Report on Form 10-K for the year ended December 31, 2001, to be filed with the
Securities and Exchange Commission.
This Audit Committee Report shall not be deemed incorporated by reference
in any document previously or subsequently filed with the Securities and
Exchange Commission that incorporates by reference all or any portion of this
Proxy Statement, except to the extent TSYS specifically requests that the Report
be specifically incorporated by reference.
The Audit Committee
John P. Illges, III
Sidney E. Harris
H. Lynn Page
6
FEES PAID TO KPMG LLP
The following table presents fees for professional audit services
rendered by KPMG LLP for the audit of TSYS' annual financial statements for
2001, and fees billed for other services rendered by KPMG LLP.
Audit fees, including out-of-pocket expenses $ 248,000
==========
Financial information system design and implementation $ 0
==========
All other fees, including out-of-pocket expenses:
Audit related fees <f1> 463,000
Other non-audit services <f2> 645,000
----------
Total all other fees $1,108,000
==========
- -------------------
<FN>
<f1> Audit related fees consisted principally of customer and synthetic
lease compliance reports, due diligence assistance on potential
acquistion transactions, reports on data center reviews, assistance
to internal audit in certain computer control technical audits
and audits of TSYS' stock purchase plans.
<f2> Other non-audit fees consisted of financial reporting associated with
changes in tax reporting structure, tax compliance and tax planning
associated with international operations, tax services in connection
with employees residing in foreign countries and assistance with
certain network security matters.
</FN>
The Audit Committee has considered whether the provision of the non-audit
services to TSYS described above is compatible with maintaining KPMG's
independence.
DIRECTORS' COMPENSATION
COMPENSATION
During 2001, directors received the following compensation:
Annual retainer........................................$20,000
Attendance fee for each Board meeting..................$ 1,800
Attendance fee for each Executive Committee meeting,
including the chairman............................$ 1,800
Attendance fee for each committee meeting chaired,
other than executive..............................$ 1,200
Attendance fee for committee meetings,
other than executive..............................$ 750
Directors may elect to defer all or a portion of their cash compensation.
Deferred amounts are deposited into one or more investment funds chosen by
the director. All deferred fees are payable only in cash.
DIRECTOR STOCK PURCHASE PLAN
TSYS' Director Stock Purchase Plan is a nontax-qualified, contributory
stock purchase plan pursuant to which qualifying TSYS directors can purchase,
with the assistance of contributions from TSYS, presently issued and outstanding
shares of TSYS stock. Under the terms of the Director Stock Purchase
Plan, qualifying directors can elect to contribute up to $5,000 per calendar
quarter to make purchases of TSYS stock, and TSYS contributes an
additional amount equal to 50% of the directors' cash contributions.
Participants in the Director Stock Purchase Plan are fully vested in, and may
request the issuance to them of, all shares of TSYS stock purchased for their
benefit under the Plan.
EXECUTIVE OFFICERS
The following table sets forth the name, age and position with TSYS of each
executive officer of TSYS.
- --------------------------------------------------------------------------------
Name Age Position with TSYS
- --------------------------- --- ------------------------------------------
James H. Blanchard 60 Chairman of the Executive Committee
7
Richard W. Ussery 54 Chairman of the Board
and Chief Executive Officer
Philip W. Tomlinson 55 President
William A. Pruett 48 Executive Vice President
James B. Lipham 53 Executive Vice President
and Chief Financial Officer
M. Troy Woods 50 Executive Vice President
Kenneth L. Tye 49 Executive Vice President
and Chief Information Officer
G. Sanders Griffith, III 48 General Counsel and Secretary
Messrs. Blanchard, Ussery and Tomlinson are directors of TSYS. William A.
Pruett was elected as Executive Vice President of TSYS in February 1993. From
1976 until 1993, Mr. Pruett served in various capacities with CB&T and/or TSYS,
including Senior Vice President. James B. Lipham was elected as Executive Vice
President and Chief Financial Officer of TSYS in July 1995. From 1984 until
1995, Mr. Lipham served in various financial capacities with Synovus and/or
TSYS, including Senior Vice President and Treasurer. M. Troy Woods was elected
as Executive Vice President of TSYS in July 1995. From 1987 until 1995, Mr.
Woods served in various capacities with TSYS, including Senior Vice President.
Kenneth L. Tye was elected as Executive Vice President and Chief Information
Officer of TSYS in August 1999. From 1971 until 1999, Mr. Tye served in various
capacities with CB&T and/or TSYS, including Senior Vice President. G. Sanders
Griffith, III has served as General Counsel of TSYS since 1988 and was elected
as Secretary of TSYS in June 1995. Mr. Griffith currently serves as Senior
Executive Vice President, General Counsel and Secretary of Synovus and has held
various positions with Synovus since 1988.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth ownership of shares of TSYS stock
by each director, by each executive officer named in the Summary Compensation
Table on page 19 and by all directors and executive officers as a group as of
December 31, 2001.
- --------------------------------------------------------------------------------
Shares of Shares of
TSYS Stock TSYS Stock Percentage of
Beneficially Beneficially Total Outstanding
Owned with Owned with Shares of Shares of
Sole Voting Shared Voting TSYS Stock TSYS Stock
and Investment and Investment Beneficially Beneficially
Power as of Power as of Owned as of Owned as of
Name 12/31/01 12/31/01 12/31/01<f1> 12/31/01
-------------------------- ------------------- -------------------- ---------------- -------------
James H. Blanchard 785,999 360,480 1,146,479 *
Richard Y. Bradley 24,216 5,000 29,216 *
G. Wayne Clough 1,090 --- 1,090 *
Gardiner W. Garrard, Jr. 16,424 --- 16,424 *
Sidney E. Harris 2,555 --- 2,555 *
John P. Illges, III 106,358 81,750 188,108 *
Alfred W. Jones III 562 --- 562 *
Mason H. Lampton 42,199 47,426<f2> 89,625 *
James B. Lipham 47,431 600 139,231 *
W. Walter Miller, Jr. 89,360 12,921 102,281 *
Samuel A. Nunn 3,183 --- 40,683 *
H. Lynn Page 442,462 137,526 579,988 *
8
William A. Pruett 130,424 --- 214,424 *
Philip W. Tomlinson 577,398 39,864 785,262 *
William B. Turner 166,093 576,000 742,093 *
Richard W. Ussery 559,443 66,000 793,443 *
M. Troy Woods 43,874 2,809 139,683 *
James D. Yancey 771,612 24,000 795,612 *
Rebecca K. Yarbrough 268,109 508,128<f3> 776,237 *
Directors and Executive
Officers as a Group
(21 persons) 4,203,720 1,862,504 6,591,996 3.3
* Less than one percent of the outstanding shares of TSYS stock.
- --------
<FN>
<f1> The totals shown for the following directors and executive officers of TSYS
include the number of shares of TSYS stock that each individual has
the right to acquire within 60 days through the exercise of stock options:
Person Number of Shares
------ ----------------
James B. Lipham 91,200
Samuel A. Nunn 37,500
William A. Pruett 84,000
Philip W. Tomlinson 168,000
Richard W. Ussery 168,000
M. Troy Woods 93,000
In addition, the other executive officers of TSYS have rights to acquire an
aggregate of 9,000 shares of TSYS stock within 60 days through the
exercise of stock options.
<f2> Includes 28,800 shares of TSYS stock held in a trust for which Mr.
Lampton is not the trustee. Mr. Lampton disclaims beneficial ownership of
such shares.
<f3> Includes 72,000 shares of TSYS stock held in a trust for which Mrs.
Yarbrough is not the trustee. Mrs. Yarbrough disclaims beneficial ownership
of such shares.
</FN>
For a detailed discussion of the beneficial ownership of Synovus stock by
TSYS' named executive officers and directors and by all directors and executive
officers of TSYS as a group, see "Synovus Stock Ownership of Directors
and Management" on page 26.
DIRECTORS' PROPOSAL TO APPROVE THE TOTAL SYSTEM SERVICES, INC.
2002 LONG-TERM INCENTIVE PLAN
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
TSYS' compensation program includes long-term performance awards under the
Total System Services, Inc. 2002 Long-Term Incentive Plan (the "TSYS 2002
Plan"). The purpose of the TSYS 2002 Plan is to attract, retain, motivate and
reward employees and non-employee directors who make a significant contribution
to TSYS' long-term success and to enable such
9
employees and non-employee directors to acquire and maintain an equity interest
in TSYS. Subject to approval by TSYS' shareholders, compensation paid to TSYS'
employees pursuant to the TSYS 2002 Plan is intended, to the extent reasonable,
to qualify for tax deductibility under Section 162(m) of the Internal Revenue
Code of 1986, as amended.
Eligibility and Participation. Any employee of TSYS or its subsidiaries
and any non-employee director of TSYS, which is approximately 5,079 persons, is
eligible to be selected to participate in the TSYS 2002 Plan. The Committee, as
described below, has discretion to select participants from year to year.
Shares Subject to the Plan. The aggregate number of shares of TSYS stock
which may be granted to participants pursuant to awards granted under the
TSYS 2002 Plan may not exceed nine million, three hundred fifty-five thousand,
two hundred ninety-nine (9,355,299).
Awards Under the TSYS 2002 Plan. Pursuant to the TSYS 2002 Plan, TSYS may
grant long-term performance awards to participants in the form of stock
options, stock appreciation rights ("SARs"), restricted stock or performance
awards.
Stock Options. The Committee may grant options under the TSYS 2002 Plan in
the form of qualified incentive stock options, nonqualified stock options or a
combination thereof. Non-employee directors, however, are not eligible to
receive qualified incentive stock options. Options may be granted either alone
or in tandem with other awards granted under the TSYS 2002 Plan. Subject to the
limits described herein, the Committee shall have discretion in determining the
number of shares subject to options granted to each participant.
The option price of nonqualified stock options may be equal to, or more or
less than, one hundred percent (100%) of the fair market value of a share of
TSYS stock on the date the option is granted. The option price of qualified
incentive stock options shall be at least equal to one hundred percent (100%) of
the fair market value of a share of TSYS stock on the date the option is
granted. Options shall expire at such times as the Committee determines at the
time of grant; provided, however, that no option shall be exercisable later than
the tenth anniversary of its grant.
Options granted under the TSYS 2002 Plan shall be exercisable at such times
and subject to such restrictions and conditions as the Committee shall approve;
provided that no option may be exercisable prior to six months following its
grant. The option exercise price shall be payable in cash, by check, or by such
other instrument as deemed acceptable by the Committee. Payment of the exercise
price and any withholding tax due at exercise may also be made through any
program approved by the Committee (including a broker-dealer cashless exercise
program).
Options may only be transferred under the laws of descent and distribution
and shall be exercisable only by the participant during his lifetime unless
otherwise specified by the Committee at or after grant. The participant's rights
in the event of termination of employment shall be specified by the Committee at
or after grant.
Stock Appreciation Rights. SARs granted under the TSYS 2002 Plan may be
granted alone or in conjunction with all or part of any option granted under the
TSYS 2002 Plan. Subject to the terms of the TSYS 2002 Plan, the Committee shall
have discretion to determine the terms and conditions of any SAR granted under
the TSYS 2002 Plan. With respect to an SAR granted in conjunction with an
option, the grant price shall be equal to the option price of the related
option, and such SAR shall terminate upon the termination or exercise of the
related option. No SAR granted under the TSYS 2002 Plan may be exercisable prior
to six months following its grant, except in the case of death (other than by
suicide) or disability of the participant. The term of any SAR shall be
determined by the Committee, provided that such term may not exceed ten years.
SARs granted alone may be exercised upon the terms and conditions as are
imposed by the Committee. An SAR granted in conjunction with an option may be
exercised only with respect to the shares of stock of TSYS for which the
related option is exercisable. SARs granted in connection with an incentive
stock option shall expire no later than the expiration of such
10
incentive stock option, the value of the payout for such SARs may be no more
than one hundred percent (100%) of the difference between the incentive stock
option option price and the fair market value of the shares subject to such
incentive stock option at exercise and may be exercised only when the fair
market value of the shares subject to the incentive stock option exceeds the
incentive stock option option price.
Upon exercise, a participant will receive the difference between the fair
market value of a share of stock on the date of exercise and the grant price
multiplied by the number of shares with respect to which the SAR is exercised.
Payment due upon exercise may be in cash, in shares having a fair market value
of the SAR being exercised or in a combination of cash and shares, as determined
by the Committee. The Committee may impose such restrictions on the exercise of
SARs as may be required to satisfy the requirements of Section 16 of the
Securities Exchange Act. SARs may only be transferred under the laws of descent
and distribution and shall be exercisable only by the participant during his
lifetime.
Restricted Stock. Restricted stock may be granted in such amounts and
subject to such terms and conditions as determined by the Committee. The
Committee shall impose such conditions and/or restrictions on any shares of
restricted stock as it deems advisable, including, but not limited to, a
graduated vesting schedule and/or conditioning the grant of restricted stock on
the attainment of performance goals. Each participant who is awarded restricted
stock shall be issued a stock certificate in respect of such restricted stock,
which shall be held in escrow by an escrow agent designated by the Committee, as
provided under the TSYS 2002 Plan.
During the six month period following the date of grant of restricted
stock, or such longer period as may be determined by the Committee, restricted
stock may not be sold, transferred, pledged or assigned. The minimum period for
the lapse of all restrictions on restricted stock is three years. Except as
limited by the TSYS 2002 Plan, the Committee may provide for the lapse of such
restrictions or may accelerate or waive such restrictions based on performance
or in the event of extraordinary, nonrecurring situations, such as retirement,
disability or death.
Participants holding restricted stock shall have all of the rights of
stockholders of TSYS, including the right to dividends, unless the Committee
determines otherwise at the time of grant. Dividends or distributions credited
during the restriction period and paid in shares shall be subject to the same
restrictions as the shares of restricted stock with respect to which they were
paid. All rights with respect to restricted stock shall be available only during
a participant's lifetime, and each restricted stock award agreement shall
specify whether the participant has a right to receive unvested restricted
shares in the event of termination of employment.
Performance Awards. Shares of stock and/or a payment in cash may be awarded
under the TSYS 2002 Plan in the amounts and subject to the terms and conditions
as determined by the Committee. The Committee may set performance objectives
which, depending on the extent to which they are met, will determine the value
of performance awards that will be paid out to participants. Participants shall
receive payment of performance awards earned, in cash and/or shares of stock, if
the specified performance objectives have been obtained during a designated
performance period (the minimum performance period is one year). The Committee
may also establish a minimum level of performance below which no performance
award may be payable.
In the event a participant's employment is terminated by reason of death
(other than by suicide), disability or retirement during a performance period,
the participant shall receive a prorated payout of the performance award at the
time and in the amount determined by the Committee. In the event employment is
terminated for any other reason, the participant's rights to any performance
award shall be forfeited. Performance awards may not be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated, other than by will or
by the laws of descent and distribution. A participant's rights under the TSYS
2002 Plan shall be exercisable only by the participant during his lifetime.
Objective Performance Measures. Performance objectives applicable to awards
granted under the TSYS 2002 Plan, as determined by the Committee, shall be
chosen from among the following alternatives, unless and until the Committee
proposes a change in such measures for shareholder vote or applicable tax and/or
securities laws change to permit Committee discretion
11
to alter such performance measures without obtaining shareholder approval: (i)
total shareholder return; (ii) return on equity; (iii) earnings per share
growth; and (iv) return on assets.
Maximum Amount Payable to Any Participant. The maximum number of shares
which may be awarded in any calendar year to any one participant is two million
(2,000,000). The maximum cash amount which may be awarded in any calendar
year to any participant is $1 million.
Adjustments in Connection With Certain Events. The TSYS 2002 Plan provides
that the Committee shall make a substitution or adjustment in the number of
shares reserved for issuance under the TSYS 2002 Plan in the number and option
price of shares subject to outstanding options and in the number of shares
subject to SARs, restricted stock, or performance awards, as it deems
appropriate and equitable in connection with a change in corporate structure
affecting TSYS' stock.
Duration of the TSYS 2002 Plan. The TSYS 2002 Plan shall remain in effect
from the date it is adopted by TSYS' Board until the date terminated by the
Committee or TSYS' Board of Directors; provided, however, that no award shall be
granted on or after the tenth anniversary of the TSYS 2002 Plan's effective
date; provided further, however, that no future awards will be granted to TSYS'
"covered employees," as defined below, unless shareholder approval of the TSYS
2002 Plan is obtained.
Administration. The TSYS 2002 Plan will be administered by a committee of
the Board of Directors of TSYS (the "Committee") which will be comprised of no
fewer than two members who must be "outside directors" within the meaning of
Section 162(m). Initially, the administering committee shall be the Compensation
Committee of TSYS' Board.
The Committee shall have authority to: (i) determine individuals to whom
awards will be granted; (ii) determine the terms and conditions upon which
awards shall be granted, including any restriction based on performance or other
factors; (iii) determine whether and to what extent awards shall be deferred;
and (iv) make all other determinations, perform all other acts, exercise all
other powers, and establish any other procedures it deems necessary, appropriate
or advisable in administering the TSYS 2002 Plan and maintaining compliance with
applicable law.
Amendment of the TSYS 2002 Plan. TSYS' Board of Directors may amend, alter
or discontinue the TSYS 2002 Plan at any time except that no such amendment,
suspension or discontinuation of the TSYS 2002 Plan may affect an existing award
under the TSYS 2002 Plan without the affected participant's consent. In
addition, no amendment, alteration or discontinuation shall be made, without the
approval of shareholders, which would: (i) increase the total number of shares
reserved under the TSYS 2002 Plan; (ii) decrease the option price of any option
to less than one hundred percent (100%) of the fair market value of a share on
the date of grant; (iii) change the participants or class of participants
eligible to participate in the TSYS 2002 Plan; or (iv) materially increase the
benefits accruing to participants. Furthermore, no amendment may reprice
previously granted stock options by lowering the exercise price or cancelling
outstanding stock options with subsequent grants of replacement stock options
with lower exercise prices.
Change in Control. Unless otherwise determined by the Committee at grant,
in the event of a change in control of TSYS, as defined in the TSYS 2002 Plan,
the vesting of any outstanding awards granted under the TSYS 2002 Plan shall be
accelerated and all such awards shall be fully exercisable.
Federal Income Tax Consequences of the TSYS 2002 Plan. The income tax
consequences under current federal tax law to participants and to TSYS and its
subsidiaries of incentive compensation awarded under the TSYS 2002 Plan is
generally as described below. Local and state tax authorities, however, may also
tax incentive compensation awarded under the TSYS 2002 Plan.
Consequences to Participants. Generally, for federal income tax purposes, a
participant will realize ordinary income and will incur tax liability upon
receipt of the payment of an award
12
under the TSYS 2002 Plan in an amount equal to such payment, if in cash, or the
fair market value of any unrestricted shares of stock received. The tax
consequences to participants of the individual types of awards which may be
granted under the TSYS 2002 Plan are described below.
Qualified Incentive Stock Options. With respect to options which qualify as
incentive stock options, a participant will not recognize ordinary income
for federal income tax purposes at the time options are granted or
exercised. If the participant disposes of shares acquired by exercise of an
incentive stock option before the expiration of two years from the date the
options are granted, or within one year after the issuance of shares upon
exercise of the incentive stock option, the participant will recognize in
the year of disposition: (a) ordinary income, to the extent that the lesser
of either (1) the fair market value of the shares on the date of option
exercise or (2) the amount realized on disposition exceeds the option
price; and (b) capital gain (or loss), to the extent that the amount
realized on disposition differs from the fair market value of the shares on
the date of option exercise. Any compensation included in an employee's
gross income will be subject to federal employment taxes. If the shares are
sold after expiration of these holding periods, the participant will
realize capital gain or loss (assuming the shares are held as capital
assets) equal to the difference between the amount realized on disposition
and the option price.
Nonqualified Stock Options. With respect to options which do not qualify as
incentive stock options, the participant will recognize no income upon
grant of the option and, upon exercise, will recognize ordinary income to
the extent of the difference between the amount paid by the participant for
the shares and the fair market value of the shares on the date of option
exercise. Any compensation included in an employee's gross income will be
subject to federal employment taxes. Upon a subsequent disposition of the
shares received under the option, the participant will recognize capital
gain or loss, as the case may be, to the extent of the difference between
the fair market value of the shares at the time of exercise and the amount
realized on the disposition (assuming the shares are held as capital
assets).
Stock Appreciation Rights. Ordinary income will be recognized by a
participant upon the exercise of an SAR, in an amount equal to the cash
received or the fair market value of the shares received on the exercise
date. Any compensation included in an employee's gross income will be
subject to federal employment taxes.
Restricted Stock. Participants holding restricted stock will recognize
ordinary income in the year in which the restrictions lapse, in the amount
of the fair market value of the shares as of the date of lapse of the
restrictions, unless the participant elects to include the fair market
value of the shares as of the date of grant in ordinary income at that
time. Any compensation included in an employee's gross income will be
subject to federal employment taxes.
Performance Awards. Ordinary income will be recognized by a participant in
the year in which it is received in an amount equal to the amount of the
performance award on the date of receipt. Any compensation included in an
employee's gross income will be subject to federal employment taxes.
Consequences to TSYS and Its Subsidiaries. In general, TSYS and its
subsidiaries will receive an income tax deduction at the same time and in the
same amount as the amount which is taxable to the employee as compensation,
except as provided below. To the extent a participant realizes capital gains, as
described above, TSYS and its subsidiaries will not be entitled to any deduction
for federal income tax purposes.
Under Section 162(m), compensation paid by a public company in excess of $1
million for any taxable year to "covered employees" generally is not deductible
by the company or its affiliates for federal income tax purposes unless it is
related to the performance of the company, is paid pursuant to a plan approved
by shareholders of the company and meets certain other requirements.
Generally, "covered employees" is defined under Section 162(m) as any
individual who is the chief executive officer or is among the four other highest
paid executive officers named in the summary compensation table in the company's
proxy statement, other than the chief
13
executive officer, as of the last day of the taxable year. It is anticipated
that awards will qualify as performance based for purposes of Section 162(m),
except for restricted stock not subject to preestablished performance goals.
TSYS does not presently anticipate making any such awards. However, TSYS
reserves the ability to make awards which do not qualify for full deductibility
under Section 162(m) if the Committee determines that the benefits of so doing
outweigh full deductibility.
DIRECTORS' PROPOSAL TO APPROVE THE SYNOVUS FINANCIAL CORP.
2002 LONG-TERM INCENTIVE PLAN
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
TSYS' compensation program includes long-term performance awards under the
Synovus Financial Corp. 2002 Long-Term Incentive Plan (the "Synovus 2002 Plan").
The purpose of the Synovus 2002 Plan is to attract, retain, motivate and reward
employees and non-employee directors who make a significant contribution to
Synovus and its subsidiaries' (including TSYS) long-term success, and to enable
such employees and non-employee directors to acquire and maintain an equity
interest in Synovus. Subject to approval by TSYS' shareholders, compensation
paid to TSYS' employees pursuant to the Synovus 2002 Plan is intended, to the
extent reasonable, to qualify for tax deductibility under Section 162(m) of the
Internal Revenue Code.
Eligibility and Participation. Any employee of Synovus or its subsidiaries
(including TSYS) and any non-employee director of Synovus or TSYS, which is
approximately 11,121 persons, is eligible to be selected to participate in the
Synovus 2002 Plan. The Committee, as described below, has discretion to select
participants from year to year.
Shares Subject to the Plan. The aggregate number of shares of Synovus
stock which may be granted to participants pursuant to awards granted
under the Synovus 2002 Plan may not exceed fourteen million (14,000,000).
Awards Under the Synovus 2002 Plan. Pursuant to the Synovus 2002 Plan,
Synovus may grant long-term performance awards to participants in the form of
stock options, stock appreciation rights ("SARs"), restricted stock or
performance awards.
Stock Options. The Committee may grant options under the Synovus 2002 Plan
in the form of qualified incentive stock options, nonqualified stock options or
a combination thereof. Non-employee directors, however, are not eligible to
receive qualified incentive stock options. Options may be granted either alone
or in tandem with other awards granted under the Synovus 2002 Plan. Subject to
the limits described herein, the Committee shall have discretion in determining
the number of shares subject to options granted to each participant.
The option price of nonqualified stock options may be equal to, or more or
less than, one hundred percent (100%) of the fair market value of a share of
Synovus stock on the date the option is granted. The option price of qualified
incentive stock options shall be at least equal to one hundred percent (100%) of
the fair market value of a share of Synovus stock on the date the option is
granted. Options shall expire at such times as the Committee determines at the
time of grant; provided, however, that no option shall be exercisable later than
the tenth anniversary of its grant.
Options granted under the Synovus 2002 Plan shall be exercisable at such
times and subject to such restrictions and conditions as the Committee shall
approve; provided that no option may be exercisable prior to six months
following its grant. The option exercise price shall be payable in cash, by
check or by such other instrument as deemed acceptable by the Committee.
Payment of the exercise price and any withholding tax due at exercise may also
be made through any program approved by the Committee (including a broker-dealer
cashless exercise program).
Options may only be transferred under the laws of descent and distribution
and shall be exercisable only by the participant during his lifetime unless
otherwise specified by the
14
Committee at or after grant. The participant's rights in the event of
termination of employment shall be specified by the Committee at or after grant.
Stock Appreciation Rights. SARs granted under the Synovus 2002 Plan may be
granted alone or in conjunction with all or part of any option granted under the
Synovus 2002 Plan. Subject to the terms of the Synovus 2002 Plan, the Committee
shall have discretion to determine the terms and conditions of any SAR granted
under the Synovus 2002 Plan. With respect to an SAR granted in conjunction with
an option, the grant price shall be equal to the option price of the related
option, and such SAR shall terminate upon the termination or exercise of the
related option. No SAR granted under the Synovus 2002 Plan may be exercisable
prior to six months following its grant, except in the case of death (other than
by suicide) or disability of the participant. The term of any SAR shall be
determined by the Committee, provided that such term may not exceed ten years.
SARs granted alone may be exercised upon the terms and conditions as are
imposed by the Committee. An SAR granted in conjunction with an option may be
exercised only with respect to the shares of stock of Synovus for which
the related option is exercisable. SARs granted in connection with an incentive
stock option shall expire no later than the expiration of such incentive stock
option; the value of the payout for such SARs may be no more than one hundred
percent (100%) of the difference between the incentive stock option option price
and the fair market value of the shares subject to such incentive stock option
at exercise and may be exercised only when the fair market value of the shares
subject to the incentive stock option exceeds the incentive stock option option
price.
Upon exercise, a participant will receive the difference between the fair
market value of a share of stock on the date of exercise and the grant
price multiplied by the number of shares with respect to which the SAR is
exercised. Payment due upon exercise may be in cash, in shares having a fair
market value of the SAR being exercised, or in a combination of cash and shares,
as determined by the Committee. The Committee may impose such restrictions on
the exercise of SARs as may be required to satisfy the requirements of Section
16 of the Securities Exchange Act. SARs may only be transferred under the laws
of descent and distribution and shall be exercisable only by the participant
during his lifetime.
Restricted Stock. Restricted stock may be granted in such amounts and
subject to such terms and conditions as determined by the Committee. The
Committee shall impose such conditions and/or restrictions on any shares of
restricted stock as it deems advisable, including, but not limited to, a
graduated vesting schedule and/or conditioning the grant of restricted stock on
the attainment of performance goals. Each participant who is awarded restricted
stock shall be issued a stock certificate in respect of such restricted stock,
which shall be held in escrow by an escrow agent designated by the Committee, as
provided under the Synovus 2002 Plan.
During the six month period following the date of grant of restricted
stock, or such longer period as may be determined by the Committee, restricted
stock may not be sold, transferred, pledged or assigned. The minimum period for
the lapse of all restrictions on restricted stock is three years. Except as
limited by the Synovus 2002 Plan, the Committee may provide for the lapse of
such restrictions or may accelerate or waive such restrictions based on
performance or in the event of extraordinary nonrecurring situations, such as
retirement, disability or death.
Participants holding restricted stock shall have all of the rights of
stockholders of Synovus, including the right to dividends, unless the Committee
determines otherwise at the time of grant. Dividends or distributions credited
during the restriction period and paid in shares shall be subject to the same
restrictions as the shares of restricted stock with respect to which they were
paid. All rights with respect to restricted stock shall be available only during
a participant's lifetime, and each restricted stock award agreement shall
specify whether the participant has a right to receive unvested restricted
shares in the event of termination of employment.
Performance Awards. Shares of stock and/or a payment in cash may be awarded
under the Synovus 2002 Plan in the amounts and subject to the terms and
conditions as determined by the Committee. The Committee may set performance
objectives which, depending on the extent to which they are met, will determine
the value of performance awards that will be paid out to
15
participants. Participants shall receive payment of performance awards earned,
in cash and/or shares of stock, if the specified performance objectives have
been obtained during a designated performance period (the minimum performance
period is one year). The Committee may also establish a minimum level of
performance below which no performance award may be payable.
In the event a participant's employment is terminated by reason of death
(other than by suicide), disability or retirement during a performance period,
the participant shall receive a prorated payout of the performance award at the
time and in the amount determined by the Committee. In the event employment is
terminated for any other reason, the participant's rights to any performance
award shall be forfeited. performance awards may not be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated, other than by will or
by the laws of descent and distribution. A participant's rights under the
Synovus 2002 Plan shall be exercisable only by the participant during his
lifetime.
Objective Performance Measures. Performance objectives applicable to awards
granted under the Synovus 2002 Plan, as determined by the Committee, shall be
chosen from among the following alternatives, unless and until the Committee
proposes a change in such measures for shareholder vote or applicable tax and/or
securities laws change to permit Committee discretion to alter such performance
measures without obtaining shareholder approval: (i) total shareholder return;
(ii) return on equity; (iii) earnings per share growth; and (iv) return on
assets.
Maximum Amount Payable to Any Participant. The maximum number of shares
which may be awarded in any calendar year to any one participant is two million
(2,000,000). The maximum cash amount which may be awarded in any calendar year
to any participant is $1 million.
Adjustments in Connection With Certain Events. The Synovus 2002 Plan
provides that the Committee shall make a substitution or adjustment in the
number of shares reserved for issuance under the Synovus 2002 Plan, in the
number and option price of shares subject to outstanding options and in the
number of shares subject to SARs, restricted stock or performance awards, as it
deems appropriate and equitable in connection with a change in corporate
structure affecting Synovus' stock.
Duration of the Synovus 2002 Plan. The Synovus 2002 Plan shall remain in
effect from the date it is adopted by Synovus' Board until the date terminated
by the Committee or Synovus' Board of Directors; provided, however, that no
award shall be granted on or after the tenth anniversary of the Synovus 2002
Plan's effective date; provided further, however, that no future awards will be
granted to TSYS' "covered employees," as defined below, unless shareholder
approval of the Synovus 2002 Plan is obtained.
Administration. The Synovus 2002 Plan will be administered by a committee
of the Board of Directors of Synovus (the "Committee") which will be comprised
of no fewer than two members who must be "outside directors" within the meaning
of Section 162(m). At least two of the Committee's members must be directors of
both Synovus and TSYS. Initially, the administering committee shall be the
Compensation Committee of Synovus' Board.
The Committee shall have authority to: (i) determine individuals to whom
awards will be granted; (ii) determine the terms and conditions upon which
awards shall be granted, including any restriction based on performance or other
factors; (iii) determine whether and to what extent awards shall be deferred;
and (iv) make all other determinations, perform all other acts, exercise all
other powers, and establish any other procedures it deems necessary, appropriate
or advisable in administering the Synovus 2002 Plan and maintaining compliance
with applicable law. In accordance with its responsibility to evaluate the
remuneration of TSYS' senior management, TSYS' Compensation Committee reviews
and approves all awards made to TSYS' employees.
Amendment of the Synovus 2002 Plan. Synovus' Board of Directors may amend,
alter or discontinue the Synovus 2002 Plan at any time except that no such
amendment, suspension or discontinuation of the Synovus 2002 Plan may affect an
existing award under the Synovus 2002 Plan without the affected participant's
consent. In addition, no amendment, alteration or discontinuation shall be made,
without the approval of shareholders, which would: (i) increase the total number
of shares reserved under the Synovus 2002 Plan; (ii) decrease the option price
16
of any option to less than one hundred percent (100%) of the fair market value
of a share on the date of grant; (iii) change the participants or class of
participants eligible to participate in the Synovus 2002 Plan; or (iv)
materially increase the benefits accruing to participants. Furthermore, no
amendment may reprice previously granted stock options by lowering the
exercise price or cancelling outstanding stock options with subsequent grants of
replacement stock options with lower exercise prices.
Change in Control. Unless otherwise determined by the Committee at grant,
in the event of a change in control of Synovus, as defined in the Synovus 2002
Plan, the vesting of any outstanding awards granted under the Synovus 2002 Plan
shall be accelerated and all such awards shall be fully exercisable.
Federal Income Tax Consequences of the Synovus 2002 Plan. The income tax
consequences under current federal tax law to participants and to Synovus and
its subsidiaries of incentive compensation awarded under the Synovus 2002 Plan
is generally as described below. Local and state tax authorities, however, may
also tax incentive compensation awarded under the Synovus 2002 Plan.
Consequences to Participants. Generally, for federal income tax purposes, a
participant will realize ordinary income and will incur tax liability upon
receipt of the payment of an award under the Synovus 2002 Plan in an amount
equal to such payment, if in cash, or the fair market value of any unrestricted
shares of stock received. The tax consequences to participants of the individual
types of awards which may be granted under the Synovus 2002 Plan are described
below.
Qualified Incentive Stock Options. With respect to options which qualify as
incentive stock options, a participant will not recognize ordinary income
for federal income tax purposes at the time options are granted or
exercised. If the participant disposes of shares acquired by exercise of an
incentive stock option before the expiration of two years from the date the
options are granted, or within one year after the issuance of shares upon
exercise of the incentive stock option, the participant will recognize in
the year of disposition: (a) ordinary income, to the extent that the lesser
of either (1) the fair market value of the shares on the date of option
exercise or (2) the amount realized on disposition exceeds the option
price; and (b) capital gain (or loss), to the extent that the amount
realized on disposition differs from the fair market value of the shares on
the date of option exercise. Any compensation included in an employee's
gross income will be subject to federal employment taxes. If the shares are
sold after expiration of these holding periods, the participant will
realize capital gain or loss (assuming the shares are held as capital
assets) equal to the difference between the amount realized on disposition
and the option price.
Nonqualified Stock Options. With respect to options which do not qualify as
incentive stock options, the participant will recognize no income upon
grant of the option and, upon exercise, will recognize ordinary income to
the extent of the difference between the amount paid by the participant for
the shares and the fair market value of the shares on the date of option
exercise. Any compensation included in an employee's gross income will be
subject to federal employment taxes. Upon a subsequent disposition of the
shares received under the option, the participant will recognize capital
gain or loss, as the case may be, to the extent of the difference between
the fair market value of the shares at the time of exercise and the amount
realized on the disposition (assuming the shares are held as capital
assets).
Stock Appreciation Rights. Ordinary income will be recognized by a
participant upon the exercise of an SAR, in an amount equal to the cash
received or the fair market value of the shares received on the exercise
date. Any compensation included in an employee's gross income will be
subject to federal employment taxes.
Restricted Stock. Participants holding restricted stock will recognize
ordinary income in the year in which the restrictions lapse, in the amount
of the fair market value of the shares as of the date of lapse of the
restrictions, unless the participant elects to include the fair market
value of the shares as of the date of grant in ordinary income at that
time. Any compensation included in an employee's gross income will be
subject to federal employment taxes.
17
Performance Awards. Ordinary income will be recognized by a participant in
the year in which it is received in an amount equal to the amount of the
performance award on the date of receipt. Any compensation included in an
employee's gross income will be subject to federal employment taxes.
Consequences to Synovus and Its Subsidiaries. In general, Synovus and its
subsidiaries will receive an income tax deduction at the same time and in the
same amount as the amount which is taxable to the employee as compensation,
except as provided below. To the extent a participant realizes capital gains, as
described above, Synovus and its subsidiaries will not be entitled to any
deduction for federal income tax purposes.
Under Section 162(m), compensation paid by a public company in excess of $1
million for any taxable year to "covered employees" generally is not deductible
by the company or its affiliates for federal income tax purposes unless it is
related to the performance of the company, is paid pursuant to a plan approved
by shareholders of the company and meets certain other requirements.
Generally, "covered employees" is defined under Section 162(m) as any
individual who is the chief executive officer or is among the four other highest
paid executive officers named in the summary compensation table in the company's
proxy statement, other than the chief executive officer, as of the last day of
the taxable year. It is anticipated that future awards will qualify as
performance based for purposes of Section 162(m), except for restricted stock
not subject to preestablished performance goals. Synovus does not presently
anticipate making any such awards. However, Synovus and TSYS reserve the ability
to make awards which do not qualify for full deductibility under Section 162(m)
if the Committee determines that the benefits of so doing outweigh full
deductibility.
NEW PLAN BENEFITS
The following table shows proposed grants of options of Synovus stock to
certain of TSYS' executive officers under the Synovus 2002 Plan for fiscal
year 2001. Amounts that may be received under the TSYS 2002 Plan are not
determinable.
Number of Shares Subject to Options Granted
Name and
Position Synovus 2002 Plan <f1>
----------------------- ---------------------------
Richard W. Ussery 45,000
Chairman of the Board
and Chief Executive
Officer
Philip W. Tomlinson 40,500
President
William A. Pruett 16,200
Executive Vice
President
M. Troy Woods 16,200
Executive Vice
President
James B. Lipham 14,100
Executive Vice President
and Chief Financial
Officer
Executive Group 145,800
Non-Executive Director
Group <f2>
Non-Executive Officer
Employee Group <f2>
<FN>
<f1> Amounts represent proposed grants to executives based upon
Synovus' performance during the 1999-2001 performance period.
<f2> Amounts are not determinable.
</FN>
18
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the cash and noncash compensation for each
of the last three fiscal years for the chief executive officer of TSYS and for
the other four most highly compensated executive officers of TSYS.
- -----------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
------------------------------------------------------- ----------------------------------------------
Other Restricted Securities All
Annual Stock Underlying Other
Name and Compen- Award(s) Options/ Compen-
Principal Position<f1> Year Salary<f2> Bonus<f3> sation<f4> <f5> SARs <f6> sation <f7>
- ----------------------- ------ -------------- ----------- ------------ -------------- ------------- ------------
Richard W. Ussery 2001 $534,400 $425,000 $10,000 $ -0- 539,829 $148,868
Chairman of the Board 2000 513,200 436,800 7,500 325,000 49,050 145,084
and Chief Executive 1999 464,000 292,500 -0- -0- 90,170 138,894
Officer
Philip W. Tomlinson 2001 484,400 382,500 -0- -0- 529,872 114,736
President 2000 458,200 357,000 -0- 650,000 35,543 121,101
1999 404,000 234,000 -0- -0- 64,937 116,561
William A. Pruett 2001 270,000 161,650 -0- -0- 417,923 78,029
Executive Vice 2000 258,000 217,720 -0- 325,000 13,115 73,551
President 1999 240,500 145,300 -0- -0- 24,189 72,110
M. Troy Woods 2001 270,000 161,650 -0- -0- 417,923 73,439
Executive Vice 2000 258,000 217,720 -0- 325,000 13,115 73,606
President 1999 240,500 145,300 -0- -0- 24,189 67,381
James B. Lipham 2001 235,000 140,825 -0- -0- 415,600 62,358
Executive Vice President 2000 222,500 187,900 -0- 650,000 11,196 62,713
and Chief Financial Officer 1999 202,500 122,500 -0- -0- 20,098 56,504
- --------------------
<FN>
<f1> Mr. Blanchard received no cash compensation from TSYS during 2001, other
than director compensation.
<f2> Amount consists of base salary and director fees for Messrs. Ussery
and Tomlinson.
<f3> Bonus amount for 2001 includes a special recognition award of $1,000 for
Messrs. Pruett, Woods and Lipham.
<f4> Amount represents matching contributions under the Director Stock
Purchase Plan. Perquisites and other personal benefits are excluded because
the aggregate amount does not exceed the lesser of $50,000 or 10% of annual
salary and bonus for the named executives.
<f5> Grants for 2000 pertain to shares of Vital Processing Services, LLC, a 50%
owned subsidiary of TSYS. Dividends are not paid on the restricted shares.
As of December 31, 2001, Messrs. Ussery, Tomlinson, Pruett, Woods and
Lipham held 100,000, 200,000, 100,000, 100,000 and 200,000 Vital restricted
shares, respectively, with a value of $378,000, $756,000, $378,000,
$378,000 and $756,000, respectively.
<f6> Grants previously disclosed for 2000 included options to purchase 100,000,
100,000, 50,000, 100,000 and 50,000 shares of DotsConnect, Inc., formerly
a subsidiary of TSYS, for each of Messrs. Ussery, Tomlinson, Pruett,
Woods and Lipham, respectively, all of which options were subsequently
surrendered by the named executives for no additional consideration.
<f7> The 2001 amount consists of contributions or other allocations to defined
contribution plans of $23,800 for each executive; allocations pursuant to
defined contribution excess benefit agreements of $107,352, $90,268,
$44,341, $44,341 and $35,266 for each of Messrs. Ussery, Tomlinson, Pruett,
Woods and Lipham, respectively; premiums paid for group term life insurance
coverage of $450, $450, $486, $450 and $423 for each of Messrs. Ussery,
Tomlinson, Pruett, Woods and Lipham, respectively; the economic benefit
of life insurance coverage related to split-dollar life insurance policies
of $1,747, $218, $2,098, $369 and $270 for each of Messrs. Ussery,
Tomlinson, Pruett, Woods and Lipham, respectively; and the dollar value of
the benefit of premiums paid for split dollar life insurance policies
(unrelated to term life insurance coverage) projected on an actuarial
19
basis of $15,519, $7,304, $4,479 and $2,599 for each of Messrs. Ussery,
Pruett, Woods and Lipham, respectively.
</FN>
STOCK OPTION EXERCISES AND GRANTS
The following tables provide certain information regarding stock options
granted and exercised in the last fiscal year and the number and value of
unexercised options at the end of the fiscal year.
- ------------------------------------------------------------------------------
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
---------------------------------------------------------
% of Total Potential
Options/ Realized Value at
SARs Exercise Assumed Annual Rates of
Options/ Granted to or Stock Price Appreciation
SARs Employees Base For Option Term<f1>
Granted in Fiscal Price Expiration --------------------------
Name (#) Year ($/Share) Date 5%($) 10%($)
- ------------------- ----------- ------------- -------- -------------- --------- -------------
Richard W. Ussery 39,829<f2> 1.30% $26.44 01/16/11 $502,642 $1,204,429
500,000<f3> 16.35 28.99 05/09/11 6,920,000 16,575,000
Philip W. Tomlinson 29,872<f2> 0.98 26.44 01/16/11 376,985 903,329
500,000<f3> 16.35 28.99 05/09/11 6,920,000 16,575,000
William A. Pruett 17,923<f2> 0.59 26.44 01/16/11 226,188 541,992
400,000<f3> 13.08 28.99 05/09/11 5,536,000 13,260,000
M. Troy Woods 17,923<f2> 0.59 26.44 01/16/11 226,188 541,992
400,000<f3> 13.08 28.99 05/09/11 5,536,000 13,260,000
James B. Lipham 15,600<f2> 0.51 26.44 01/16/11 196,872 471,744
400,000<f3> 13.08 28.99 05/09/11 5,536,000 13,260,000
- ---------------
<FN>
<f1> The dollar gains under these columns result from calculations using the
identified growth rates and are not intended to forecast future price
appreciation of Synovus stock.
<f2> Options to purchase Synovus stock granted on January 17, 2001 at
fair market value. Options become exercisable on January 17, 2003 and are
transferable to family members.
<f3> Options to purchase Synovus stock granted on May 10, 2001 at fair
market value. Options become exercisable in equal installments when the
per share fair market value of Synovus stock meets or exceeds $40, $45
and $50, and in any event on May 10, 2008. Options are transferable to
family members.
</FN>
- -----------------------------------------------------------------------------------------------------------
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities Value of
Underlying Unexercised Unexercised In-the-Money
Shares Value Options/SARs at FY-End (#) Options/SARs at FY-End ($)<f1>
Acquired on Realized -------------------------- -----------------------------
Name Exercise (#) ($)<f1> Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------- ------------ ----------- -------------------------- -----------------------------
Richard W. Ussery 33,668 $ 805,675 503,325 / 589,029<f2> $4,577,861 / $ 343,640
-0- -0- 168,000 / 252,000<f3> 1,338,960 / 2,008,440
Philip W. Tomlinson 62,087 1,294,971 296,000 / 565,565<f2> 2,110,381 / 249,253
-0- -0- 168,000 / 252,000<f3> 1,338,960 / 2,008,440
William A. Pruett 8,255 173,529 131,999 / 431,188<f2> 1,192,092 / 92,527
-0- -0- 84,000 / 126,000<f3> 669,480 / 1,004,220
M. Troy Woods -0- -0- 104,535 / 431,128<f2> 731,013 / 92,527
-0- -0- 93,000 / 126,000<f3> 841,740 / 1,004,220
James B. Lipham -0- -0- 99,213 / 426,946<f2> 833,953 / 79,117
-0- -0- 91,200 / 126,000<f3> 1,142,028 / 1,004,220
- ----------
<FN>
<f1> Market value of underlying securities at exercise or year-end, minus the
exercise or base price.
<f2> Options pertain to shares of Synovus stock.
<f3> Options pertain to shares of TSYS stock.
</FN>
20
CHANGE IN CONTROL ARRANGEMENTS
Long-Term Incentive Plans. Under the terms of the TSYS 2000 and 2002
Long-Term Incentive Plans and Synovus' 1992, 1994, 2000 and 2002 Long-Term
Incentive Plans, all awards become automatically vested in the event of a Change
of Control, as defined below, unless otherwise determined by the Committee at
grant. Awards under the Plans may include stock options, restricted stock, stock
appreciation and performance awards. Messrs. Ussery, Tomlinson, Pruett, Woods
and Lipham each have, or will have with respect to the proposed 2002 Long-Term
Incentive Plans, restricted stock and stock options under the Synovus/TSYS
Long-Term Incentive Plans.
Change of Control Agreements. TSYS has entered into Change of Control
Agreements with Messrs. Ussery, Tomlinson, Pruett, Woods and Lipham, and certain
other officers. In the event of a Change of Control, an executive would receive
the following:
. For Messrs. Ussery and Tomlinson, three times their current base
salary and bonus (bonus is defined as the average bonus over the past
three years measured as a percentage multiplied by the executive's
current base salary). Messrs. Pruett, Woods and Lipham would receive
two times their current base salary and bonus, as defined above.
. Three years of medical, life, disability and other welfare benefits
(two years for Messrs. Pruett, Woods and Lipham).
. A pro rata bonus through the date of termination for the separation
year.
. A cash amount in lieu of a long-term incentive award for the year of
separation equal to 1.5 times the normal market grant, if the
executive received a long-term incentive award in the year of
separation, or 2.5 times the market grant if not.
In order to receive these benefits, an executive must be actually or
constructively terminated within one year following a Change of Control, or the
executive may voluntarily or involuntarily terminate employment during the
thirteenth month following a Change of Control.
With respect to Synovus, a Change of Control under these agreements is
defined as: (i) the acquisition of 20% or more of the "beneficial ownership" of
Synovus' outstanding voting stock, with certain exceptions for Turner family
members; (ii) the persons serving as directors of Synovus as of January 1, 1996,
and their replacements or additions, ceasing to comprise at least two-thirds of
the Board members; (iii) a merger, consolidation, reorganization or sale of
Synovus' assets unless the prior owners of Synovus own more than two-thirds of
the new company, no person owns more than 20% of the new company, and two-thirds
of the new company's Board members are prior Board members of Synovus; or (iv) a
triggering event occurs as defined in the Synovus Rights Agreement. With respect
to TSYS, a Change of Control is generally defined the same as a Change of
Control of Synovus, except that (a) a spin-off of TSYS stock to Synovus
shareholders, and (b) any transaction in which Synovus continues to own more
than 50% of the outstanding stock of TSYS are specifically excluded from the
Change of Control definition. In the event an executive is impacted by the
Internal Revenue Service excise tax that applies to certain Change of Control
arrangements, the executive would receive additional payments so that he or she
would be in the same position as if the excise tax did not apply. The Change of
Control Agreements do not provide for any retirement benefits or perquisites.
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in cumulative
shareholder return on TSYS stock with the cumulative total return of the
Standard & Poor's 500 Index and the Standard & Poor's Computer Software &
Services Index for the last five fiscal years (assuming a $100 investment on
December 31, 1996 and reinvestment of all dividends).
21
[Omitted Stock Performance Graph is represented by the following table.]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
TSYS, S&P 500 AND S&P COMPUTER SOFTWARE & SERVICES INDEX
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- -----
TSYS $100 $ 92 $132 $ 92 $126 $120
S&P 500 $100 $134 $171 $208 $189 $166
S&P CS&S $100 $139 $252 $467 $221 $222
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee ("Committee") of TSYS is responsible for the
design and oversight of the TSYS executive compensation program, as well as the
compensation and other benefit plans in which officers, employees and directors
of TSYS and its subsidiaries participate. The Committee has designed its
compensation program to attract and retain highly motivated and well-trained
executives in order to create superior shareholder value for TSYS shareholders.
Elements of Executive Compensation. The four elements of executive
compensation at TSYS are:
. Base Salary . Annual Bonus
. Long-Term Incentives . Other Benefits
The Committee believes that a substantial portion (though not a majority)
of an executive's compensation should be at risk based upon performance, both in
the short-term (through the annual bonus and the Synovus/TSYS Profit Sharing
Plan and the Synovus/TSYS 401(k) Savings Plan) and long-term (through long-term
incentives such as stock options and restricted stock awards). The remainder of
each executive's compensation is primarily based upon the competitive practices
of computer systems/data processing companies ("similar companies"), with
certain adjustments as described below. The companies used for comparison under
this approach are not
22
the same companies included in the peer group index appearing in the Stock
Performance Graph on page 22. Each element of executive compensation is
discussed in detail below.
Base Salary. Base salary is an executive's annual rate of pay without
regard to any other elements of compensation. The primary consideration used by
the Committee is a market comparison of comparable positions within similar
companies based upon the executive's level of responsibility and experience. The
Committee has had difficulty, however, in obtaining appropriate market data for
certain of TSYS' executives. Market data for most positions is based upon the
50th percentile of the computer systems/data processing market, adjusted to
reflect the size of TSYS. If market data could not be obtained for a particular
position, the Committee targeted the median level of general industry data with
a premium added to reflect the technology component of TSYS' business. The
Committee made no adjustments to the base salaries of Mr. Ussery or TSYS'
other executive officers in 2001.
Annual Bonus. The Committee may award annual bonuses to TSYS executives
under two different plans, the Synovus Executive Bonus Plan and the Synovus
Incentive Bonus Plan. The Committee selects the participants in each Plan from
year to year. For 2001, Mr. Ussery was selected to participate in the Synovus
Executive Bonus Plan and Messrs. Tomlinson, Pruett, Woods and Lipham were
selected to participate in the Incentive Bonus Plan. Under the terms of the
Plans, bonus amounts are paid as a percentage of base pay based on the
achievement of performance goals that are established each year by the
Committee. The performance goals may be chosen by the Committee from among the
following measurements:
. Number of cardholder, merchant and/or other customer accounts
processed and/or converted by TSYS;
. Successful negotiation or renewal of contracts with new and/or
existing customers by TSYS;
. Productivity and expense control;
. Stock price;
. Return on capital compared to cost of capital;
. Net income;
. Operating income;
. Earnings per share and/or earnings per share growth;
. Return on equity;
. Return on assets; and
. Asset growth.
The Committee established a payout matrix based on attainment of net income
goals during 2001 for Mr. Ussery and TSYS' other executive officers. The maximum
percentage payouts under the Plans for 2001 were 100% for Messrs. Ussery and
Tomlinson and 70% for Messrs. Pruett, Woods and Lipham. The Committee also
established a "super bonus" payout matrix that increased the bonus amount
otherwise payable if certain "stretch" net income goals were attained. TSYS'
financial performance and each executive's individual performance can reduce the
bonus awards determined by the attainment of the goals. Although the Company's
net income targets were achieved, the Committee exercised downward discretion
with respect to the bonus payments based upon a recommendation from TSYS'
management. Based upon TSYS' net income and the exercise of downward discretion
described above, Mr. Ussery and TSYS' other executive officers were awarded the
bonus amounts set forth in the Summary Compensation Table.
Long-Term Incentives. The Committee has awarded both stock options and
restricted stock awards to executives. Because of the relatively low number of
publicly traded shares of TSYS, the Committee has awarded Synovus stock options
and restricted stock awards to TSYS executives, linking their interests to those
of Synovus and TSYS shareholders. Restricted stock awards are designed to focus
executives on the long-term performance of Synovus and TSYS. Stock options
provide executives with the opportunity to buy and maintain an equity interest
in Synovus and TSYS and to share in their capital appreciation. The Committee
has established a
23
payout matrix for long-term grants that uses total shareholder return measured
by Synovus' performance (stock price increases plus dividends) and how Synovus'
total shareholder return compares to the return of a peer group of companies.
For the long-term incentive awards made in 2001, total shareholder return and
peer comparisons were measured during the 1998 to 2000 performance period. Under
the payout matrix, the Committee awarded Messrs. Ussery, Tomlinson, Pruett,
Woods and Lipham stock options of 39,829, 29,872, 17,923, 17,923 and 15,600,
respectively, which options become exercisable on January 17, 2003.
The Committee also made performance grants of 500,000, 500,000, 400,000,
400,000 and 400,000 Synovus stock options to Messrs. Ussery, Tomlinson, Pruett,
Woods and Lipham, respectively. The options are exercisable in equal
installments when the market price of Synovus stock exceeds $40, $45 and $50 per
share and in any event seven years from the date of grant. The Committee
strongly believes that these performance grants, which are designed to reward
the executives for significant growth in shareholder value, are in the best
interests of Synovus and TSYS shareholders.
Other Benefits. Executives receive other benefits that serve a different
purpose than the elements of compensation discussed above. In general, these
benefits either provide retirement income or protection against catastrophic
events such as illness, disability and death. Executives generally receive the
same benefits offered to the employee population, with the only exceptions
designed to promote tax efficiency or to replace other benefits lost due to
regulatory limits. The Synovus/TSYS Profit Sharing Plan and the Synovus/TSYS
401(k) Savings Plan, including an excess benefit plan which replaces benefits
lost due to regulatory limits (collectively the "Plan"), is the largest
component of TSYS' benefits package for executives. The Plan is directly related
to the performance of TSYS because the contributions to the Plan, up to a
maximum of 14% of an executive's compensation, depend upon TSYS' profitability.
For 2001, Mr. Ussery and TSYS' other executive officers received a Plan
contribution of 7% of their compensation, based upon the Plan's profitability
formula. The remaining benefits provided to executives are primarily based upon
the competitive practices of similar companies.
The Internal Revenue Code limits the deductibility for federal income tax
purposes of annual compensation paid by a publicly held corporation to its chief
executive officer and four other highest paid executives for amounts in excess
of $1 million, unless certain conditions are met. Because the Committee seeks to
maximize shareholder value, the Committee has taken steps to ensure that any
compensation paid to its executives in excess of $1 million is deductible. For
2001, Mr. Ussery and Mr. Tomlinson would have been affected by this provision,
but for the steps taken by the Committee. The Committee reserves the ability to
make awards which do not qualify for full deductibility under the Internal
Revenue Code, however, if the Committee determines that the benefits of doing so
outweigh full deductibility.
The Committee believes that its executive compensation program serves the
best interests of the shareholders of TSYS. As described above, a substantial
portion of the compensation of TSYS' executives is directly related to TSYS'
performance. The Committee believes that the performance of TSYS to date
validates its compensation philosophy.
The Compensation Committee
Gardiner W. Garrard, Jr.
G. Wayne Clough
Mason H. Lampton
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Gardiner W. Garrard, Jr., Mason H. Lampton and G. Wayne Clough served as
members of TSYS' Compensation Committee during 2001. No member of the Committee
is a current or former officer or employee of TSYS or its subsidiaries.
During 2001, TSYS paid $311,704 in gross commissions to Jordan Real Estate
Brokerage, LLC, $116,820 of which was retained by Jordan Real Estate Brokerage,
LLC as net commissions,
24
in connection with the location of office space in the Atlanta, Georgia area.
Jordan Real Estate Brokerage, LLC is a wholly owned subsidiary of The Jordan
Company. Gardiner W. Garrard, Jr., a director of TSYS, CB&T and Synovus, is an
officer, director and shareholder of The Jordan Company.
TRANSACTIONS WITH MANAGEMENT
During 2001, DotsConnect, Inc., a subsidiary of TSYS during 2001, leased
approximately 9,558 square feet of office space in Columbus, Georgia from
W.C. Bradley Co. for approximately $167,905.
TSYS has entered into an agreement with CB&T with respect to the use of
aircraft owned or leased by CB&T and W.C.B. Air L.L.C. CB&T and W.C.B. Air are
parties to a Joint Ownership Agreement pursuant to which they jointly own or
lease aircraft. W.C. Bradley Co. owns all of the limited liability company
interests of W.C.B. Air. CB&T and W.C.B. Air have each agreed to pay fixed fees
for each hour they fly the aircraft owned and/or leased pursuant to the Joint
Ownership Agreement. TSYS paid CB&T $956,408 for its use of the aircraft during
2001, which was used by CB&T to satisfy its commitments under the Joint
Ownership Agreement. The charges payable by TSYS to CB&T in connection with its
use of this aircraft approximate charges available to unrelated third parties in
the State of Georgia for use of comparable aircraft for commercial purposes.
William B. Turner, a director of TSYS and Chairman of the Executive Committee of
CB&T and Synovus, is an advisory director and shareholder of W.C. Bradley Co.
James H. Blanchard, Chairman of the Executive Committee of TSYS, Chairman of the
Board of Synovus and a director of CB&T, is a director of W.C. Bradley Co. W.
Walter Miller, Jr., a director of W.C. Bradley Co., is a director of TSYS.
Stephen T. Butler, the nephew of William B. Turner and an officer and director
of W.C. Bradley Co., is a director of CB&T. W.B. Turner, Jr. and John T. Turner,
the sons of William B. Turner, are officers and directors of W.C. Bradley Co.
and are also directors of CB&T.
King & Spalding, a law firm located in Atlanta, Georgia, performed legal
services on behalf of TSYS during 2001. Samuel A. Nunn, a director of TSYS,
is a senior partner of King & Spalding.
For a description of certain transactions between TSYS and its affiliated
companies, upon whose Boards of Directors certain of TSYS' directors also serve,
see "Bankcard Data Processing Services Provided to CB&T and Certain of Synovus'
Subsidiaries; Other Agreements Between TSYS, Synovus, CB&T and Certain of
Synovus' Subsidiaries" on page 27.
24
RELATIONSHIPS BETWEEN TSYS, SYNOVUS, CB&T AND CERTAIN OF SYNOVUS'
SUBSIDIARIES
BENEFICIAL OWNERSHIP OF TSYS STOCK BY CB&T
The following table sets forth the number of shares of TSYS stock
beneficially owned by CB&T, the only known beneficial owner of more than 5% of
the issued and outstanding shares of TSYS stock, as of January 1, 2002.
- --------------------------------------------------------------------------------
Percentage of
Shares of Outstanding Shares of
TSYS Stock TSYS Stock
Name and Address of Beneficially Owned Beneficially Owned
Beneficial Owner as of 1/1/02 as of 1/1/02
- ------------------------ ------------------------ -----------------------------
Columbus Bank
and Trust Company 159,630,980<f1><f2> 81.1%
1148 Broadway
Columbus, Georgia 31901
- ------------
25
<FN>
<f1> CB&T individually owns these shares.
<f2> As of January 1, 2002, Synovus Trust Company, a wholly owned trust
company subsidiary of CB&T, held in various fiduciary capacities a total of
2,233,104 shares (1.13%) of TSYS stock. Of this total, Synovus Trust
Company held 1,954,713 shares as to which it possessed sole voting power,
1,926,074 shares as to which it possessed sole investment power, 232,440
shares as to which it possessed shared voting power and 238,840 shares as
to which it possessed shared investment power. In addition, as of January
1, 2002, Synovus Trust Company held in various agency capacities an
additional 1,892,951 shares of TSYS stock as to which it possessed
no voting or investment power. Synovus and its subsidiaries disclaim
beneficial ownership of all shares of TSYS stock which are held by
Synovus Trust Company in various fiduciary and agency capacities.
</FN>
CB&T, by virtue of its individual ownership of 159,630,980 shares, or
81.1%, of the outstanding shares of TSYS stock on January 1, 2002 is able to,
and intends to, elect a majority of TSYS' Board of Directors. CB&T presently
controls TSYS.
INTERLOCKING DIRECTORATES OF TSYS, SYNOVUS AND CB&T
Seven of the sixteen members of and nominees to serve on TSYS' Board of
Directors also serve as members of the Boards of Directors of Synovus and CB&T.
They are James H. Blanchard, Richard Y. Bradley, Gardiner W. Garrard, Jr., John
P. Illges, III, H. Lynn Page, William B. Turner and James D. Yancey. Alfred W.
Jones III serves as a director of Synovus and Mason H. Lampton serves as an
Advisory Director of CB&T and as a director of Synovus.
SYNOVUS STOCK OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth the number of shares of Synovus
stock beneficially owned by TSYS' directors, by each executive officer named in
the Summary Compensation Table on page 19 and by all directors and executive
officers as a group as of December 31, 2001.
- ------------------------------------------------------------------------------------
Shares of Shares of
Synovus Stock Synovus Stock Percentage
Beneficially Beneficially of
Owned with Owned with Total Outstanding
Sole Voting Shared Shares of Shares of
and Voting and Synovus Stock Synovus Stock
Investment Investment Beneficially Beneficially
Power as of Power as of Owned as of Owned as of
Name 12/31/01 12/31/01 12/31/01<f1> 12/31/01
- -------------------- -------------- ------------ ------------ ------------
James H. Blanchard 1,056,572<f2> 211,360 2,693,812 *
Richard Y. Bradley 22,907 84,887 107,794 *
G. Wayne Clough --- --- --- ---
Gardiner W. Garrard, Jr. 204,147 927,075 1,131,222 *
Sidney E. Harris --- --- --- ---
John P. Illges, III 281,053 441,429 722,482 *
Alfred W. Jones III 4,684 --- 4,684 *
Mason H. Lampton 92,106 279,761<f3> 371,867 *
James B. Lipham 7,506 --- 117,915 *
W. Walter Miller, Jr. 30,777 211,911 276,701 *
Samuel A. Nunn --- --- --- ---
H. Lynn Page 758,116 11,515 769,631 *
William A. Pruett 11,082 --- 156,196 *
Philip W. Tomlinson 55,296 --- 386,927 *
William B. Turner 2,138,960 4,653,357 6,792,317 2.3
Richard W. Ussery 96,304 878 649,557 *
M. Troy Woods 3,818 --- 121,468 *
James D. Yancey 1,030,156 61,677 1,964,347 *
Rebecca K. Yarbrough 42,928 19,062 61,990 *
26
Directors and Executive
Officers as a Group
(21 persons) 5,998,052 6,902,912 16,779,514 5.7
* Less than one percent of the outstanding shares of Synovus stock.
- -------------------
<FN>
<f1> The totals shown for the following directors and executive officers of TSYS
include the number of shares of Synovus stock that each individual has
the right to acquire within 60 days through the exercise of stock options:
Person Number of Shares
------ ----------------
James H. Blanchard 1,425,880
James B. Lipham 110,409
W. Walter Miller, Jr. 34,013
William A. Pruett 145,114
Philip W. Tomlinson 331,631
Richard W. Ussery 552,375
M. Troy Woods 117,650
James D. Yancey 872,514
In addition, the other executive officers of TSYS have rights to acquire an
aggregate of 450,604 shares of Synovus stock within 60 days through
the exercise of stock options.
<f2> Includes 112,968 shares with respect to which Mr. Blanchard has no
investment power.
<f3> Includes 276,187 shares of Synovus stock held in a trust for which
Mr. Lampton is not the trustee. Mr. Lampton disclaims beneficial ownership
of such shares.
</FN>
BANKCARD DATA PROCESSING SERVICES PROVIDED TO CB&T AND CERTAIN OF SYNOVUS'
SUBSIDIARIES; OTHER AGREEMENTS BETWEEN TSYS, SYNOVUS, CB&T AND CERTAIN OF
SYNOVUS' SUBSIDIARIES
During 2001, TSYS provided bankcard data processing services to CB&T and
certain of Synovus' other banking subsidiaries. The bankcard data processing
agreement between TSYS and CB&T can be terminated by CB&T upon 60 days prior
written notice to TSYS or terminated by TSYS upon 180 days prior written notice
to CB&T. During 2001, TSYS derived $12,893,460 in revenues from CB&T and certain
of Synovus' other banking subsidiaries for the performance of bankcard data
processing services and $480,285 in revenues from Synovus and its subsidiaries
for the performance of other data processing services. TSYS' charges to CB&T and
Synovus' other subsidiaries for bankcard and other data processing services are
comparable to, and are determined on the same basis as, charges by TSYS to
similarly situated unrelated third parties.
TSYS and Synovus are parties to a Lease Agreement pursuant to which
Synovus leased from TSYS office space for lease payments aggregating $454,926
during 2001. Synovus also paid TSYS $24,900 during 2001 for data processing
services. The terms of these transactions are comparable to those which could
have been obtained in transactions with unaffiliated third parties.
TSYS and Synovus are parties to Management Agreements pursuant to which
Synovus provided certain management services to TSYS. During 2001, these
services included human resource services, maintenance services, security
services, communications services, corporate education services, travel
services, investor relations services, corporate governance services, legal
services, regulatory and statutory compliance services, executive management
services performed on behalf of TSYS by certain of Synovus' officers and
financial services. As compensation for management services provided during
2001, TSYS paid Synovus aggregate management
27
fees of $8,569,278. In addition, Synovus and TSYS are parties to Management
Agreements pursuant to which TSYS provided management services to Synovus in
connection with TSYS' assistance in managing the businesses of ProCard, Inc. and
TSYS Total Debt Management, Inc., both of which were wholly owned subsidiaries
of Synovus during 2001. As compensation for management services provided during
2001, Synovus paid TSYS management fees of $1,497,000 in connection with TSYS
Total Debt Management, Inc. and $303,000 in connection with ProCard, Inc.
Management fees are subject to future adjustments based upon charges at the time
by unrelated third parties for comparable services.
During 2001, Synovus Trust Company served as Trustee of various employee
benefit plans of TSYS. During 2001, TSYS paid Synovus Trust Company trustee's
fees under these plans of $558,303.
During 2001, Columbus Depot Equipment Company, a wholly owned subsidiary of
TSYS, and CB&T and five of Synovus' other subsidiaries were parties to Lease
Agreements pursuant to which CB&T and five of Synovus' other subsidiaries leased
from Columbus Depot Equipment Company computer related equipment for bankcard
and bank data processing services for lease payments aggregating $68,903. The
terms, conditions and rental rates provided for in these Agreements are
comparable to corresponding terms, conditions and rates provided for in leases
of similar equipment offered by unrelated third parties.
During 2001, Synovus paid TSYS $81,025 for data links, network services
and other miscellaneous items related to the data processing services which
Synovus provided to its customers, which amount was reimbursed to Synovus by its
customers. During 2001, Synovus paid TSYS $24,900, primarily for computer
processing services. During 2001, TSYS paid Synovus $100,697 for lockbox
services. The charges for processing and other services are comparable to those
between unrelated third parties.
During 2001, pointpathbank, N.A., a wholly owned subsidiary of Synovus,
paid DotsConnect, Inc., a wholly owned subsidiary of TSYS during 2001, $470,424
in connection with Web hosting services and CB&T paid DotsConnect $70,184 in
connection with online customer support services. During 2001, DotsConnect paid
CB&T $211,878 in connection with its lease of furniture and equipment from CB&T.
The lease payments and charges paid for these services are comparable to those
between unrelated third parties.
During 2001, Synovus, CB&T and other Synovus subsidiaries paid to Columbus
Productions, Inc. and TSYS Total Solutions, Inc., wholly owned subsidiaries of
TSYS during 2001, an aggregate of $6,348,746 for printing, correspondence and
facilities management services. The charges for these services are comparable to
those between unrelated third parties.
During 2001, CB&T leased office space from TSYS for lease payments of
$39,405. During 2001, TSYS and its subsidiaries were paid $2,305,617 of interest
by CB&T in connection with deposit accounts with, and commercial paper purchased
from, CB&T. The lease payments and interest rates paid are comparable to those
provided for between unrelated third parties.
In January 2002, TSYS acquired TSYS Total Debt Management, Inc. from
Synovus in exchange for newly issued shares of TSYS stock valued at
$43,500,000. The terms of the Share Exchange Agreement executed in connection
with the transaction are comparable to those between unrelated third parties.
The Board of Directors of TSYS has resolved that transactions with
officers, directors, key employees and their affiliates shall be approved by a
majority of its independent and disinterested directors, if otherwise permitted
by applicable law, and will be on terms no less favorable than could be obtained
from unrelated third parties.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires TSYS'
officers and directors, and persons who own more than ten percent of TSYS
stock, to file reports of ownership and changes in ownership on Forms 3,4 and 5
with the Securities and Exchange Commission and the New York Stock Exchange.
Officers, directors and greater than ten percent shareholders are required by
Securities and Exchange Commission regulations to furnish TSYS with copies of
all Section 16(a) forms they file.
28
To TSYS' knowledge, based solely on its review of the copies of such forms
received by it, and written representations from certain reporting persons that
no Forms 5 were required for those persons, TSYS believes that during the fiscal
year ended December 31, 2001, all Section 16(a) filing requirements applicable
to its officers, directors and greater than ten percent beneficial owners were
complied with, except for the following. Although Messrs. Clough, Turner, Ussery
and Thomas G. Cousins (now an emeritus director of TSYS), each filed one late
report, none of them reported any transactions late. Ms. Yarbrough filed one
late report, which reported five transactions late. Mr. Miller filed one late
report and reported two transactions late.
INDEPENDENT AUDITORS
On March 5, 2002, TSYS' Board of Directors appointed KPMG LLP as the
independent auditors to audit the financial statements of TSYS and its
subsidiaries for the fiscal year ending December 31, 2002. The Board of
Directors knows of no direct or material indirect financial interest by KPMG in
TSYS or of any connection between KPMG and TSYS in the capacity of promoter,
underwriter, voting trustee, director, officer, shareholder or employee.
Representatives of KPMG will be present at TSYS' 2002 Annual Meeting with
the opportunity to make a statement if they desire to do so and will be
available to respond to appropriate questions.
GENERAL INFORMATION
FINANCIAL INFORMATION
Consolidated financial statements for TSYS and its subsidiaries are attached
as a Financial Appendix to this Proxy Statement and are included in the Annual
Report on Form 10-K as filed with the Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. A copy of the 2001 Form 10-K
(excluding exhibits) will be furnished, without charge, by writing to the
Corporate Secretary, Total System Services, Inc., 901 Front Avenue, Suite 301,
Columbus, Georgia 31901.
SHAREHOLDER PROPOSALS FOR THE 2003 PROXY STATEMENT
Any shareholder satisfying the Securities and Exchange Commission
requirements and wishing to submit a proposal to be included in the Proxy
Statement for the 2003 Annual Meeting of Shareholders should submit the proposal
in writing to the Secretary, Total System Services, Inc., 901 Front Avenue,
Suite 301, Columbus, Georgia 31901. TSYS must receive a proposal by November 8,
2002 in order to consider it for inclusion in the Proxy Statement for the 2003
Annual Meeting of Shareholders.
DIRECTOR NOMINEES OR OTHER BUSINESS FOR PRESENTATION AT THE ANNUAL MEETING
Shareholders who wish to present director nominations or other business at
the Annual Meeting are required to notify the Secretary of their intent between
December 9, 2002 and January 23, 2003 and the notice must provide information
as required in the bylaws, or the persons appointed as proxies may exercise
their discretionary voting authority with respect to the proposal. A copy of
these bylaw requirements will be provided upon request in writing to the
Secretary, Total System Services, Inc., 901 Front Avenue, Suite 301, Columbus,
Georgia 31901. This requirement does not apply to the deadline for submitting
shareholder proposals for inclusion in the Proxy Statement (see "Shareholder
Proposals for the 2003 Proxy Statement" above), nor does it apply to questions a
shareholder may wish to ask at the meeting.
SOLICITATION OF PROXIES
TSYS will pay the cost of soliciting proxies. Proxies may be solicited on
behalf of TSYS by directors, officers or employees by mail, in person or by
telephone, facsimile or other electronic means. TSYS will reimburse brokerage
firms, nominees, custodians and fiduciaries for their out-of-pocket expenses
for forwarding proxy materials to beneficial owners.
29
Householding
The Securities and Exchange Commission recently adopted amendments to
its proxy rules which permit companies and intermediaries, such as brokers and
banks, to satisfy delivery requirements for proxy statements with respect to two
or more shareholders sharing the same address by delivering a single proxy
statement to those shareholders. This method of delivery, often referred to as
householding, should reduce the amount of duplicate information that
shareholders receive and lower printing and mailing costs for companies. TSYS is
not householding proxy materials for its shareholders of record in connection
with its 2002 Annual Meeting. However, we have been notified that certain
intermediaries will household proxy materials. If you hold your shares of TSYS
stock through a broker or bank that has determined to household proxy materials:
. Only one annual report and proxy statement will be delivered
to multiple shareholders sharing an address unless you notify
your broker or bank to the contrary;
. You can contact TSYS by calling (706) 649-5220 or by writing
Investor Relations Manager, Total System Services, Inc., P.O.
Box 120, Columbus, Georgia 31902 to request a separate copy of
the annual report and proxy statement for the 2002 Annual
Meeting and for future meetings or you can contact your bank
or broker to make a similar request; and
. You can request delivery of a single copy of annual reports or
proxy statements from your bank or broker if you share the
same address as another TSYS shareholder and your bank or
broker has determined to household proxy materials.
The above Notice of Annual Meeting and Proxy Statement are sent by order of
the TSYS Board of Directors.
/s/Richard W. Ussery
Richard W. Ussery
Chairman of the Board
March 8, 2002
Financial Appendix
TSYS(SM)(Logo)
Selected Financial Data ............................................... F-2
Financial Review ...................................................... F-3
Consolidated Balance Sheets ........................................... F-14
Consolidated Statements of Income ..................................... F-15
Consolidated Statements of Cash Flows ................................. F-16
Consolidated Statements of Shareholders' Equity and Comprehensive Income F-17
Notes to Consolidated Financial Statements ............................ F-18
Report of Independent Auditors ........................................ F-28
Report of Financial Responsibility .................................... F-29
Quarterly Financial Data, Stock Price, Dividend Information .......... F-30
TSYS 2001 F-1
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 15.9%
and 21.1%, respectively. The balance sheet data also reflect the continued
strong financial position of TSYS as evidenced by the current ratio of 2.0:1 at
December 31, 2001, 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) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Revenues:
Bankcard data processing services $ 563,573 505,935 456,840 350,310 324,718
Other services 86,835 95,358 77,086 45,884 36,781
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues 650,408 601,293 533,926 396,194 361,499
- -----------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 258,119 235,670 207,618 160,855 147,438
Net occupancy and equipment expense 169,535 162,906 151,964 105,658 94,685
Other operating expenses 87,422 90,111 86,052 63,312 59,447
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 515,076 488,687 445,634 329,825 301,570
- -----------------------------------------------------------------------------------------------------------------------------
Equity in income of joint ventures 17,824 15,586 12,327 12,974 9,347
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 153,156 128,192 100,619 79,343 69,276
- -----------------------------------------------------------------------------------------------------------------------------
Nonoperating income:
Gain (loss) on disposal of property and equipment, net (90) (1,422) 798 (48) (36)
Interest income, net of interest expense 2,681 5,037 2,159 2,492 2,315
Minority interest in subsidiary's net income (76) (99) -- -- --
Other, net 122 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total nonoperating income 2,637 3,516 2,957 2,444 2,279
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 155,793 131,708 103,576 81,787 71,555
Income taxes 52,891 46,065 34,983 26,956 24,077
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 102,902 85,643 68,593 54,831 47,478
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .53 .44 .35 .28 .24
- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .53 .44 .35 .28 .24
- -----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ .060 .048 .040 .038 .030
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 194,773 194,785 194,913 194,020 193,956
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 195,604 195,265 195,479 194,669 194,239
- -----------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
December 31,
---------------------------------------------------------
(in thousands) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
Balance Sheet Data:
Total assets $652,277 601,224 463,622 353,775 299,958
Working capital 103,801 63,655 76,414 60,472 70,899
Total long-term debt -- -- 204 342 475
Shareholders' equity 500,812 409,014 334,292 270,354 221,255
F-2
Financial Review
This Financial Review provides a discussion of critical accounting
policies, related party transactions, off-balance sheet arrangements, 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.
Critical Accounting Policies
TSYS' (The Company's) financial position and results of operations are
impacted by the accounting policies the Company has adopted. In order to get a
full understanding of the Company's financial statements, one must have a clear
understanding of the accounting policies employed.
Risks and Uncertainties and Use of Estimates: The Company has prepared the
accompanying consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America. In preparing
financial statements, it is necessary for management to make assumptions and
estimates affecting the amounts reported in the consolidated financial
statements and related notes. These estimates and assumptions are developed
based upon all information available. Actual results can differ from assumed and
estimated amounts.
Factors that could affect the Company's future operating results and cause
actual results to vary materially from expectations include, but are not limited
to, lower than anticipated growth from existing customers, an inability to
attract new customers and grow internationally, an inability to grow through
acquisitions or successfully integrate acquisitions, technology changes,
financial services consolidation, increased regulatory mandates, a decline in
the use of credit cards as a payment mechanism, or a decline in the financial
stability of the Company's customers.
Negative developments in these or other risk factors could have a material
adverse effect on the Companys financial position and results of operations.
A summary of the Company's critical accounting policies follows:
Accounts Receivable: Accounts receivable balances are stated net of
allowances for doubtful accounts and billing adjustments of $5.4 million and
$5.8 million at December 31, 2001 and 2000, respectively. The allowance
represents 4.5% and 5.7% of accounts receivable at 2001 and 2000, respectively.
TSYS' client base mainly consists of financial institutions and other card
issuers such as major retailers. Historically, the Company has not encountered
any significant write-offs.
TSYS records allowances for doubtful accounts when it is probable that the
accounts receivable balance will not be collected. When estimating the
allowances for doubtful accounts, the Company takes into consideration such
factors as its day-to-day knowledge of specific customers, the industry and size
of its customers, the overall composition of its accounts receivable aging,
prior history of accounts receivable write-offs and prior history of allowances
in proportion to the overall receivable balance. This analysis includes an
on-going and continuous communication with its largest customers. A financial
decline of any one of these customers could have an adverse and material effect
on collectibility of receivables.
Increases in the allowance for doubtful accounts are recorded as bad debt
expense and are reflected in other operating expenses in the Company's
consolidated statements of income.
TSYS records provisions for billing adjustments for potential billing
discrepancies. When estimating the provision for billing adjustments, the
Company considers prior history of billing adjustments. Increases in the
provision for billing adjustments are recorded net of revenues in the Company's
consolidated statements of income.
Revenue Recognition: The Company's bankcard processing revenues are derived
from long-term processing contracts with banks and other institutions and are
recognized as revenues at the time the service is performed. Bankcard data
processing revenues are generated primarily from charges based on the number of
accounts billed, transactions and authorizations processed, statements mailed,
and other processing services for cardholder accounts on file. Most of these
contracts have prescribed minimums. The terms of contracts generally range from
three to ten years in length.
The Company's other service revenues are derived from printing activities
and customer relationship management services, such as call center activities
for card activation and balance transfer requests. The contract terms for these
services are generally shorter in nature, and some are project based. Revenue is
recognized on these other services either on a per unit or a fixed price basis.
The Company uses the percentage of completion method of accounting for its fixed
price contracts.
Contract Acquisition Costs: The Company capitalizes contract acquisition
costs related to signing or renewing long-term contracts. These costs, primarily
consisting of cash payments for rights to provide processing services and
internal conversion and software development costs, are amortized using the
straight-line method over the contract term beginning when the clients
cardholder accounts are converted to the system. All costs incurred prior to
contract execution are expensed as incurred.
The amortization of these costs is recognized in other operating expenses.
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. The
determination of expected undiscounted net operating cash flows requires
management to make estimates.
These costs may become impaired with the loss of a contract, the financial
decline of a customer, termination of conversion efforts after a contract is
signed, diminished prospects for current customers or if the Company's estimates
of future cash flows differ from actual results. Capitalized contract
acquisition costs are classified in prepaid and other assets.
Software Development Costs: The Company develops software that is used in
providing transaction processing services to clients. Software development costs
are capitalized once technological feasibility of the software has been
established. Costs incurred prior to establishing technological feasibility are
expensed as incurred. Technological feasibility is established when the Company
has completed all planning, designing, coding and testing activities that are
necessary to determine that a product can be produced to meet its design
specifications, including functions, features and technical performance
requirements. Capitalization of costs ceases when the product is available to
customers for general use. The Company evaluates the unamortized capitalized
costs of software development as compared to the net realizable value of the
development which is determined by projected future cash flows. The amount by
which the unamortized software development costs exceed the net realizable value
are written off. Software development costs are amortized using the greater of
(1) the straight-line method over the estimated useful life (which ranges from
3-10 years) or (2) the ratio of current revenues to current anticipated
revenues.
Software development costs may become impaired in situations where
development efforts are abandoned due to the viability of the
TSYS 2001 F-3
planned project becoming doubtful or due to technological obsolescence of the
planned project.
Transaction Processing Provisions: The Company has made certain estimates
to accrue for contract contingencies and processing errors. When providing for
these accruals, the Company takes into consideration such factors as the prior
history of contract penalties and processing errors incurred, contractual
penalties inherent in the Company's contracts, progress towards meeting
milestones and amounts not covered by insurance.
These accruals are recorded in other current liabilities in the
accompanying consolidated balance sheets. Increases and decreases in transaction
processing provisions are reflected in other operating expenses in the Company's
consolidated statements of income.
Impairment of Long-lived Assets and Intangibles: The Company evaluates the
recoverability of property and equipment, identifiable intangibles and goodwill
by comparing the carrying amount of the asset against the estimated undiscounted
cash flows associated with it. Should the sum of the expected future cash flows
be less than the carrying value of the asset being evaluated, the Company uses
fair value in determining the amount of impairment loss that should be recorded.
The determination of undiscounted net operating cash flows requires management
to make estimates.
Equity Investments: TSYS' 49% investment in Total System Services de
Mexico, S.A. de C.V. (TSYS de Mexico), a bankcard data processing support
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.
Income Taxes: Income taxes reflected in TSYS' consolidated financial statements
are computed based on the taxable income of TSYS as if TSYS were a stand-alone
tax paying entity. A consolidated federal income tax return is filed for Synovus
and its majority owned subsidiaries, including TSYS.
The Company accounts for income taxes in accordance with the asset and
liability method. Under the asset and liability method, deferred income tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred income
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Income tax provisions require the use of management judgements, which are
subject to challenge by various taxing authorities. Estimates relate to the
determination of taxable income, the determination of temporary differences
between book and tax bases, as well as anticipated tax credits and related
provisions.
Related Party Transactions
The Company provides bankcard processing services and other services for
its parent company, Synovus Financial Corp. (Synovus), and its affiliates, and
for Vital and TSYS de Mexico. The services are performed under negotiated
contracts. The Company believes the terms and conditions of transactions between
the Company and Synovus and its affiliates are comparable to those which could
have been obtained in transactions with unaffiliated parties.
TSYS has entered into agreements with Columbus Bank and Trust Company
(CB&T) and certain of its affiliates, pursuant to which TSYS performs bankcard
data processing services. Such bankcard data processing service revenues were
$12.9 million, $12.3 million and $8.0 million during the years ended December
31, 2001, 2000 and 1999, respectively. Miscellaneous data processing services
performed by TSYS for certain Synovus nonbanking affiliates generated revenues
of $480,000, $256,000 and $222,000 during the years ended December 31, 2001,
2000 and 1999, 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 $15.9 million, $15.7 million and $16.0 million for
the years ended December 31, 2001, 2000 and 1999, respectively.
Merchant processing revenues, included in bankcard data processing
revenues, related to Vital, the Company's joint venture with Visa, were $15.1
million, $14.1 million and $12.9 million for the years ended December 31, 2001,
2000 and 1999, respectively.
During 2001 and 2000, TSYS provided web hosting and electronic commerce
processing services to CB&T for which the Company was paid $470,000 and
$546,000, respectively.
Revenues from other services provided by TSYS to Synovus and its affiliates
were $6.4 million, $6.6 million and $5.5 million during the years ended December
31, 2001, 2000 and 1999, respectively.
During 2000 and 1999, Synovus Technologies, Inc. (STI) paid TSYS $143,000
and $168,000, respectively, for data links, network services, computer
processing services and other miscellaneous items. In January 2001, STI was
folded into Synovus to take advantage of operating efficiences. In 2001, Synovus
paid TSYS $106,000 for data links, network services, computer processing
services and other miscellaneous items.
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 included recovery collections work, bankruptcy
process management, legal account management and skip tracing. These services
are being marketed through the Company under the name TSYS Total Debt
Management, Inc. (TDM) for which Synovus paid TSYS a management fee of $1.5
million in 2001 and $505,000 in 2000.
Effective January 1, 2002, TSYS acquired TDM in exchange for 2,175,000
newly issued shares of TSYS common stock with a market value of approximately
$43.5 million. The TDM valuation was performed by an independent professional
appraisal firm. TDM will operate as a separate subsidiary of TSYS. This
transaction increased CB&T's ownership of TSYS to 81.1% in 2002.
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 have been integrated into TSYS
processing solutions. The Company is assisting in managing ProCard, for which
the Company was paid a management fee by Synovus of $303,000 in 2001 and
$177,000 in 2000.
TSYS maintains deposit accounts with CB&T, the majority of which earn interest
and on which TSYS receives market rates of interest. Included in cash and cash
equivalents are deposit balances with CB&T of $45.9 million and $74.6 million at
December 31, 2001 and 2000, respectively.
In 2001, 2000 and 1999, TSYS received interest income of $2,305,617,
$4,772,461 and $1,865,621, respectively, from CB&T. TSYS paid banking account
service fees and wire transfer fees to CB&T of $46,396 in 2001, $68,004 in 2000
and $53,195 in 1999.
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 2001 or 2000.
TSYS paid cash dividends to CB&T in the amount of approximately
F-4
$9.0 million, $7.1 million and $6.3 million in 2001, 2000 and 1999,
respectively. TSYS received cash dividends from its equity joint ventures of
approximately $7.1 million, $5.4 million and $5.1 million in 2001, 2000 and
1999, respectively. As part of the restructured joint venture agreement in 2001,
TSYS received a capital distribution of approximately $3.3 million from TSYS de
Mexico.
Off-Balance Sheet Arrangements
Operating Leases: As a method of funding its operations, TSYS employs
noncancelable operating leases for computer equipment, software and facilities.
These leases allow the Company to provide the latest technology while avoiding
the ownership risk of technological obsolescence. Neither the assets nor
liabilities related to these leases are included on the balance sheet. One of
the Company's most significant leases is its synthetic lease for its corporate
campus (see Off-Balance Sheet Arrangements and Contractual Cash Commitments and
Note 9.)
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 agreed to guarantee the loan. As of
December 31, 2001, all payments on the loan have been made timely. The
outstanding loan balance at December 31, 2001, was $7.5 million. The Company
does not anticipate any negative consequences to its results of operations and
financial condition as a result of its loan guarantee.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141 (SFAS 141), "Business Combinations," and Statement No. 142
(SFAS 142), "Goodwill and Other Intangible Assets." SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet to be recognized
and reported apart from goodwill. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 121, (SFAS 121) "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted the provisions of SFAS 141 effective July 1, 2001, and
adopted SFAS 142 effective January 1, 2002.
At December 31, 2001, the Company has unamortized goodwill in the amount of
$3.6 million, which will be subject to the transition provisions of SFAS 142.
Amortization expense related to goodwill was $889,000 and $528,000 for the years
ended December 31, 2001 and 2000, respectively. The Company is in the process of
evaluating the impact on the Company's financial statements of adopting SFAS 142
at the date of this report and does not believe it will have any transitional
impairment losses to be reported as a cumulative effect of a change in
accounting principle.
In August 2001, the FASB issued Statement No. 143 (SFAS 143), "Accounting
for Asset Retirement Obligations." SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS 143 applies to all
entities. SFAS 143 applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain lease
obligations. SFAS 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company has assessed the adoption of
SFAS 143 and does not expect any impact on the Company's financial statements.
In October 2001, the FASB issued Statement No. 144 (SFAS 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes SFAS 121 and the accounting and reporting provisions
of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business (as previously defined in that Opinion). SFAS 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary.
SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. The provisions are to be applied prospectively. Management does not
expect the adoption of SFAS 144 to have a material effect on its financial
condition or results of operations.
At the November 2001 Emerging Issues Task Force (EITF) meeting, the FASB
released Staff Announcement Topic D-103, "Income Statement Characterization of
Reimbursements Received for 'Out-of-Pocket' Expenses Incurred." The FASB Staff
Announcement clarified interpretations of EITF 99-19, "Reporting Revenue Gross
as a Principal versus Net as an Agent," stating that the Staff believes that
reimbursements received for out-of-pocket expenses should be characterized as
revenue. Historically, TSYS has not reflected such reimbursements in its
consolidated statements of income. The largest expenses, for which TSYS is
reimbursed by clients, are postage and express courier charges.
The FASB Staff Announcement requires adoption in financial reporting
periods beginning after December 15, 2001. Upon application of this FASB Staff
Announcement, comparative financial statements for prior periods will be
reclassified to provide consistent presentation.
TSYS does not expect the new FASB Staff Announcement to have any impact on
its financial position, operating income and net income. However, TSYS'
operating and net income margins will be reduced as the result of the gross-up
of revenues and expenses for reimbursable expenses. The following table shows
the expected impact of adopting the FASB Staff Announcement on revenues,
operating margins and net income margins for 2001, 2000 and 1999:
- --------------------------------------------------------------------------------
As Reported 2001 2000 1999
- --------------------------------------------------------------------------------
Revenues (in millions) $ 650.4 601.3 533.9
Operating Margin 23.5% 21.3% 18.8%
Net Income Margin 15.8% 14.2% 12.8%
After Reclassification 2001 2000 1999
- --------------------------------------------------------------------------------
Revenues (in millions) $ 896.2 836.3 739.1
Operating Margin 17.1% 15.3% 13.6%
Net Income Margin 11.5% 10.2% 9.3%
* Operating margin equals operating income divided by revenue.
* Net income margin equals net income divided by revenue.
TSYS 2001 F-5
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 F-2:
- ----------------------------------------------------------------------------------------------------------------
Percentage Change
in Dollar Amounts
-----------------
Percentage of Total Revenues 2001 2000
Years Ended December 31, vs vs
-----------------------------
2001 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services 86.6% 84.1 85.6 11.4 10.7
Other services 13.4 15.9 14.4 (8.9) 23.7
- -------------------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0 8.2 12.6
- -------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 39.7 39.2 38.9 9.5 13.5
Net occupancy and equipment expense 26.1 27.1 28.5 4.1 7.2
Other operating expenses 13.4 15.0 16.1 (3.0) 4.7
- -------------------------------------------------------------------------------------------
Total operating expenses 79.2 81.3 83.5 5.4 9.7
- -------------------------------------------------------------------------------------------
Equity in income of joint ventures 2.7 2.6 2.3 14.4 26.4
- -------------------------------------------------------------------------------------------
Operating income 23.5 21.3 18.8 19.5 27.4
- -------------------------------------------------------------------------------------------
Nonoperating income:
Gain (loss) on disposal of property and equipment, net (0.0) (0.2) 0.2 nm nm
Interest income, net of interest expense 0.4 0.8 0.4 (46.8) 133.3
Minority interest in subsidiary's net income (0.0) (0.0) -- nm nm
Other, net 0.0 -- -- nm nm
- -------------------------------------------------------------------------------------------
Total nonoperating income 0.4 0.6 0.6 (25.0) 18.9
- -------------------------------------------------------------------------------------------
Income before income taxes 23.9 21.9 19.4 18.3 27.2
Income taxes 8.1 7.7 6.6 14.8 31.7
- -------------------------------------------------------------------------------------------
Net income 15.8% 14.2 12.8 20.2 24.9
- -------------------------------------------------------------------------------------------
nm = not meaningful
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, the
Caribbean and Europe. The Company currently offers merchant services to
financial institutions and other organizations in Japan.
Bankcard Data Processing Services
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 and retail industries 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 included in bankcard data processing revenues
F-6
and consists of optional features each client can choose to subscribe to in
order to increase the financial performance of its portfolio. Value added
products and services include: risk management tools and techniques, such as
credit evaluation, fraud detection and prevention, and behavior analysis tools;
and revenue enhancement tools, such as loyalty programs and bonus rewards. For
the years ended December 31, 2001, 2000 and 1999, value added products and
services represented 13.8%, 12.4% and 11.5% of total revenues, respectively.
Revenues from these products and services increased 8.2%, or $15.0 million, for
2001 compared to 2000, and increased 22.2%, or $13.6 million, for 2000 compared
to 1999. The Company changed its accounting policy in early 2001 for recognizing
revenue for one of the value added products and services it offers clients.
Prior to that time, the Company was recognizing revenue one month in arrears.
Due to the availability of historical data the Company has accumulated over a
set amount of time, the Company determined that it now can reasonably estimate
its current monthly revenue with some precision. During 2001, the Company
recognized, as a result of the change, thirteen months of revenue, or an
additional $1.4 million, for this one value added product and service.
The average number of cardholder accounts on file increased 5.9% to 206.1
million in 2001, compared to 194.6 million in 2000, which represented a 7.9%
increase over 180.4 million in 1999. At December 31, 2001, TSYS cardholder
accounts on file were approximately 218.5 million, compared to 195.2 million and
206.2 million at December 31, 2000 and 1999, respectively. The change in
cardholder accounts on file at December 31, 2001, as compared to December 31,
2000, included the deconversion of 7.9 million accounts, the addition of
approximately 14.8 million accounts attributable to the internal growth of
existing clients, and approximately 16.4 million accounts added for new clients.
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 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
commercial, retail 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 American Express cards and stored value cards. The
following table summarizes TSYS accounts on file by portfolio type:
Percent Percent
Accounts on Change Change
File by Type 2001 vs 2000 vs
(in millions) 2001 2000 1999 2000 1999
-----------------------------------------------------------------------
Consumer 127.2 90.7 106.7 40.3 (15.0)
Retail 73.5 90.1 88.7 (18.5) 1.5
Commercial 17.8 14.4 10.8 23.8 33.2
------------------------------------------------
Total 218.5 195.2 206.2 11.9 (5.3)
---------------------------
Based upon available market share data, the Company believes it has a 20%
market share of the domestic Visa and MasterCard 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 5%
market share of the U.S. off-line debit processing market at the end of 2001.
TSYS competes with other third-party bankcard processors. The Company believes
it has significant growth opportunities as in-house processors and issuers
processed by competitors realize the potential for reduced costs and better
portfolio performance offered through TSYS' processing solutions.
At December 31, 2001, TSYS was processing approximately 127.2 million
consumer card accounts, a 40.3% increase from the approximately 90.7 million
being processed at year-end 2000, which was a 15.0% decrease over the 106.7
million at year-end 1999. The increase in consumer accounts in 2001 was
primarily the result of converting the portfolios of The Royal Bank of Scotland
Group plc (RBS) and Allied Irish Banks plc (AIB). The decrease in consumer
accounts in 2000 compared to 1999 was the result of the deconversion of the
portfolio of UCS. Future growth in consumer card revenue is dependent upon
increased card activity, continued internal growth in client's portfolios and
aquisition of new clients. Also impacting the increase in consumer cards is the
number of retail card accounts that are being converted to consumer card
accounts (more information is provided in the discussion of retail card
accounts.)
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, 2001, TSYS was processing approximately 73.5
million retail card accounts, an 18.5% decrease over the approximately 90.1
million being processed at year-end 2000, which represented a 1.5% increase over
the 88.7 million at year-end 1999. The majority of the 16.6 million decrease in
retail accounts in 2001 was the result of a portfolio "flip" of retail accounts
by Sears to a MasterCard portfolio. The 1.4 million increase in retail accounts
in 2000 was net of a decrease 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.
In January 2002, TSYS announced the signing of a multiyear agreement to
process 13 million Fashion Bug private-label card accounts for Charming Shoppes,
Inc., one of the leading specialty apparel retailers in America.
TSYS provides processing services for commercial cards. At December 31,
2001, TSYS was processing approximately 17.8 million commercial card accounts, a
23.8% increase over the 14.4 million commercial card accounts being processed at
year-end 2000, which was a 33.2% increase over the approximately 10.8 million
being processed at year-end 1999. 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 and plans to
continue to expand its service offerings internationally in the future. In 2000,
the Company announced the signing of RBS and AIB to multiyear processing
agreements. The portfolios of both clients, approximately nine million accounts,
were fully converted by the third quarter of 2001.
TSYS 2001 F-7
The following table summarizes TSYS accounts on file by area:
Percent Percent
Accounts on Change Change
File by Area 2001 vs 2000 vs
(in millions) 2001 2000 1999 2000 1999
----------------------------------------------------------------------
Domestic 190.4 178.4 190.4 6.6 (6.3)
International 28.1 16.8 15.8 66.9 6.1
--------------------------------------------------
Total 218.5 195.2 206.2 11.9 (5.3)
----------------------------
A significant amount of the Company's revenues is derived from long-term
contracts with large clients, including certain major customers. In September
1999, TSYS announced a new ten-year agreement with the Bank of America
Corporation to continue processing its credit card portfolio until 2009. Bank of
America accounted for approximately 16%,16% and 16% of total revenues for the
years ended December 31, 2001, 2000 and 1999, 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 the year ended December 31, 1999. 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 years ended December 31, 2001 and 2000.
The Company has a long-term processing relationship with Providian
Financial Corporation (Providian), one of the largest bankcard issuers in the
nation. In October 2001, the Company announced it signed a multiyear extension
to its long-term credit card-processing agreement with Providian, which included
a cash payment for processing rights of $12.7 million. Providian accounted for
approximately 13% and 11% of total revenues for the years ended December 31,
2001 and 2000, respectively. Providian was not a major customer in 1999. In late
2001, Providian made several announcements regarding concerns about its
financial status, related changes in management and the sale of a portion of its
portfolio. As a result of these announcements, TSYS management is actively
monitoring Providian's status through frequent interaction. The loss of
Providian, or any other major or significant clients, could have a material
adverse effect on the Company's financial condition and results of operations.
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 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 2001, nor was it a major customer in 1999. The loss of Sears,
or any other major or significant clients, could have a material adverse effect
on the Company's financial condition and results of operations.
The Company did experience a drop in transaction and authorization volumes
on September 11, 2001, and the following weeks as a result of the terrorist
attacks. In the ensuing weeks, those processing volumes returned to normal
levels as consumers resumed their daily activities. TSYS did not experience any
material financial impact as a result of the September 11th terrorist attacks.
The Company has experienced a delay by potential clients of pursuing processing
agreements as those clients focus on matters such as disaster recovery and other
internal processes.
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. GP Net's revenues are included in bankcard processing revenues and
were not significant to total revenues during either 2001 or 2000. 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.
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 delivered premier
e-payments software that allowed buyers and sellers to conduct commerce
electronically. DotsConnect commenced operations on May 1, 2000, with
approximately 30 team members comprising the initial DotsConnect team.
In November 2001, TSYS announced its decision to integrate the operations
of DotsConnect into a separate division of TSYS. The function of DotsConnect
will remain the same supporting e-commerce services. The decision was made to
better serve TSYS' clients through more productive and efficient processes. The
integration became effective January 1, 2002.
Other services
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, CB&T, the flagship bank of Synovus, for $20.1
million. The business of PCS became part of TSYS' wholly owned subsidiary, TSI.
Revenues from other services decreased $8.5 million, or 8.9%, in 2001,
compared to 2000. In 2000, revenues from other services increased $18.3 million,
or 23.7%, compared to 1999. The majority of revenues from other services are
generated by TSI. During 2001, one of TSI's major clients stopped outsourcing
certain functions to TSI as a result of changes in economic uncertainties,
business contraction and discontinuing certain services. As a result, TSI's
revenues during 2001 were negatively impacted.
In November 2001, TSYS announced its decision to integrate the operations
of TSI into a separate division of TSYS. The functions of TSI will remain the
same supporting customer care and business process management solutions. The
decision was made to better serve TSYS'
F-8
clients through more productive and efficient processes. The integration became
effective January 1, 2002.
Operating Expenses
As a percentage of revenues, operating expenses decreased in 2001 to 79.2%,
compared to 81.3% and 83.5% for 2000 and 1999, respectively. The principal
decreases in operating expenses as a percentage of revenue in 2001 as compared
to 2000 resulted from a concerted emphasis on expense control, management fee
income from Synovus, a focus on improved processes, lower provisions for bad
debt expense, lower provisions for transaction processing accruals and a
reduction in amortization of contract acquisition costs. Operating expenses were
$515.1 million in 2001, compared to $488.7 million in 2000 and $445.6 million in
1999.
Salaries and other personnel expense increased 9.5% in 2001 over 2000,
compared to 13.5% in 2000 over 1999. A significant portion of TSYS' operating
expenses relates to salaries and other personnel costs. During 2001, the average
number of employees increased to 4,933, compared to 4,606 in 2000 and 4,106 in
1999. The change in total employment costs consists of increases of $39.6
million, $37.2 million and $61.7 million in 2001, 2000 and 1999, 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 $17.2 million, $9.1 million and $14.9 million in
2001, 2000 and 1999, respectively, invested in software development and contract
acquisition costs.
Due to the importance of technology to its business, a significant portion
of TSYS' employees are programmers approximately 21.3% in 2001, compared to
20.2% and 22.7% in 2000 and 1999, respectively. 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, 2001, approximately 687 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 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 4.1% in 2001 over 2000,
compared to 7.2% in 2000 over 1999. Computer equipment and software rentals,
which represent the largest components of net occupancy and equipment expense,
remained consistent in 2001 and 2000. 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, the Company made significant investments in computer software
licenses related to a 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
the costs associated with these new licenses.
[Omitted graph is represented by the following chart.]
BANKCARD REVENUES
(Millions of Dollars)
1997 $324.7
1998 350.3
1999 456.8
2000 505.9
2001 563.6
TSYS continues to monitor and assess its building, software and computer
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, a special purpose entity, purchased the
land, obtained financing from a syndicate of banks, 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 to the
campus 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 occupying the campus was $9.6
million in 2000 and $6.4 million in 1999, net of the relinquished lease
obligations.
In 1999, TSYS opened an office in London which currently serves as the
headquarters for TSYS' European operations. During 2000, TSYS opened a European
data center in the United Kingdom.
In December 2000, TSYS purchased a 40,000 square-foot building and
equipment in York, England for approximately $13.0 million. The building houses
client service and administrative personnel for TSYS Europe. The Company has
leased back 17,000 square-feet to the previous owner. Although it only began
processing accounts for its new European clients during the last six months of
2001, the Company had to build the necessary infrastructure in order to begin
processing those accounts in 2001. Through 2001, the Company incurred $16.4
million of operating expenses, net of revenues, related to the expansion in
Europe.
In March 2001, the Company announced plans to move its materials management
division and its printing subsidiary, CPI, into a new building in east Columbus.
The 61,000 square-foot building was completed in August 2001 at a cost of
approximately $3.7 million. In conjunction with the move, CPI sold its existing
location for $960,000. While waiting on construction of the new building to be
completed, CPI leased the existing facility from the new owner.
In July 2000, TSYS broke ground on a 33,000 square foot childcare facility
which is located on the northeast corner of the campus. The new facility offers
the Company's employees an alternative option for childcare needs. The facility
was completed at a cost of approximately $3.5 million and opened in August 2001.
The Company expects to recover a significant portion of its building costs
through future state tax credits from the state of Georgia for setting up a
company-sponsored childcare facility.
TSYS 2001 F-9
Other operating expenses decreased 3.0% in 2001 compared to 2000, and
increased 4.7% in 2000 compared to 1999. Other operating expenses were impacted
by the amortization of contract acquisition costs, the provision for bad debt
expense, the provision of transaction processing accruals and the amount of
management fee income TSYS received from Synovus for management services TSYS
provided to TDM and ProCard. Amortization of contract acquisition costs was $6.5
million, $7.5 million and $12.3 million in 2001, 2000 and 1999, respectively.
For 2001, 2000 and 1999, transaction processing provisions were $1.4 million,
$5.7 million and $6.9 million, respectively. TSYS received $1.8 million in 2001,
and $682,000 in 2000 for management services from Synovus.
Equity in Income of Joint Ventures
TSYS' share of income from its equity in joint ventures was $17.8 million, $15.6
million and $12.3 million for 2001, 2000 and 1999, respectively. The increase in
2001 is primarily the result of Vital's improved operating results as a result
of increased volumes and expense control.
The Company has completed negotiations with its Mexican partners to
restructure its Mexican joint venture agreement whereby TSYS will process for
the member banks directly instead of processing through the joint venture. The
joint venture, TSYS de Mexico, will continue to print statements and provide
card-issuing services to the joint venture clients and others. The Company has
executed contracts with banks that represent approximately 73% of the
account-on-file base in Mexico. The net effect of the restructuring will result
in a decrease in equity in income of joint ventures while bankcard processing
revenues should increase. The increase in revenues is not expected to
significantly impact the Companys bankcard data processing revenues.
Beginning in 2001, and as a result of the restructuring of its joint
venture agreement, TSYS agreed to pay TSYS de Mexico a management fee for
certain client relationship services that TSYS de Mexico has assumed from TSYS.
TSYS paid TSYS de Mexico a management fee of $300,587 in 2001.
Operating Income
Operating income increased 19.5% to $153.2 million in 2001, compared to
$128.2 million in 2000, an increase of 27.4% over 1999 operating income of
$100.6 million in 1999. Excluding equity in income of joint ventures, operating
income increased 20.2% to $135.3 million in 2001, compared to $112.6 million in
2000, an increase of 27.5% over the amount for 1999 of $88.3 million. The
operating income margin increased to 23.5% in 2001, compared to 21.3% and 18.8%
in 2000 and 1999, respectively. The increases in the operating margin were the
result of revenues increasing at a faster rate than operating expenses in 2001
and 2000. In 2002, TSYS will adopt FASB Staff Announcement Topic D-103. As a
result of its adoption and implementation, operating margins will decrease in
the future.
Nonoperating Income
Nonoperating income decreased in 2001 compared to 2000 and increased in
2000 over 1999 primarily due to the amount of interest the Company earned on its
cash investments. Interest income for 2001 was $2.7 million, a 46.7% decrease
compared to $5.1 million in 2000, which was a 131.7% increase compared to $2.2
million in 1999. The variation in interest income is primarily attributable to
the fluctuations in the cash available for investment and lower short-term
interest rates.
Income Taxes
Income tax expense was $52.9 million, $46.1 million and $35.0 million in
2001, 2000 and 1999, respectively, representing effective income tax rates of
33.9%, 35.0% and 33.8%, respectively. TSYS decrease in its effective income tax
rate for 2001 was the result of the recognition of state tax credits. The
Company expects its tax rates in the future to gradually increase over time
primarily as a result of federal and state tax credits growing slower than
pretax income.
Net Income
Net income increased 20.2% to $102.9 million (basic and diluted earnings
per share of $0.53) in 2001, compared to 2000. In 2000, net income increased
24.9% to $85.6 million (basic and diluted earnings per share of $0.44), compared
to $68.6 million (basic and diluted earnings per share of $0.35) in 1999.
Projected Outlook 2002
TSYS expects an increase in net income for 2002 over 2001 of 20%. This
anticipated increase in net income is based in part upon the following
assumptions: a 10-12% internal growth rate for existing portfolios; an
aggressive focus on expense control and productivity improvement; the successful
implementation and market acceptance of new product offerings; and an increase
in the total cardholder base to approximately 245 million accounts. Factors that
could prevent TSYS from achieving this objective include the merger of TSYS
clients with entities that are not TSYS clients or the sale of portfolios by
TSYS clients to entities that are not TSYS clients, adverse developments with
respect to existing and prospective clients, TSYS' inability to control expenses
and uncertain economic conditions.
Extended Financial Outlook for 2003
With the continued expansion of the Company's businesses, both domestically
and internationally, market acceptance of new products and services and
aggressive expense management, TSYS expects to increase its annual net income by
at least 20-25% in 2003 as compared to 2002. 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; $1
billion in total revenues; and 20% of total revenues derived from international
sources. Factors that could prevent TSYS from achieving this objective include
the merger of TSYS clients with entities that are not TSYS clients or the sale
of portfolios by TSYS clients to entities that are not TSYS clients, adverse
developments with respect to existing and prospective clients, TSYS' inability
to control expenses and uncertain economic conditions.
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
and the occasional use of borrowed funds to supplement financing of capital
expenditures. TSYS' net cash provided by operating activities in 2001 was $88.4
million, compared to $166.3 million in 2000 and $134.5 million in 1999. The
decline in 2001 in net cash provided by operating activities was the result of
paying obligations that arose in 2000, specifically software commitments and
cash commitments of expanding in Europe without the benefit of any processing
revenues. The increase in 2000 in net cash provided was driven by the increase
in net income. The major uses of cash 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
F-10
associated with obtaining and serving new clients; and the payment of cash
dividends.
Capital expenditures for property and equipment were $30.8 million in 2001,
compared to $31.8 million in 2000 and $19.8 million in 1999. Expenditures for
purchased computer software were $36.9 million in 2001, compared to $66.8
million in 2000 and $42.3 million in 1999. Additions to capitalized software
development costs, including enhancements to and development of TS2 processing
systems, were $19.3 million in 2001, $12.0 million in 2000 and $11.9 million in
1999. As a result of ceasing development on three software projects, the Company
expensed $1.2 million and $6.1 million in 2001 and 2000, respectively, as
employment and other operating expenses that were previously capitalized.
The Company's investments in contract acquisition costs were $27.2 million
in 2001, $41.7 million in 2000 and $15.8 million in 1999. These amounts include
cash payments for processing rights, third-party development costs and other
direct salary related costs incurred in connection with converting new customers
to the Company's processing systems. Cash payments for processing rights were
$16.5 million, $40.5 million and $15.7 million in 2001, 2000 and 1999,
respectively. 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.
As of December 31, 2001, all payments on the loan have been made timely. The
remaining balance at December 31, 2001, was $7.5 million. The Company does not
anticipate any negative consequences to its results of operations and financial
condition as a result of this loan guarantee.
At December 31, 2001, TSYS' carrying value in its investment in TSYS de
Mexico was $4.0 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 loss. The Company had a
currency translation adjustment of $979,000 and $312,000 related to TSYS de
Mexico in 2001 and 2000, respectively.
As part of the restructured agreement for the Mexican joint venture, TSYS
de Mexico made a capital distribution to its owners. In March 2001, TSYS
received $3.3 million from TSYS de Mexico as its share of the capital
distribution, which reduced TSYS' investment in TSYS de Mexico.
On January 1, 1999, TSYS acquired PCS from its majority shareholder, CB&T,
in exchange for 854,042 newly issued shares of TSYS common stock valued at $20.1
million. 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 became part of TSYS' wholly owned subsidiary, TSI. This transaction
increased CB&T's ownership of TSYS to 80.8% in 1999.
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. (TDM) through
the Company and its wholly owned subsidiary, TSI, for which Synovus paid TSYS a
management fee of $1.5 million in 2001 and $505,000 in 2000 related to services
provided to Synovus in managing TDM.
Effective January 1, 2002, TSYS acquired TDM in exchange for 2,175,000
newly issued shares of TSYS common stock with a market value of approximately
$43.5 million. TDM will now operate as a wholly owned subsidiary of TSYS. This
transaction increased CB&T's ownership of TSYS to 81.1% in 2002.
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 have been integrated into TSYS'
processing solutions. The Company is assisting in managing ProCard, for which
the Company was paid a management fee by Synovus of $303,000 in 2001 and
$177,000 in 2000.
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. The plan expired in October 2001.
Total dividends declared on TSYS common stock were $11.7 million in 2001,
$9.3 million in 2000 and $7.8 million in 1999. In February 2001, the Company
increased its quarterly dividend by 20.0% to $.015 per share from $.0125 per
share. In April 2000, the Company increased its quarterly dividend by 25.0% to
$.0125 per share from $.01 per share.
In March 2001, the Company announced plans to move its materials management
division and its printing subsidiary, Columbus Productions, Inc., into a new
building in east Columbus. The 61,000 square-foot building was completed in
August 2001 at a cost of approximately $3.7 million. In conjunction with the
move, CPI sold its existing location for $960,000. While waiting on construction
of the new building to be completed, CPI leased the existing facility from the
new owner.
In July 2000, TSYS broke ground on a 33,000 square foot childcare facility
which is located on the northeast corner of the campus. The new facility offers
the Company's employees an alternative option for childcare needs. The facility
was completed at a cost of approximately $3.5 million and opened in August 2001.
The Company expects to recover its building costs through future state tax
credits from the state of Georgia for setting up a company-sponsored childcare
facility.
In the third quarter of 2000, TSYS signed a ten-year contract with RBS. In
conjunction with the requirements of its contract, TSYS paid $37.8 million in
contract acquisition costs to RBS. 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 10 million British Pounds Sterling 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.
TSYS 2001 F-11
TSYS operates internationally and is subject to potentially adverse
movements in foreign currency rate changes. TSYS has not entered into foreign
exchange forward contracts to reduce its exposure to foreign currency rate
changes. The Company has determined that, once it begins processing for
additional European clients, it 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 began 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." Management expects to spend $10-15
million on the base program. To date, the Company has expensed approximately
$2.6 million and has capitalized $4.0 million since reaching technological
feasibility. The Company expects to complete the base program by the end of the
second quarter of 2002.
The Company is developing a new commercial card system, which is built upon
the architectural design of TS2. The new system will provide enhanced reporting,
increased purchasing controls and flexible billing options. The Company has
capitalized approximately $7.0 million, $9.6 million and $10.0 million in 2001,
2000 amd 1999, respectively, related to this new processing platform. The
Company expects to complete the system and make it available for general use by
the fourth quarter of 2002.
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 2.0:1. At December 31, 2001,
TSYS had working capital of $103.8 million, compared to $63.7 million in 2000
and $76.4 million in 1999.
Management believes that outside sources of 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.
Off-Balance Sheet Arrangements
and Contractual Cash Obligations
TSYS uses various operating leases in its normal course of business. The
"off-balance" sheet arrangements obligate TSYS under noncancelable operating
leases for computer equipment, software and facilities, including the Company's
corporate campus. These computer and software lease commitments may also be
replaced with new lease commitments due to new technology. 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 with a
special purpose entity (SPE) for the Company's corporate campus. The business
purpose of the SPE was to provide a means of financing the Company's corporate
campus. The assets and liabilities of the SPE consists solely of the cost of the
building and the loans from a consortium of banks. The cost of the building and
the outstanding principal balance of the debt resident within the financial
statements of the SPE both approximate $93.5 million. The lease, which is
guaranteed by Synovus, provides for substantial residual value guarantees.The
amount of the residual value guarantees relative to the assets under this lease
is approximately $81.4 million. Due to the nature of the lease, no asset or
obligation is recorded on the Company's consolidated balance sheets.
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. TSYS is also subject to interest rate risk associated
with the lease on its campus facilities. The payments under the operating lease
arrangement, which can be locked in for six month intervals, are tied to the
floating London Interbank Offered Rate (LIBOR). In the event that LIBOR rates
increase, operating expenses could increase proportionately.
The campus lease expires November 2002. The Company has the option to
either renew the lease subject to prevailing market rates or purchase the
property at the original cost of the property. The Company is currently
evaluating which option to pursue. As a result, the Company will have a future
cash obligation with respect to the corporate campus beyond the lease expiration
of November 2002.
The following table summarizes future lease payments under noncancelable
operating leases as of December 31, 2001, for the next five years and
thereafter:
Contractual Payments Due By Period
-----------------------------------------------------------------
Cash After
Obligations Total 1 Year or Less 2-3 Years 4-5 Years 5 Years
- --------------------------------------------------------------------------------
(dollars in millions)
Operating
Leases $276.1 $110.1 117.6 41.2 7.2
Campus
Lease 2.1 2.1 -- -- --
- --------------------------------------------------------------------------------
Total
Contractual
Cash
Obligations $278.2 $112.2 117.6 41.2 7.2
- --------------------------------------------------------------------------------
Euro Conversion Readiness Disclosure
The Company converted the account portfolios of RBS and AIB 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. As of October 2000, TSYS' TS2 processing system is capable of
processing Euro-denominated transactions. TSYS' costs in connection with the
Euro conversion were not material. The European Union officially converted to
the Euro currency on January 1, 2002. TSYS has not experienced any difficulties
in processing Euro-denominated transactions.
Forward-Looking Statements
Certain statements contained in this filing which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the Act). These forward-
F-12
looking statements include, among other things, statements regarding the
expected impact on TSYS of recent accounting pronouncements; TSYS' expected
expansion of its position in the consumer card, retail card and commercial card
arenas; TSYS' expected recoupment of building costs through future state tax
credits; TSYS' expected growth in net income for 2002 over 2001; TSYS' expected
increase in net income for 2003; TSYS' expected expenditures on and time frame
for completing its double byte project or other development projects; the
anticipated impact on TSYS of its loan guarantee on behalf of an affiliate of a
former prospective client; TSYS' belief with respect to its ability to meet its
contractual commitments and the assumptions underlying such statements,
including, with respect to TSYS' expected increase in net income for 2002 and
2003; TSYS' expected internal growth rate for existing portfolios; an aggressive
focus on expense control and productivity improvement; the successful
implementation and market acceptance of new product offerings; expected
increases in the number of accounts on file; expected increases in revenues; and
expected increases in revenues attributable to international clients. In
addition, certain statements in future filings by TSYS with the Securities and
Exchange Commission, in press releases, and in oral and written statements made
by or with the approval of TSYS which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenue, income or loss, earnings or loss per share, the payment or nonpayment
of dividends, capital structure and other financial items; (ii) statements of
plans and objectives of TSYS or its management or Board of Directors, including
those relating to products or services; (iii) statements of future economic
performance; and (iv) statements of assumptions underlying such statements.
Words such as "believes," "anticipates," "expects," "intends," "targeted," and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.
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 filing. 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
customers; (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 or succesfully integrate
aquisitions; (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 or the sale of portfolios
by TSYS clients to 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; (xvi) TSYS' inability to successfully manage
any impact from slowing economic conditions or consumer spending; (xvii) the
occurrence of catastrophic events that would impact TSYS or its major customers'
operating facilities, communications systems and technology, or that has a
material negative impact on current economic conditions or levels; (xviii)
successfully managing the potential both for patent protection and patent
liability in the context of rapidly developing legal framework for expansive
software patent protection; (xix) decreases in card activity; and (xx) 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 alleged, among other things, that the defendants
failed to report properly the credit standing of each member of the putative
class. The named plaintiff 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
parties have reached a settlement of the litigation. On September 21, 2001, the
Magistrate Judge for the United States District Court for the Southern District
of Mississippi issued an order of final approval of that settlement pursuant to
Rule 23(e) of the Federal Rules of Civil Procedure. Payments to settle the
litigation were substantially covered by insurance.
TSYS 2001 F-13
Consolidated Balance Sheets
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c>
Assets
Current assets:
Cash and cash equivalents (includes $45.9 million and $74.6 million
on deposit with a related party at 2001 and 2000, respectively) $ 55,961,088 80,071,895
Accounts receivable, net of allowance for doubtful accounts and billing
adjustments of $5.4 million and $5.8 million at 2001 and 2000, respectively 113,318,623 97,522,227
Prepaid expenses and other current assets (Note 10) 37,074,206 30,192,248
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 206,353,917 207,786,370
Property and equipment, net (Note 3) 120,799,905 110,971,777
Computer software, net (Note 4) 170,889,575 145,454,042
Deferred income tax assets (Note 7) 8,492,257 11,104,254
Other assets (Notes 5 and 10) 145,741,354 125,907,383
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 652,277,008 601,223,826
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 24,129,727 43,935,426
Accrued salaries and employee benefits 39,687,428 45,202,518
Other current liabilities (includes $2.4 million and $2.0 million payable to related parties
at 2001 and 2000, respectively) (Note 10) 38,735,928 54,993,790
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 102,553,083 144,131,734
Other liabilities -- 10,652,600
Deferred income tax liabilities (Note 7) 46,553,661 34,841,622
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 149,106,744 189,625,956
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Minority interest in consolidated subsidiary 2,358,578 2,583,682
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (Notes 2 and 6):
Common stock- $0.10 par value. Authorized 300,000,000 shares; 195,079,087 issued at
2001 and at 2000; 194,778,670 and 194,738,870 outstanding at 2001 and 2000, respectively 19,507,909 19,507,909
Additional paid-in capital 9,360,223 6,998,100
Accumulated other comprehensive loss (3,455,338) (1,613,681)
Treasury stock (3,533,325) (3,594,683)
Retained earnings 478,932,217 387,716,543
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 500,811,686 409,014,188
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Total liabilities and shareholders' equity $ 652,277,008 601,223,826
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
F-14
Consolidated Statements of Income
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Revenues:
Bankcard data processing services (includes $44.9 million, $47.3 million
and $37.1 million from related parties for the years ended
December 31, 2001, 2000 and 1999, respectively) $ 563,572,318 505,934,776 456,839,589
Other services (includes $6.5 million, $6.6 million
and $5.5 million from related parties for the years ended
December 31, 2001, 2000 and 1999, respectively) 86,835,332 95,357,966 77,086,422
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues (Notes 2 and 11) 650,407,650 601,292,742 533,926,011
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 258,119,227 235,670,223 207,618,319
Net occupancy and equipment expense 169,534,960 162,905,729 151,964,229
Other operating expenses (includes $8.9 million, $11.2 million
and $13.1 million, net to related parties for the years ended
December 31, 2001, 2000 and 1999, respectively) 87,421,298 90,111,097 86,051,059
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (Note 2) 515,075,485 488,687,049 445,633,607
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in income of joint ventures (Note 5) 17,824,455 15,586,309 12,326,609
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 153,156,620 128,192,002 100,619,013
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense):
Gain (loss) on disposal of property and equipment, net (89,867) (1,421,955) 797,916
Interest income, net of interest expense (includes $2.3 million, $4.8 million
and $1.9 million from a related party for the years ended
December 31, 2001, 2000 and 1999, respectively) 2,680,772 5,036,645 2,159,074
Minority interest in subsidiary's net income (76,003) (98,750) --
Other, net 121,967 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (Note 2) 2,636,869 3,515,940 2,956,990
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 155,793,489 131,707,942 103,576,003
Income taxes (Note 7) 52,891,460 46,064,561 34,983,027
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 102,902,029 85,643,381 68,592,976
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .53 .44 .35
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ .53 .44 .35
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 194,772,766 194,784,981 194,912,983
Increase due to assumed issuance of shares related to stock options outstanding 831,696 480,371 565,610
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent shares outstanding 195,604,462 195,265,352 195,478,593
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
TSYS 2001 F-15
Consolidated Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 102,902,029 85,643,381 68,592,976
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in subsidiary's net income 76,003 98,750 --
Equity in income of joint ventures (17,824,455) (15,586,309) (12,326,609)
Depreciation and amortization 57,395,583 51,600,551 50,182,601
Provision for doubtful accounts and billing adjustments 485,337 1,594,342 2,665,500
Provision for transaction processing accruals 1,438,241 5,726,889 6,910,080
Deferred income tax expense 14,324,036 4,101,488 542,398
(Gain) loss on disposal of property and equipment, net 89,867 1,421,955 (797,916)
(Increase) decrease in:
Accounts receivable (16,281,733) (1,499,484) (15,471,271)
Prepaid expenses and other assets (3,010,347) (13,496,376) (1,953,576)
Increase (decrease) in:
Accounts payable and other liabilities (30,458,299) 38,849,371 7,864,956
Accrued salaries and employee benefits (5,515,090) 8,781,280 11,777,789
Other current liabilities (15,252,456) (930,983) 16,540,427
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 88,368,716 166,304,855 134,527,355
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (30,807,717) (31,785,383) (19,772,202)
Additions to computer software (55,037,556) (72,685,206) (54,188,928)
Proceeds from disposal of property and equipment 1,084,219 79,473 4,540,483
Cash acquired in acquisition -- 623,364 --
Dividends received from joint ventures 10,410,281 5,369,192 5,104,905
Repayment of contract acquisition costs -- 10,000,000 --
Increase in contract acquisition costs (27,194,200) (41,713,092) (15,812,318)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (101,544,973) (130,111,652) (80,128,060)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repurchase of common stock -- (2,077,301) (1,290,748)
Principal payments on long-term debt and
capital lease obligations -- (204,286) (70,619)
Dividends paid on common stock (11,198,915) (8,766,916) (7,787,981)
Proceeds from exercise of stock options 264,365 24,088 97,400
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (10,934,550) (11,024,415) (9,051,948)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (24,110,807) 25,168,788 45,347,347
Cash and cash equivalents at beginning of year 80,071,895 54,903,107 9,555,760
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 55,961,088 80,071,895 54,903,107
- ------------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 31,336 54,051 23,934
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Cash paid for income taxes (net of refunds received) $ 49,318,149 42,708,816 24,647,585
- ------------------------------------------------------------------------------------------------------------------------------------
Significant noncash transaction: In 1999, the Company acquired Partnership
Card Services through the issuance of 854,042 shares of common stock with a
market value of $20,070,000
(Note 2). See accompanying Notes to Consolidated Financial Statements.
F-16
Consolidated Statements of Shareholders' Equity and Comprehensive Income
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2001, 2000 and 1999
Accumulated
Common Stock Additional Other Total
-------------------------- Paid-in Comprehensive Treasury Retained Shareholder's
Shares Amount Capital Loss Stock Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
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 (Note 2) 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 ($.040 per
share) -- -- -- -- -- (7,796,771) (7,796,771)
Tax benefit associated with stock
awards and options -- -- 1,137,363 -- -- -- 1,137,363
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999 195,079,087 19,507,909 6,442,300 (1,453,708) (1,529,176) 311,324,731 334,292,056
Comprehensive income:
Net income -- -- -- -- -- 85,643,381 85,643,381
Other comprehensive loss, net
of tax:
Foreign currency translation
adjustments -- -- -- (159,973) -- -- (159,973)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss -- -- -- -- -- -- (159,973)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- -- -- 85,483,408
Common stock issued from treasury
shares for exercise of stock
options (Note 6) -- -- 15,300 -- 11,794 -- 27,094
Purchase of treasury shares -- -- -- -- (2,077,301) -- (2,077,301)
Cash dividends declared ($.048
per share) -- -- -- -- -- (9,251,569) (9,251,569)
Tax benefit associated with stock
awards and options -- -- 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
Comprehensive income:
Net income -- -- -- -- -- 102,902,029 102,902,029
Other comprehensive loss, net
of tax:
Foreign currency translation
adjustments -- -- -- (1,841,657) -- -- (1,841,657)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss -- -- -- -- -- -- (1,841,657)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income -- -- -- -- -- -- 101,060,372
Common stock issued from treasury
shares for exercise of stock
options (Note 6) -- -- 243,167 -- 61,358 -- 304,525
Cash dividends declared ($.060
per share) -- -- -- -- -- (11,686,355) (11,686,355)
Tax benefit associated with stock
awards and options -- -- 2,118,956 -- -- -- 2,118,956
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2001 195,079,087 $19,507,909 9,360,223 (3,455,338) (3,533,325) 478,932,217 $ 500,811,686
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
TSYS 2001 F-17
Notes To Consolidated Financial Statements
NOTE 1 Basis of Presentation and Summary of Significant
Accounting Policies
Business: As of January 1, 2002, Total System Services, Inc. (TSYS or the
Company) is an 81.1% 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, the
Caribbean and Europe. The Company currently offers merchant services to
financial institutions and other organizations in Japan.
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. The Company's future
results of operations involve a number of substantial risks and uncertainties.
Risks and Uncertainties and Use of Estimates: The Company has prepared the
accompanying consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America. In preparing
financial statements, it is necessary for management to make assumptions and
estimates affecting the amounts reported in the consolidated financial
statements and related notes. These estimates and assumptions are developed
based upon all information available. Actual results can differ from assumed and
estimated amounts.
Factors that could affect the Company's future operating results and cause
actual results to vary materially from expectations includes, but are not
limited to, lower than anticipated growth from existing customers, an inability
to attract new customers and grow internationally, an inability to grow through
acquisitions or successfully integrate acquisitions, technology changes,
financial services consolidations increased regulatory mandates, a decline in
the use of credit cards as a payment mechanism, or a decline in the financial
stability the Company's customers.
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 support
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.
Investments in joint ventures are recognized in other noncurrent assets.
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. The company
evaluates impairment losses on long-lived assets used in operations in
accordance with Statement of Financial Accounting Standards (SFAS) 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," considering whether events and circumstances indicate that
assets may be impaired.
Software Development Costs: The Company develops software that is used in
providing processing services to clients. Software development costs are
capitalized once technological feasibility of the software has been established.
Software development costs are amortized using the greater of (1) the
straight-line method over the estimated useful life (which ranges from 3-10
years) or (2) the ratio of current revenues to current anticipated revenues.
Costs incurred prior to establishing technological feasibility are expensed as
incurred. Technological feasibility is established when the Company has
completed all planning, designing, coding and testing activities that are
necessary to determine that a product can be produced to meet its design
specifications, including functions, features and technical performance
requirements. Capitalization of costs ceases when the product is available for
general use. The Company evaluates the unamortized capitalized costs of software
development as compared to the net realizable value of the development which is
determined by projected future cash flows. The amount by which the unamortized
capitalized costs exceed the net realizable value are written off. Software
development costs are recognized in computer software, net.
Accounts Receivable: Accounts receivable balances are stated net of
allowances for doubtful accounts and billing adjustments of $5.4 million and
$5.8 million at December 31, 2001 and 2000, respectively. The allowance
represents 4.5% and 5.7% of accounts receivable at 2001 and 2000, respectively.
TSYS' client base mainly consists of financial institutions and other card
issuers such as major retailers. Historically, the Company has not encountered
any significant write-offs.
TSYS records allowances for doubtful accounts when it is probable that the
accounts receivable balance will not be collected. When estimating the
allowances for doubtful accounts, the Company takes into consideration such
factors as its day-to-day knowledge of specific customers, the industry and size
of its customers, the overall composition of its accounts receivable aging,
prior history of accounts receivable write-offs and prior history of allowances
in proportion to the overall receivable balance. This analysis includes an
on-going and continuous communication with its largest customers. A financial
decline of any one of these customers could have an adverse and material effect
on collectibility of receivables.
Increases in the allowance for doubtful accounts are recorded as bad debt
expense and are reflected in other operating expenses in the Company's
consolidated statements of income.
TSYS records provisions for billing adjustments for potential billing
discrepencies. When estimating the provision for billing adjustments, the
Company considers prior history of billing adjustments. Increases in the
provision for billing adjustments are recorded net of revenues in the Company's
consolidated statements of income.
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 service is performed. Bankcard
data processing revenues are generated primarily from charges based on the
number of accounts billed, transactions and authorizations processed, statements
mailed, and other processing services for cardholder accounts on file. Most of
these contracts have prescribed minimums. The terms of contracts generally range
from three to ten years in length.
The Company's other services revenues are derived from printing activities
and customer relationship management services, such as call center activities
for card activation and balance transfer requests. The contract terms for these
services are generally shorter in nature, and some are project based. Revenue is
recognized on these other services either on a per unit or a fixed price basis.
The Company uses percentage of completion method of accounting for its fixed
price contracts.
Contract Acquisition Costs: The Company capitalizes contract acquisition
costs related to signing or renewing long-term contracts. These costs, primarily
consisting of cash payments for rights to provide processing services and
internal conversion and software development costs, are amortized using the
straight-line method over the contract term beginning when the clients
cardholder accounts are converted to the system. All costs incurred prior to
contract execution are expensed as incurred.
The amortization of these costs is recognized in other operating expenses.
F-18
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.
Capitalized contract acquisition costs are recognized in prepaid and other
assets.
Transaction Processing Provisions: The Company has made certain estimates
to accrue for contract contingencies and processing errors. When providing for
these accruals, the Company takes into consideration such factors as the prior
history of contract penalties and processing errors incurred, contractual
penalties inherent in the Company's contracts, progress towards meeting
milestones and amounts not covered by insurance.
These accruals are recorded in other current liabilities in the Company's
consolidated balance sheets. Increases and decreases in the transaction
processing provisions are reflected in other operating expenses in the Company's
consolidated statements of income.
Goodwill: Goodwill results from the excess of cost over the fair value of
net assets of businesses acquired and is 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. Goodwill is included in other assets.
Income Taxes: Income taxes reflected in TSYS' consolidated financial
statements are computed based on the taxable income of TSYS as if TSYS were a
stand-alone tax paying entity. A consolidated federal income tax return is filed
for Synovus and its majority owned subsidiaries, including TSYS.
The Company accounts for income taxes in accordance with the asset and
liability method. Under the asset and liability method, deferred income tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred income
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Cash 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 their 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 or issue treasury stock upon option exercises
and displays treasury stock as a reduction of shareholders' equity.
Stock Based Compensation: The Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion (APB) 25, "Accounting for
Stock Issued to Employees." Under APB 25, TSYS does not recognize compensation
expense for a stock option grant if the exercise price is equal to or greater
than the fair market value of the Company's common stock on the grant date.
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 branches in Japan and the United Kingdom, 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.
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.
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, 2001.
Recent Accounting Pronouncements: At the November 2001 Emerging Issues Task
Force (EITF) meeting, the FASB released Staff Announcement Topic D-103, "Income
Statement Characterization of Reimbursements Received for 'Out-of-Pocket'
Expenses Incurred." The FASB Staff Announcement clarified interpretations of
EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent,
stating that the Staff believes that reimbursements received for out-of-pocket
expenses should be characterized as revenue. Historically, TSYS has not
reflected such reimbursements in its consolidated statements of income. The
largest reimbursement expenses for which TSYS is reimbursed by clients, are
postage and express courier charges.
The FASB Staff Announcement will be applied in financial reporting periods
beginning after December 15, 2001. Upon application of this FASB Staff
Announcement, comparative financial statements for prior periods will be
reclassified to provide consistent presentation.
Reclassifications: Certain reclassifications have been made to the 2000 and 1999
financial statements to conform to the presentation adopted in 2001.
NOTE 2 Relationships with Affiliated Companies
At December 31, 2001, CB&T owned 157,455,980 shares (80.8%) of TSYS common stock
On January 1, 2002, CB&T's ownership increased to 81.1% (see Note 13).
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 $12,893,460, $12,281,914 and $8,049,915
during the years ended December 31, 2001, 2000 and 1999,
TSYS 2001 F-19
respectively. Miscellaneous data processing services performed by TSYS for
certain Synovus nonbanking affiliates generated revenues of $480,285, $256,126
and $221,844 during the years ended December 31, 2001, 2000 and 1999,
respectively; these revenues are included in bankcard data processing services.
Bankcard data processing revenues related to TSYS de Mexico were $15,934,797,
$15,710,029 and $15,954,155 for the years ended December 31, 2001, 2000 and
1999, respectively. Merchant processing revenues, included in bankcard data
processing revenues and related to Vital were $15,068,775, $14,109,721 and
$12,898,723 for the years ended December 31, 2001, 2000 and 1999, respectively.
During 2001 and 2000, TSYS provided web hosting and electronic commerce
processing services to CB&T for which the Company was paid $470,424 and
$545,507, respectively.
Revenues from other services provided by TSYS to Synovus and its affiliates
were $6,417,650, $6,593,783 and $5,483,784 during the years ended December 31,
2001, 2000 and 1999, respectively.
During 2000 and 1999, Synovus Technologies, Inc.(STI) paid TSYS $143,222
and $168,305, respectively, for data links, network services, computer
processing services and other miscellaneous items.
In January 2001, STI's operations were folded into Synovus. Synovus paid
TSYS $105,925 for data links, network services, computer processing services and
other miscellaneous items.
TSYS leased a portion of its facilities from CB&T, and leases portions of
the buildings it owns to CB&T. Lease payments made to CB&T amounted to $36,308
in 1999. Lease payments received from CB&T amounted to $39,405 in 2001 and 2000,
and $9,851 in 1999. TSYS also leased furnishings from Synovus Leasing Co. for
$211,878 in 2001 and $20,807 in 2000.
Synovus Trust Company (STC) serves as trustee of various employee benefit
plans of TSYS. During 2001, 2000 and 1999, STC trustees fees paid by TSYS were
$558,303, $391,414 and $317,081, 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 $1,026,984 in 2001, $1,703,840 in 2000 and
$1,524,780 in 1999.
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 $1,800,000 in 2001 and
$681,511 in 2000.
TSYS maintained an agreement with Synovus Service Corp. (SSC) in 2000 and
1999 for SSC to provide human resource, payroll, security, maintenance and other
administrative services to TSYS and its subsidiaries. TSYS paid SSC $8,070,260
and $10,639,179 for these services in 2000 and 1999, respectively. TSYS received
$197,597 in 2000 and $51,594 in 1999 in rent from SSC. TSYS also received
$63,806 and $382,840 in 2000 and 1999, respectively, for data processing
services provided to SSC.
In January 2001, SSC's operations were folded into Synovus. TSYS paid
$7,542,294 to Synovus for providing human resource, payroll, security,
maintenance and other administrative services to TSYS and its subsidiaries in
2001. TSYS received $454,926 in 2001 in rent from Synovus. TSYS also received
$24,900 in 2001 for data processing services provided to Synovus.
Beginning in 2001 and as a result of the restructuring of its joint venture
agreement, TSYS agreed to pay TSYS de Mexico a management fee for certain client
relationship services that TSYS de Mexico has assumed from TSYS. TSYS paid TSYS
de Mexico a management fee of $300,587 in 2001.
Effective January 1, 1999, TSYS acquired Partnership Card Services (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 client service to card-issuing financial
institutions, including CB&T. The business of PCS became part of TSYS' wholly
owned subsidiary, TSI.
Effective January 1, 2002, TSYS acquired TSYS Total Debt Management, Inc.
(TDM) from its majority shareholder, CB&T, in exchange for 2,175,000 newly
issued shares of TSYS common stock with a market value of approximately $43.5
million. Prior to the acquisition, TDM operated as a wholly owned subsidiary of
Synovus, providing third-party collection services. TDM will operate as a
separate wholly owned subsidiary of TSYS.
TSYS maintains deposit accounts with CB&T, the majority of which earn
interest and on which TSYS receives market rates of interest. Included in cash
and cash equivalents are deposit balances with CB&T of $45.9 million and $74.6
million at December 31, 2001 and 2000, respectively. In 2001, 2000 and 1999,
TSYS received interest income of $2,305,617, $4,772,461 and $1,865,621,
respectively, from CB&T. TSYS paid banking account service fees and wire
transfer fees to CB&T of $46,396 in 2001, $68,004 in 2000 and $53,195 in 1999.
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 2001 or 2000.
TSYS paid cash dividends to CB&T in the amount of approximately $9.0
million, $7.1 million and $6.3 million in 2001, 2000 and 1999, respectively.
TSYS received cash dividends from its equity joint ventures of approximately
$7.1 million, $5.4 million and $5.1 million in 2001, 2000 and 1999,
respectively. As part of the restructured joint venture agreement in 2001, TSYS
received a capital distribution of approximately $3.3 million from TSYS de
Mexico.
Certain officers of TSYS and other TSYS employees participate in the
Synovus Incentive Plans. Nonqualified options to acquire Synovus common stock
were granted in 2001, 2000 and 1999 as follows:
- --------------------------------------------------------------------------------
Number of shares
2001 2000 1999
- --------------------------------------------------------------------------------
Stock options 3,062,523 324,122 1,001,933
- --------------------------------------------------------------------------------
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 over
two to three years and expire eight to ten years from date of grant.
In 2001, Synovus has granted performance-accelerated stock options to
certain key TSYS executives. The exercise price per share is equal to the fair
market value at the date of grant. The options are exercisable in equal
installments when the market price of Synovus common stock exceeds $40, $45 and
$50. However, all options may be exercised after seven years from the grant
date.
The Company believes the terms and conditions of the transactions described
above between TSYS, CB&T, Synovus and other affiliated companies are comparable
to those which could have been obtained in transactions with unaffiliated
parties. No changes have been made to the method of establishing terms with the
affiliated companies in the current year.
NOTE 3 Property and Equipment
Property and equipment balances at December 31 are as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Land $ 6,748,039 6,092,433
Buildings and improvements 90,500,757 80,344,434
Computer equipment 73,390,762 65,840,658
Furniture and other equipment 57,731,151 52,013,579
Construction in progress 1,695,087 1,488,817
- --------------------------------------------------------------------------------
230,065,796 205,779,921
Less accumulated depreciation
and amortization 109,265,891 94,808,144
- --------------------------------------------------------------------------------
Property and equipment, net $120,799,905 110,971,777
- --------------------------------------------------------------------------------
Depreciation and amortization expense related to property and equipment was
$19,521,866, $16,553,156 and $15,637,169 for the years ended December 31, 2001,
2000 and 1999, respectively.
F-20
NOTE 4 Computer Software
Computer software at December 31 is summarized as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Purchased computer software $199,021,424 177,629,217
TS2 33,048,872 33,048,872
Other capitalized software
development costs 50,616,478 32,467,800
- --------------------------------------------------------------------------------
282,686,774 243,145,889
Less accumulated amortization 111,797,199 97,691,847
- --------------------------------------------------------------------------------
Computer software, net $170,889,575 145,454,042
- --------------------------------------------------------------------------------
Amortization expense related to purchased computer software costs was
$24,803,900, $20,604,861 and $16,153,985 for the years ended December 31, 2001,
2000 and 1999, respectively. Amortization of TS2 and other capitalized software
development costs was $4,817,586, $5,101,047 and $5,472,776 for the years ended
December 31, 2001, 2000 and 1999, respectively.
During 2001, the Company ceased developing a software project. The project
was reevaluated to determine its utilization in a new customer service platform.
The Company expensed $1.2 million of costs of this project in employment and
other operating expenses that were originally capitalized on this project.
During 2000, the Company ceased development of two software projects. The
projects were reevaluated to determine their utilization in a new design plan.
Based on its review, the Company expensed $6.1 million of costs as employment
and other operating expenses that were originally capitalized on those projects.
NOTE 5 Investments in Joint Ventures
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, 2001 and 2000, and for the years ended
December 31, 2001, 2000 and 1999, is summarized as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Balance Sheet Data:
(in thousands)
Current assets $ 85,153 72,038
Total assets 130,285 110,237
Current liabilities 34,029 33,864
Total liabilities 36,048 37,008
Members capital 94,237 71,935
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Statement of Income Data:
(in thousands)
Revenues $218,635 180,242 151,245
Operating income 31,279 23,438 18,690
Net income* 32,302 25,655 20,065
*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 a limited liability 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 units held by the owners to make awards to key management of
Visa and TSYS. In 2000, TSYS awarded six of its key executives an aggregate of
800,000 Vital restricted stock units for their role in the development, growth
and success of Vital. 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 related to these restricted units. The vesting
of these units accelerates upon a change of control or an initial public
offering of Vital. The Company recognized $467,976 and $766,919 as compensation
expense in 2001 and 2000, respectively, related to the Vital unit awards.
A reconciliation of equity in income of joint ventures is as follows:
(millions of dollars) 2001 2000 1999
- --------------------------------------------------------------------------------
Vital $ 16.0 13.2 10.1
Other 1.8 2.4 2.2
- --------------------------------------------------------------------------------
Total equity in income
of joint ventures $ 17.8 15.6 12.3
- --------------------------------------------------------------------------------
The Company estimates its share of equity in income of Vital and adjusts
those estimates based upon the final results of Vital.
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 ensuing two years. During the year ended December 31, 2000, the
Company purchased 130,400 shares for $2.1 million. During the year ended
December 31, 1999, the Company purchased 77,100 shares for $1.3 million.
The following table summarizes shares held as treasury stock and treasury
stock costs:
- --------------------------------------------------------------------------------
Number of Treasury
Treasury Shares Shares Cost
- --------------------------------------------------------------------------------
December 31, 2001 300,417 $3,533,325
December 31, 2000 340,217 3,594,683
December 31, 1999 217,467 1,529,176
- --------------------------------------------------------------------------------
During 2001, 2000 and 1999, certain employees of the Company exercised
options for 39,800, 7,650 and 41,100 shares of common stock, respectively, that
were issued from treasury shares.
Long-Term Incentive Plans-TSYS: 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; 3.2 million
shares of common stock were reserved for distribution under the LTI Plan.
Options granted under the LTI Plan may be incentive stock options or
nonqualified stock options as determined by the Committee at the time of grant.
Incentive stock options are granted at a price not less than 100% of the fair
market value of the stock on the grant date, and nonqualified options are
granted at a price to be determined by the Committee. Option vesting terms are
established by the Committee at the time of grant and presently range from one
to five years. The expiration date of options granted under the LTI Plan is
determined at the time of grant and may not exceed ten years from the date of
the grant. At December 31, 2001, there were options outstanding under the LTI
Plan to purchase 1,567,500 shares of the Company's common stock, of which
683,800 shares were exercisable. There were no shares available for grant at
December 31, 2001, under the LTI Plan.
Additionally, options (not issued under the LTI Plan) to purchase 77,050
shares of the Companys common stock were outstanding at December 31, 2001, of
which 37,500 were exercisable.
TSYS 2001 F-21
A summary of the Company's stock option activity as of December 31, 2001,
2000 and 1999, and changes during the years ended on those dates is presented
below:
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options:
Outstanding at beginning of year 1,684,350 $ 12.55 1,637,000 $ 12.41 1,678,100 $ 12.15
Granted -- -- 55,000 15.44 -- --
Exercised (39,800) 6.64 (7,650) 2.00 (41,100) 2.00
Forfeited/canceled -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at
end of year 1,644,550 $ 12.69 1,684,350 $ 12.55 1,637,000 $ 12.41
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercis-
able at year-end 721,300 $ 11.96 614,100 $ 11.33 448,500 $ 10.24
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $ -- $ 5.78 $ --
- ------------------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
and exercisable at December 31,2001:
Outstanding Exercisable
- ------------------------------------------------------------------------ ----------------------------------------------------
Number Weighted Number
Outstanding at Average Remaining Weighted Average Exercisable at Weighted Average
December 31, 2001 Contractual Life in Years Exercise Price December 31, 2001 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<c>
95,800 .50 $ 2.00 95,800 $ 2.00
1,470,000 5.84 13.17 588,000 13.17
41,250 8.20 15.44 -- --
37,500 7.03 18.50 37,500 18.50
- -----------------------------------------------------------------------------------------------------------------------------------
1,644,550 5.61 $ 12.69 721,300 $ 11.96
- -----------------------------------------------------------------------------------------------------------------------------------
The weighted average exercise price represents actual exercise prices. No range
of prices exist.
The per share weighted average fair value of stock options granted during
2000 was $5.78. 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: risk-free interest rate of 5.05%; expected volatility of
38.8%; expected life of 4.0 years; and dividend yield of 0.0%.
Long-Term Incentive Plans-Synovus: 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 employees. 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.
In 2001, Synovus granted performance-accelerated stock options to certain
key executives to acquire 2.6 million shares of Synovus stock at an exercise
price of $28.99. The options are exercisable in equal installments when the
market price of Synovus common stock exceeds $40, $45 and $50. However, all
options may be exercised after seven years from the grant date.
During 1999, Synovus granted options to purchase 150 shares of stock to
each employee, including TSYS and its subsidiaries, at an exercise price per
share equal to the fair market value at the grant date of $19.19. The total
number of shares granted to TSYS employees to acquire Synovus stock under this
program was 489,750. The options are exercisable after the price of Synovus
stock doubles or after three years, whichever comes first.
A summary of Synovus' stock option activity related to TSYS' employees as
of December 31, 2001, 2000 and 1999 and changes during the years then ended is
presented below:
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options:
Outstanding at beginning of year 3,479,558 $ 17.43 3,467,568 $ 17.14 2,654,848 $ 15.16
Granted 3,062,523 28.60 324,122 18.06 1,001,933 21.07
Exercised (344,987) 14.97 (183,869) 11.41 (146,343) 7.56
Forfeited/canceled (55,785) 20.46 (128,263) 19.68 (42,870) 19.45
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at
end of year 6,141,309 $ 23.11 3,479,558 $ 17.43 3,467,568 $ 17.14
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercis-
able at year-end 2,083,099 $ 16.62 1,539,283 $ 13.22 1,106,230 $ 10.75
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $ 8.56 $ 6.42 $ 5.41
- ------------------------------------------------------------------------------------------------------------------------------------
F-22
The following table summarizes information about Synovus' stock options
outstanding and exercisable at December 31, 2001:
Outstanding Exercisable
------------------------------------------------------------------- ------------------------------------------
Number Weighted Number
Range of Outstanding at Average Remaining Weighted Average Exercisable at Weighted Average
Exercise Prices December 31, 2001 Contractual Life in Years Exercise Price December 31, 2001 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
$ 6.74 218,696 3.09 $ 6.74 218,696 $ 6.74
$8.72-$18.37 884,128 4.12 13.51 884,128 13.51
$19.19-$22.88 1,656,675 5.62 21.23 980,275 21.64
$18.06 320,497 6.82 18.06 -- --
$26.44-$28.99 3,061,313 10.40 28.61 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
6,141,309 7.76 $ 23.11 2,083,099 $ 16.62
- -----------------------------------------------------------------------------------------------------------------------------------
The per share weighted average fair value of Synovus stock options granted
to TSYS employees during 2001, 2000 and 1999 was $8.56, $6.42 and $5.41,
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 2001, 2000 and 1999, respectively: risk-free interest
rates of 4.6%, 6.4% and 5.3%; expected volatility of 31%, 36% and 36%; expected
life of 5.7 years, 6.3 years and 4.3 years; and dividend yield of 1.8%, 2.3% and
1.7%.
Pro Forma Net Income and Earnings Per Share: The Company applies APB 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, 2001 2000 1999
- --------------------------------------------------------------------------------
Net income applicable
to common stockholders
As reported $ 102,902,029 85,643,381 68,592,976
Pro forma 99,418,426 81,824,048 64,349,852
Basic earnings per share:
As reported .53 .44 .35
Pro forma .51 .42 .33
Diluted earnings per share:
As reported .53 .44 .35
Pro forma .51 .42 .33
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 was 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. 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.
As a result of the integration of DotsConnect's business into TSYS, the
2000 plan was cancelled in January 2002. TSYS paid approximately $58,600 in cash
to cancel a portion of the options, while the rest were cancelled without
consideration.
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 accumulated comprehensive loss are as follows:
- ----------------------------------------------------------------------------------------------------------------------
Balance at Balance at
December 31, 2000 Pretax amount Tax benefit December 31, 2001
- ----------------------------------------------------------------------------------------------------------------------
Currency translation adjustments $ (1,613,681) (2,917,277) 1,075,620 $ (3,455,338)
- ----------------------------------------------------------------------------------------------------------------------
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)
- ----------------------------------------------------------------------------------------------------------------------
TSYS 2001 F-23
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, 2001 2000 1999
- --------------------------------------------------------------------------------
Current income tax expense:
Federal $ 41,496,285 41,649,857 32,816,025
State (2,928,861) 313,216 1,624,604
- --------------------------------------------------------------------------------
Total current income tax expense 38,567,424 41,963,073 34,440,629
- --------------------------------------------------------------------------------
Deferred income tax expense:
Federal 13,528,256 3,873,627 512,265
State 795,780 227,861 30,133
- --------------------------------------------------------------------------------
Total deferred income tax expense: 14,324,036 4,101,488 542,398
- --------------------------------------------------------------------------------
Total income tax expense $ 52,891,460 46,064,561 34,983,027
- --------------------------------------------------------------------------------
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, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Computed "expected" income tax expense $ 54,527,723 46,097,780 36,251,600
Increase (decrease) in income tax expense resulting from:
State income tax expense (benefit), net
of federal income tax effect (1,386,503) 351,700 1,075,579
Foreign tax credits (758,000) (1,005,000) (969,000)
Other, net 508,240 620,081 (1,375,152)
- ----------------------------------------------------------------------------------------------------------
Total income tax expense $ 52,891,460 46,064,561 34,983,027
- ----------------------------------------------------------------------------------------------------------
The tax effects of the significant components of deferred income tax assets
and liabilities are presented in the following table:
- ------------------------------------------------------------------------------------------
As of December 31, 2001 2000
- ------------------------------------------------------------------------------------------
Deferred income tax assets:
Allowances for processing transactions $ 2,766,772 3,792,899
Primarily accruals not deductible until paid 5,270,288 4,883,057
State tax credits 1,855,197 3,828,298
- ------------------------------------------------------------------------------------------
Gross deferred income tax assets 9,892,257 12,504,254
Less valuation allowance (1,400,000) (1,400,000)
- ------------------------------------------------------------------------------------------
Net deferred income tax assets 8,492,257 11,104,254
- ------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Computer software development costs (24,725,512) (17,662,312)
Excess tax over financial statement depreciation (15,973,764) (11,442,535)
Other, net (5,854,385) (5,736,775)
- ------------------------------------------------------------------------------------------
Gross deferred income tax liability (46,553,661) (34,841,622)
- ------------------------------------------------------------------------------------------
Net deferred income tax liability $ (38,061,404) (23,737,368)
- ------------------------------------------------------------------------------------------
As of December 31, 2001 and 2000, TSYS had state income tax credit
carryforwards of $1,855,197 and $3,828,298, 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, 2001 and 2000, 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,
2001 and 2000.
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) 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:
- --------------------------------------------------------------------------------
2001 $ 11,244,465
2000 10,024,695
1999 10,992,344
- --------------------------------------------------------------------------------
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 contribu-
F-24
tions to the plan equal to 7% of participant compensation, as defined. The
Company's contributions to the plan charged to expense are as follows:
- --------------------------------------------------------------------------------
2001 $ 11,321,652
2000 9,511,049
1999 8,413,213
- --------------------------------------------------------------------------------
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) 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:
- --------------------------------------------------------------------------------
2001 $ 0
2000 6,774,850
1999 5,443,934
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
2001 $ 3,089,487
2000 2,722,035
1999 2,352,505
- --------------------------------------------------------------------------------
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 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 guarantee
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, 2001, are as follows:
- --------------------------------------------------------------------------------
2002 $ 99,127,382
2003 73,865,225
2004 43,727,124
2005 24,977,770
2006 16,232,763
Thereafter 7,171,496
- --------------------------------------------------------------------------------
$ 265,101,760
- --------------------------------------------------------------------------------
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 2001, 2000 and 1999 was
$86,641,072, $89,824,836 and $85,928,317, respectively.
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 agreed to guarantee the loan. As of
December 31, 2001, all payments on the loan have been made timely. The
outstanding loan balance at December 31, 2001 was $7.5 million. The Company does
not anticipate any negative consequences to its results of operations and
financial condition as a result of its loan guarantee.
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.
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 alleged, among other things, that the defendants
failed to report properly the credit standing of each member of the putative
class. The named plaintiff 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
parties have reached a settlement of the litigation. On September 21, 2001, the
Magistrate Judge for the United States District Court for the Southern District
of Mississippi issued an order of final approval of that settlement pursuant to
Rule 23(e) of the Federal Rules of Civil Procedure. Payments to settle the
litigation were substantially covered by insurance.
NOTE 10 Supplementary Balance Sheet Information
Significant components of prepaid expenses and other current assets at December
31 are summarized as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Contract acquisition costs, net $ 11,899,957 9,644,657
Prepaid expenses 10,634,921 12,377,875
Other 14,539,328 8,169,716
- --------------------------------------------------------------------------------
Total $ 37,074,206 30,192,248
- --------------------------------------------------------------------------------
Significant components of other noncurrent assets at December 31 are
summarized as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Contract acquisition costs, net $ 75,183,275 65,434,739
Investments in joint ventures, net 51,566,564 45,631,679
Other 18,991,515 14,840,965
- --------------------------------------------------------------------------------
Total $145,741,354 125,907,383
- --------------------------------------------------------------------------------
TSYS 2001 F-25
Amortization expense related to contract acquisition costs was $6.6
million, $7.2 million and $11.8 million for 2001, 2000 and 1999 respectively.
Refer to Note 5 Investments in Joint Ventures for a discussion of joint
ventures.
Significant components of other current liabilities at December 31 are
summarized as follows:
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Customer postage deposits $ 19,065,119 18,751,617
Transaction processing accruals 5,326,554 8,717,456
Other 14,344,255 27,524,717
- --------------------------------------------------------------------------------
Total $ 38,735,928 54,993,790
- --------------------------------------------------------------------------------
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, the Caribbean and
Europe. 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Transaction Support
Operating Segments Processing Services Services Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
2001
Total revenue $ 574,362,301 80,690,241 $ 655,052,542
Intersegment revenue (1,636,747) (3,008,145) (4,644,892)
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue from external customers $ 572,725,554 77,682,096 $ 650,407,650
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in income of joint ventures $ 17,824,455 -- $ 17,824,455
- -----------------------------------------------------------------------------------------------------------------------------------
Segment operating income $ 145,412,854 7,743,766 $ 153,156,620
- -----------------------------------------------------------------------------------------------------------------------------------
Income tax expense $ 50,790,779 2,100,681 $ 52,891,460
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 96,815,337 6,086,692 $ 102,902,029
- -----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 641,144,796 58,583,787 $ 699,728,583
Intersegment eliminations (47,371,240) (80,335) (47,451,575)
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 593,773,556 58,503,452 $ 652,277,008
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 586,896,327 57,738,614 $ 644,634,941
Intersegment eliminations (43,264,302) (146,813) (43,411,115)
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 543,632,025 57,591,801 $ 601,223,826
- -----------------------------------------------------------------------------------------------------------------------------------
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 $ 451,776,573 47,704,132 $ 499,480,705
Intersegment eliminations (35,704,897) (154,067) (35,858,964)
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 416,071,676 47,550,065 $ 463,621,741
- -----------------------------------------------------------------------------------------------------------------------------------
F-26
Geographic Area Data: The following geographic data represent revenues based on
the geographic locations of customers.
- --------------------------------------------------------------------------------
(dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
United States $ 564.5 546.0 493.2
Canada* 35.5 33.3 22.5
Europe 23.5 -- --
Mexico 15.9 15.7 16.0
Japan 9.6 4.9 --
Other 1.4 1.4 2.2
- --------------------------------------------------------------------------------
$ 650.4 601.3 533.9
- --------------------------------------------------------------------------------
*These revenues include those generated from the Caribbean accounts owned by a
Canadian institution.
The Company maintains property and equipment in the following geographic
areas:
- --------------------------------------------------------------------------------
At December 31, 2001 2000
(dollars in millions)
- --------------------------------------------------------------------------------
United States $ 98.7 93.5
Europe 20.9 16.7
Canada 0.1 0.1
Japan 1.1 0.7
- --------------------------------------------------------------------------------
Totals $ 120.8 111.0
- --------------------------------------------------------------------------------
Major Customers:
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Total of Total of Total
Revenue Dollars Revenues Dollars Revenues Dollars Revenues
- -------------------------------------------------------------------------------------------------------------------------
(dollars in millions)
One $ 101.1 15.5% $ 93.0 15.5% $ 86.9 16.3%
Two 82.1 12.6 66.7 11.1 na na
Three na na 61.3 10.2 na na
Four na na na na 69.4 13.0
- -------------------------------------------------------------------------------------------------------------------------
Totals $ 183.2 28.1% $ 221.0 36.8% $ 156.3 29.3%
- -------------------------------------------------------------------------------------------------------------------------
na = not applicable. Client represented less than 10% of total revenues.
For the year ended December 31, 2001, the Company had two major customers
which accounted for approximately 28% 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 year ended December 31, 1999, the
Company had two major customers accounting for approximately 29% of total
revenues. 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. TSYS' ownership of GP Net was lowered to 51.46% in
August 2001 when another party purchased an ownership interest in GP Net.
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 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.
The impact of these transactions was not material.
The Company has not provided pro forma financial information related to the
acquisition as such pro forma was not significant.
The Company has not restated periods prior to 1999 because such restatement
was not material.
NOTE 13 Subsequent Event
Effective January 1, 2002, TSYS acquired TSYS Total Debt Management, Inc.
(TDM) from CB&T in exchange for 2,175,000 newly issued shares of TSYS common
stock with a market value of approximately $43.5 million. Prior to the
acquisition, TDM operated as a wholly owned subsidiary of Synovus Financial
Corp., providing third-party collection services. TDM will operate as a separate
subsidiary of TSYS.
Because the acquisition of TDM was a transaction between entities under
common control, the Company will reflect the acquisition at historical cost in
accordance with SFAS 141 and will reflect the results of operations of TDM in
the Company's financial statements beginning January 1, 2002.
The Company does not plan on restating periods prior to 2002 because such
restatement was not material.
TSYS 2001 F-27
Report of Independent Auditors
KPMG [LOGO]
303 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30308
The Board of Directors
Total System Services, Inc.:
We have audited the accompanying consolidated balance sheets of Total
System Services, Inc. and subsidiaries as of December 31, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/KPMG LLP
January 15, 2002
F-28
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 managements 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.
KPMG LLP, independent auditors, are engaged to audit the Company's
consolidated financial 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
Richard W. Ussery
Chairman of the Board & Chief Executive Officer
/s/James B. Lipham
James B. Lipham
Executive Vice President & Chief Financial Officer
/s/Dorenda K. Weaver
Dorenda K. Weaver
Group Executive & Controller
/s/Ronald L. Barnes
Ronald L. Barnes Group Executive & General Auditor
TSYS 2001 F-29
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, 2002,
there were 11,911 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 $.015 per share was declared on December 10,
2001, and was paid January 2, 2002, to shareholders of record on December 20,
2001. Total dividends declared in 2001 and in 2000 amounted to $11.7 million and
$9.3 million, respectively. It is the present intention of the Board of
Directors of TSYS to continue to pay cash dividends on its common stock.
Presented here is a summary of the unaudited quarterly financial data for the
years ended December 31, 2001 and 2000.
[Omitted graph is represented by the following table.]
REVENUES
(Millions of Dollars)
2001 2000
QTR 1 $154.1 $145.9
QTR 2 162.5 150.5
QTR 3 163.0 149.0
QTR 4 170.8 156.0
[Omitted graph is represented by the following table.]
NET INCOME
(Millions of Dollars)
2001 2000
QTR 1 $22.0 $20.7
QTR 2 26.0 24.3
QTR 3 25.5 19.1
QTR 4 29.5 21.6
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First Second Third Fourth
(in thousands except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
2001 Revenues ......................................... $ 154,134 162,471 162,955 170,848
Operating income ................................. 32,476 39,455 38,084 43,142
Net income ....................................... 22,015 25,956 25,458 29,473
Basic earnings per share ......................... .11 .13 .13 .15
Diluted earnings per share ....................... .11 .13 .13 .15
Cash dividends declared per share ................ .015 .015 .015 .015
Stock prices:
High ............................................. 24.630 32.000 35.840 26.450
Low .............................................. 21.500 24.100 20.000 18.910
- ------------------------------------------------------------------------------------------------------------------------------------
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 ................ .010 .013 .013 .013
Stock prices:
High ............................................. 18.563 20.625 18.750 22.750
Low .............................................. 15.000 15.750 16.000 14.875
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F-30