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 24.4%
and 17.0%, respectively. The balance sheet data also reflects the continued
strong financial position of TSYS, as evidenced by the current ratio of 2.1:1 at
December 31, 1995, and increased shareholders equity. The following data should
be read in conjunction with the Consolidated Financial Statements and related
Notes thereto and Financial Review, included elsewhere in the Annual Report.
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands except share and per share data) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services ............................$ 218,953 166,194 136,650 123,356 108,225
Other services ............................................... 30,755 21,377 15,424 6,307 4,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues ....................................... 249,708 187,571 152,074 129,663 112,361
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense ......................... 94,946 73,051 54,517 43,136 38,637
Net occupancy and equipment expense .......................... 64,549 51,283 43,421 39,793 32,151
Other operating expenses ..................................... 47,291 28,139 21,521 17,712 16,149
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses ............................. 206,786 152,473 119,459 100,641 86,937
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income ..................................... 42,922 35,098 32,615 29,022 25,424
- ------------------------------------------------------------------------------------------------------------------------------------
Other nonoperating income (expense):
Gain (loss) on disposal of equipment, net .................... (123) 65 335 157 52
Interest income (expense), net ............................... 839 264 (80) (1,121) (1,203)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other nonoperating income (expense) ............ 716 329 255 (964) (1,151)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in
income (loss) of joint venture ............... 43,638 35,427 32,870 28,058 24,273
Income taxes ......................................................... 15,977 12,924 12,647 10,489 9,061
- ------------------------------------------------------------------------------------------------------------------------------------
Income before equity in income (loss) of joint venture 27,661 22,503 20,223 17,569 15,212
Equity in income (loss) of joint venture ............................. 69 (13) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income ...........................................$ 27,730 22,490 20,223 17,569 15,212
====================================================================================================================================
Net income per share .................................$ .43 .35 .31 .27 .24
====================================================================================================================================
Cash dividends declared per share ....................................$ .09 .08 .07 .07 .07
====================================================================================================================================
Weighted average outstanding shares .................................. 64,631,613 64,629,562 64,405,640 64,053,336 63,564,908
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Total assets ............................. $ 199,000 165,042 133,339 122,048 107,004
Working capital .......................... 40,246 33,421 30,594 31,850 30,003
Total long-term debt ..................... 931 1,162 1,707 12,282 21,167
Shareholders' equity ...................... 144,472 123,004 102,278 85,945 70,111
Total System Services, Inc.(SM)
17
Financial Review
This Financial Review provides a discussion of the results of operations,
financial condition, liquidity and capital resources of TSYS(R) and creates
awareness of the factors that have affected its recent earnings, as well as
those factors that may affect its future earnings. The accompanying Consolidated
Financial Statements and related Notes, and Selected Financial Data are an
integral part of this Financial Review and should be read in conjunction with
it.
[Omitted Bankcard Revenues Graph is represented by the following table.]
Bankcard Revenues
(Millions of Dollars)
91 $108.2
92 $123.4
93 $136.6
94 $166.2
95 $219.0
Results of Operations
Revenues
TSYS' revenues are derived principally from providing bankcard data processing
and related services to banks and other institutions under long-term processing
contracts. TSYS' services are provided as THE TOTAL SYSTEM(SM) to financial
institutions and other organizations across the United States and in Mexico,
Puerto Rico and Canada.
[Omitted Operating Income Graph is represented by the following table.]
Operating Income
(Millions of Dollars)
91 $25.4
92 $29.0
93 $32.6
94 $35.1
95 $42.9
Bankcard data processing revenues are generated primarily from charges
based on the number of accounts billed, transactions and authorizations
processed, credit bureau requests, credit cards embossed and mailed, and other
processing services for cardholder accounts on file. Due to the expanding use of
bankcards and the increase in the number of cardholder accounts processed by
TSYS, revenues relating to bankcard data processing services have continued to
grow. Processing contracts with certain large customers generally provide for
discounts on certain services based on increases in the number of cardholder
accounts processed. As a result, bankcard data processing revenues are
influenced by the customer mix relative to the size of customer bankcard
portfolios, as well as the number of individual cardholder accounts processed
for each customer.
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 season. Furthermore, the conversion of new
customers to THE TOTAL SYSTEM, as well as the deconversion of customers, also
impacts the results of operations from period to period.
The average number of cardholder accounts on file increased 35.2% to 53.1
million in 1995, compared to 39.3 million in 1994, which represented a 20.9%
increase over 32.5 million in 1993. At December 31, 1995, TSYS' total cardholder
accounts on file were approximately 63.3 million, up from 44.1 million and 35.6
million at December 31, 1994 and 1993, respectively. The cardholder accounts on
file at December 31, 1995, included 3.8 million accounts of banks being
processed for Total System Services de Mexico, S.A. de C.V. ("TSYS de Mexico"),
TSYS' Mexican joint venture; the conversion of these accounts to THE TOTAL
SYSTEM was completed in July 1995. In June 1995, approximately 590,000
cardholder
18 Total System Services, Inc.(SM)
[Omitted 1995 Revenues Graph is represented by the following table.]
1995 Revenues
Bankcard Data Processing Services 87.7%
Other Services 12.3%
[Omitted 1995 Revenue Distribution Graph is represented by the following table.]
1995 Revenue Distribution
Salaries and Other Personnel Expenses 38.0%
Net Occupancy and Equipment Expense 25.8%
Other Operating Expenses and
Other Nonoperating Income (Expense) 18.7%
Income Taxes 6.4%
Net Income 11.1%
accounts of an existing customer being serviced by another processor were added
to THE TOTAL SYSTEM. The remaining growth in cardholder accounts is primarily a
result of portfolio growth of existing customers.
Revenues derived from the processing of TSYS' merchant account customers
who accept certain private-label cards, as well as bankcards, are included in
bankcard data processing revenues. Due to a significantly higher volume of
transactions and item charges per individual account than consumer cardholder
accounts, merchant accounts generally provide more revenue per account
processed. At year-end 1995, TSYS was processing over 600,000 merchant accounts,
a 57.9% increase over the 380,000 accounts being processed at year-end 1994;
269,000 merchant accounts were being processed at year-end 1993. The majority of
the increase in merchant accounts being processed is attributable to the over
100,000 merchant accounts of TSYS de Mexico and 40,000 merchant accounts of an
existing customer previously processed by another processor.
During 1994, TSYS met all Visa and MasterCard requirements for servicing
commercial cards and became the first processor fully certified to process these
cards. At December 31, 1995, TSYS was processing approximately 2.0 million
commercial card accounts, compared to approximately 1.3 million at year-end
1994, representing a 53.8% increase over 1994.
A significant amount of the Company's revenues are derived from certain
major customers who are processed under long-term contracts. For the years ended
December 31, 1995, 1994 and 1993, two customers accounted for approximately 34%,
36% and 37% of total revenues, respectively. As a result, the loss of one of the
Company's major customers could have a material adverse effect on the Company's
results of operations.
In January of 1996, TSYS successfully completed the conversion of
approximately 20,000 Bank of America cardholder accounts to TS2, and in early
February of 1996, Bank of America began opening new cardholder accounts on TS2.
TSYS' conversion schedule with Bank of America contemplated completion of the
conversion of the balance of Bank of
Total System Services, Inc.(SM) 19
The following table sets forth certain revenue and expense items as a percentage
of total revenues and the percentage increase or decrease in those items from
the table of Selected Financial Data:
Percentage Change
in Dollar Amounts
Percentage of ---------------------
Total Revenues 1995 1994
Years Ended December 31, vs vs
1995 1994 1993 1994 1993
Revenues:
Bankcard data processing services ..................................... 87.7% 88.6 89.9 31.7 21.6
Other services ........................................................ 12.3 11.4 10.1 43.9 38.6
- -----------------------------------------------------------------------------------------------------------
Total revenues ................................................ 100.0 100.0 100.0 33.1 23.3
- -----------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense .................................. 38.0 38.9 35.8 30.0 34.0
Net occupancy and equipment expense ................................... 25.8 27.3 28.6 25.9 18.1
Other operating expenses .............................................. 19.0 15.0 14.1 68.1 30.8
- -----------------------------------------------------------------------------------------------------------
Total operating expenses ...................................... 82.8 81.2 78.5 35.6 27.6
- -----------------------------------------------------------------------------------------------------------
Operating income .............................................. 17.2 18.8 21.5 22.3 7.6
- -----------------------------------------------------------------------------------------------------------
Other nonoperating income (expense):
Gain (loss) on disposal of equipment, net ............................. (0.0) 0.0 0.2 nm nm
Interest income (expense), net ........................................ 0.3 0.1 (0.1) nm nm
- -----------------------------------------------------------------------------------------------------------
Total other nonoperating income (expense) ..................... 0.3 0.1 0.1 118.2 28.6
- -----------------------------------------------------------------------------------------------------------
Income before income taxes and equity in
income (loss) of joint venture ........................ 17.5 18.9 21.6 23.2 7.7
Income taxes .................................................................. 6.4 6.9 8.3 23.6 2.2
- -----------------------------------------------------------------------------------------------------------
Income before equity in income (loss) of joint venture ........ 11.1 12.0 13.3 22.9 11.2
Equity in income (loss) of joint venture ...................................... 0.0 (0.0) -- nm nm
- -----------------------------------------------------------------------------------------------------------
Net income ............................................................ 11.1% 12.0 13.3 23.3 11.2
===========================================================================================================
nm = not meaningful
America's cardholder accounts by the end of 1996; however, there have been
delays, and this conversion schedule may be changed, and portions of Bank of
America's cardholder accounts may be converted in 1997. While delays in Bank of
America's conversion schedule allow Bank of America certain remedies, including
the receipt of financial penalties and the right to terminate its relationship
with TSYS, TSYS' management believes all of Bank of America's cardholder
accounts will be successfully converted. The conversion and processing of Bank
of America's cardholder accounts is not expected to have a material impact on
TSYS' 1996 financial condition or results of operations.
20 Total System Services, Inc.(SM)
[Omitted Assets Graph is represented by the following table.]
Assets
(Millions of Dollars)
91 $107.0
92 $122.0
93 $133.3
94 $165.0
95 $199.0
[Omitted Shareholders' Equity Graph is represented by the following table]
Shareholders' Equity
(Millions of Dollars)
91 $ 70.1
92 $ 85.9
93 $102.3
94 $123.0
95 $144.5
[Omitted Working Capital Graph is represented by the following table.]
Working Capital
(Millions of Dollars)
91 $30.0
92 $31.8
93 $30.6
94 $33.4
95 $40.2
Revenues from other services consist primarily of revenues generated by
TSYS' wholly owned subsidiaries, Columbus Depot Equipment Company ("CDEC"),
Mailtek, Inc. ("Mailtek"), Lincoln Marketing, Inc. ("LMI"), and Columbus
Productions, Inc. ("CPI"). CDEC provides TSYS customers with an option to lease
certain equipment necessary for on-line communications and use of TSYS
applications; Mailtek and LMI provide TSYS customers and others with mail and
correspondence processing services, and CPI provides full-service commercial
printing services to TSYS customers and others.
Operating Expenses
As a percentage of revenues, operating expenses increased in 1995 to 82.8%,
compared to 81.2% and 78.5% for 1994 and 1993, respectively. The principal
increases in operating expenses resulted from the addition of personnel and
equipment; the cost of materials associated with the services provided by all
companies, particularly the supplies related to processing the increased number
of accounts on THE TOTAL SYSTEM; certain processing provisions, and certain
costs associated with the conversion of customers to TS2 and the start-up of
TSYS de Mexico.
A significant portion of TSYS' operating expenses relates to salaries and
other personnel costs. During 1995, the average number of employees increased to
2,087, compared to 1,874 in 1994 and 1,504 in 1993. In addition to the growth in
number of employees, the increase in salaries and other personnel costs is
attributable to normal salary increases and related employee benefits.
Nonemployee compensation, including contract programmers, also contributed to
the increase in employment expenses. Employment expenses capitalized in 1995
were $8.4 million, compared to $14.5 million and $9.7 million in 1994 and 1993,
respectively, the majority of which related to the development of TS2. The core
of TS2 was completed in September 1994, and, since that time, employment
expenses capitalized relate primarily to enhancements to TS2 and costs
associated with the conversion of customers under new long-term contracts to
TS2.
Total System Services, Inc.(SM) 21
Due to the importance of technology to our business, a large portion of
TSYS' employees are programmers -- approximately 35.7% in 1995 compared to
approximately 31.6% in 1994. TSYS has utilized a number of sources to supply its
programmer needs. Offices have been established in Atlanta, Georgia, and
Jacksonville, Florida, to take advantage of those markets. In addition, training
programs in conjunction with the state of Georgia and Columbus College have been
successful in providing additional programmers. One such program, Programmer
Associate Training, began a new, six-month class of 100 participants in February
1996. While in training, these students are paid employees of TSYS. Contract
programmers will continue to be utilized to fill additional needs.
Net occupancy and equipment expense increased 25.9% in 1995 over 1994,
compared to 18.1% in 1994 over 1993. A portion of this increase can be
attributable to amortization of TS2, which commenced in October 1994 and was
$3.3 million in 1995 compared to $826,000 in 1994.
Equipment and software rentals, which represents the largest component of
net occupancy and equipment expense, increased 35.1% in 1995 compared to 1994
and 17.8% in 1994 compared to 1993. Substantial new, technologically advanced
equipment was obtained in order to meet growth needs in 1995 and anticipated
future growth, including significant upgrades of certain mainframe computers and
significant additional direct access storage devices. Purchasing and leasing
mainframe computers, laser printers and direct access storage drives are part of
TSYS' strategy of supporting infrastructure growth. Due to the rapidly changing
technology in computer equipment, leasing provides a way for TSYS to acquire new
equipment while minimizing some of the risks associated with investing in
state-of-the-art computer equipment.
TSYS continues to monitor and assess its building and equipment needs as it
positions itself for future growth and expansion. In 1995, a new, 110,000
square-foot building was purchased to accommodate current space needs and
facilitate future growth. Additional space was leased in 1995, 1994 and 1993 for
various purposes such as warehousing, administrative offices and programming
needs.
Other operating expenses increased 68.1% in 1995 compared to 1994 and 30.8%
in 1994 compared to 1993. A number of factors contributed to this increase. The
volume of supplies related to the processing of accounts increased due to the
growth in number of accounts serviced, coupled with an increase in the cost of
supplies, especially paper. Travel expenses were up significantly in 1995 as a
result of travel necessitated by the start-up of TSYS de Mexico. On-site
training by TSYS staff of personnel in banks being converted in Mexico, as well
as Bank of America, also generated increased travel expenses. In the second half
of 1995, management fees totaling $3.2 million were paid to an affiliate for
various services; these management fees are included in other operating expenses
in the second half of 1995 and would have been reflected as salaries and other
personnel expenses in the first half of 1995 and in 1994. Other operating
expenses also increased in 1995 as a result of certain provisions made for
contractual or negotiated processing commitments. These provisions were deemed
necessary in view of the increased risks associated with the significant growth
in the number of accounts processed. Also contributing to the growth in other
operating expenses are costs related to the conversion of clients to TS2.
22 Total System Services, Inc.(SM)
Operating Income
Operating income increased 22.3% to $42.9 million in 1995, compared to $35.1
million in 1994, an increase of 7.6% compared to 1993. The growth in operating
income is primarily attributable to the Company's increased revenue growth rate
in 1995 as compared to 1994. Operating income margin decreased to 17.2% in 1995,
compared to 18.8% in 1994, and 21.5% in 1993, due to higher operating costs and
greater discounts provided to high-volume customers.
Other Nonoperating Income (Expense)
Interest income (expense), net, includes interest expense of $156,692, $151,584
and $604,969 and interest income of $996,373, $415,565 and $524,738 for 1995,
1994 and 1993, respectively.
Interest expense increased only slightly -- 3.4% -- in 1995, as compared to
1994, due to new debt obtained in early 1995 and paid off in November 1995.
Interest expense decreased in 1994, as compared to 1993, primarily due to
significant reductions in the amount of outstanding debt in 1993 through
prepayments of long-term debt and the termination of a capital lease obligation.
Also in 1993, a note payable to CB&T in the amount of $5.0 million was paid off.
During 1993, the Company prepaid $3.4 million on the Industrial Development
bonds issued in conjunction with the construction of the operations center in
north Columbus, Georgia; these bonds were retired in the first quarter of 1995.
Interest income increased 139.8% in 1995, as compared to 1994, and
decreased 20.8% in 1994, as compared to 1993. The changes are the result of both
fluctuations in cash available for investment and short-term interest rates.
Income Taxes
Income tax expense was $16.0 million, $12.9 million and $12.6 million in 1995,
1994 and 1993, respectively, representing effective tax rates of 36.6%, 36.5%
and 38.5%. The decline in TSYS' effective income tax rate for 1995 and 1994, as
compared to 1993, is attributable to the realization of certain income tax
planning strategies, including the identification and recognition of research
and experimentation credits for ongoing development activities and reduction in
effective state income tax rates.
Net Income
Net income increased 23.3% to $27.7 million ($.43 per share) in 1995, compared
to an 11.2% increase to $22.5 million ($.35 per share) for 1994, up from $20.2
million ($.31 per share) in 1993.
Financial Condition, Liquidity
and Capital Resources
The Consolidated Statements of Cash Flows detail the Company's cash flows from
operating, investing and financing activities. TSYS' primary method for funding
liquidity requirements for TSYS has been cash generated from current operations
and the occasional use of borrowed funds to supplement financing of capital
expenditures. The major uses of cash generated from operations have been the
addition of property and equipment, computer software developed internally and
purchased, investment in TSYS de Mexico, principal payments on long-term debt
and the payment of cash dividends.
During 1995, TSYS purchased and leased computer hardware and related
equipment, including additional soft-
Total System Services, Inc.(SM) 23
ware. Capital expenditures for land, buildings and equipment were $17.0 million
in 1995, compared to $8.7 million in 1994, and $8.0 million in 1993.
Expenditures for purchased computer software were $5.5 million in 1995, compared
to $3.1 million in 1994 and $1.9 million in 1993. Additions to internally
developed computer software, principally TS2 and enhancements to TS2, totaled
$2.6 million in 1995, $10.6 million in 1994, and $11.7 million in 1993. In
November 1995, as a result of evaluating investment alternatives and yields, the
Company repaid debt in the amount of $2.0 million, obtained earlier in 1995 for
the purchase of a state-of-the-art printing press.
The project to develop the core TS2 bankcard processing and support
software concluded in late September 1994 with the successful conversion of
First Omni Bank's 750,000 cardholder accounts. Costs associated with the
development of TS2 were capitalized, and amortization began in October 1994,
over a useful life of ten years. Amortization of TS2 resulted in 1995
amortization expense of $3.3 million and $826,000 in 1994. Costs associated with
the development of additional features of TS2 continue to be capitalized upon
establishing technological feasibility and are amortized when they become
available for general customer use. Costs associated with the conversion of
customers under new long-term contracts to TS2 are capitalized as contract
acquisition costs and are amortized over the life of the new processing
contracts. Capitalized conversion costs, included in contract acquisition costs,
at December 31, 1995, 1994 and 1993, amounted to $5.4 million, $2.5 million and
$457,000, respectively. Total costs associated with customer conversions to TS2
have not yet been specifically determined. Management believes that the
amortization of these increased software development and contract acquisition
costs in future years will be substantially offset by increases in revenues from
existing customers and new customers attributable to the expanded product
offerings of TS2 and its relative technological superiority as compared to
alternatives currently available in the marketplace.
In late 1994, TSYS invested in a Mexican joint venture, TSYS de Mexico,
which began generating revenues in June 1995 from its new facility in Toluca
near Mexico City. TSYS de Mexico is now providing credit card related processing
for 19 banks, representing approximately 75% of Mexican card-issuing banks. TSYS
de Mexico performs card and statement production services, while subcontracting
bankcard processing to TSYS.
TSYS contributed additional start-up capital to TSYS de Mexico in 1995 in
the amount of $3.5 million, for a total capital investment of $6.2 million,
representing an equity interest of 49%. At December 31, 1995, cumulative
currency translation adjustments decreased the Company's equity investment in
TSYS de Mexico by $1.1 million. TSYS' share of earnings from the joint venture,
in U.S. dollars, for 1995 was approximately $69,000. TSYS' revenues, in U.S.
dollars, in 1995 for processing services provided to TSYS de Mexico were
approximately $8.3 million.
The economic conditions in Mexico still remain largely unpredictable.
Nineteen ninety-five was a year of great change and difficulty for the credit
card industry in Mexico, and, as a result, the Mexican operations were
negatively affected by these changes. The Company believes that predictions of
increased stability of both interest and exchange rates
24 Total System Services, Inc.(SM)
in 1996 will improve the financial picture of both the joint venture and its
customers. Because 1995 was the start-up year for TSYS de Mexico, its earnings
are expected to increase significantly in 1996 over 1995.
On August 16, 1995, TSYS and Visa U.S.A. Inc. ("Visa") announced an
agreement in principle to merge their merchant and point-of-sale processing
operations. The planned venture will be a new, stand-alone processing company to
offer fully integrated merchant transaction and related electronic information
services to financial and nonfinancial institutions and their merchant
customers. The new organization, to be known as Vital Processing Services L.L.C.
("Vital"), is being structured with its own management team and a separate Board
of Directors. The corporate headquarters of Vital will be located in Phoenix,
Arizona, with other locations in Columbus, Georgia, and Atlanta, Georgia. TSYS
and Visa will be equal owners in the joint venture. The parties are currently
negotiating a definitive agreement. The impact of this venture on TSYS' future
results of operations has not been determined at this time.
Effective July 1, 1995, a new, wholly owned subsidiary of Synovus Financial
Corp., Synovus Administrative Services Corp. ("SASC"), was formed which is
providing certain administrative services to TSYS and other related companies.
Services provided by SASC include human resources, maintenance, security,
communications, corporate education, travel and administration. In connection
with the formation of this new company, approximately 110 TSYS employees were
transferred to SASC, and TSYS sold to the new company property and equipment
with a market value of approximately $438,000.
In each quarter of 1995, the Board of Directors declared a dividend on
TSYS' common stock of $.0225 per share. Total dividends declared in 1995 were
$5.8 million, compared to $5.2 million in 1994 and $4.5 million in 1993.
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 the 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 2.1:1. At December 31, 1995,
TSYS had working capital of $40.2 million, compared to $33.4 million in 1994 and
$30.6 million in 1993.
Management believes that outside sources for capital will be available to
finance expansion projects and possible acquisitions should the Company decide
to pursue such financing. The form of any such financing will vary depending
upon prevailing market and other conditions and may include short-term or
long-term borrowings from financial institutions, or the issuance of additional
equity securities. However, there can be no assurance that funds will be
available on terms acceptable to TSYS. The Company did not require any
short-term borrowings during 1995, 1994 or 1993.
Total System Services, Inc.(SM) 25
Consolidated Balance Sheets
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (includes $16,742,926 and $13,862,765 on
deposit with an affiliated company in 1995 and 1994, respectively) ............ $ 18,849,623 14,684,674
Accounts receivable, net of allowance for doubtful accounts of
$714,374 and $255,768 at 1995 and 1994, respectively .......................... 49,614,779 36,102,888
Prepaid expenses and other current assets ............................................. 9,362,500 7,850,804
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets .......................................................... 77,826,902 58,638,366
Property and equipment, net (Note 3) .......................................................... 54,572,903 47,895,253
Computer software, net (Note 4) ............................................................... 39,215,561 39,239,821
Other assets (Note 10) ........................................................................ 27,384,435 19,268,890
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets .................................................................. $ 198,999,801 165,042,330
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ...................................................................... $ 5,811,334 5,496,449
Current portion of long-term debt and obligations under capital leases (Note 5) ....... 243,786 255,631
Accrued employee benefits ............................................................. 10,412,551 6,265,044
Other current liabilities (Note 10) ................................................... 21,113,104 13,200,247
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities ..................................................... 37,580,775 25,217,371
Long-term debt and obligations under capital leases,
excluding current portion (Note 5) .................................................... 686,955 906,567
Deferred income taxes (Note 7) ................................................................ 16,260,050 15,914,554
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities ............................................................. 54,527,780 42,038,492
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (Notes 2 and 6):
Common stock $.10 par value. Authorized 100,000,000 shares;
64,730,772 and 64,728,694 issued in 1995 and 1994, respectively;
64,633,372 and 64,631,294 outstanding in 1995 and 1994, respectively .......... 6,473,077 6,472,869
Additional paid-in capital ............................................................ 10,918,832 10,312,015
Treasury stock, at cost ............................................................... (475,789) (475,789)
Cumulative currency translation adjustments ........................................... (1,052,081) --
Retained earnings ..................................................................... 128,607,982 106,694,743
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders equity ..................................................... 144,472,021 123,003,838
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Total liabilities and shareholders equity ..................................... $ 198,999,801 165,042,330
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
26 Total System Services, Inc.(SM)
Consolidated Statements of Income
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services ..................................... $ 218,953,101 166,194,263 136,649,698
Other services ........................................................ 30,754,596 21,376,564 15,424,257
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues (Notes 2 and 11) ............................... 249,707,697 187,570,827 152,073,955
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense .................................. 94,946,370 73,050,930 54,516,789
Net occupancy and equipment expense ................................... 64,548,541 51,282,584 43,421,419
Other operating expenses .............................................. 47,291,267 28,138,822 21,520,946
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (Note 2) ............................. 206,786,178 152,472,336 119,459,154
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income .............................................. 42,921,519 35,098,491 32,614,801
- ------------------------------------------------------------------------------------------------------------------------------------
Other nonoperating income (expense):
Gain (loss) on disposal of equipment, net ............................. (122,790) 64,539 335,670
Interest income (expense), net (Note 2) ............................... 839,681 263,981 (80,231)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other nonoperating income ............................... 716,891 328,520 255,439
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity
in income (loss) of joint venture ..................... 43,638,410 35,427,011 32,870,240
Income taxes (Note 7) ......................................................... 15,976,974 12,924,255 12,647,179
- ------------------------------------------------------------------------------------------------------------------------------------
Income before equity in income (loss) of joint venture ........ 27,661,436 22,502,756 20,223,061
Equity in income (loss) of joint venture ...................................... 68,666 (12,612) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income .................................................... $ 27,730,102 22,490,144 20,223,061
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share .......................................... $ .43 .35 .31
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding ........................................... 64,631,613 64,629,562 64,405,640
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
Total System Services, Inc.(SM) 27
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1995, 1994 and 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative
Additional Currency
Common Stock Paid-in Treasury Translation Retained
Shares Amount Capital Stock Adjustments Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1992 64,503,040 $6,450,304 6,310,534 (475,789) -- 73,660,435 $85,945,484
Amortization of restricted
stock awards (Note 6) -- -- 618,018 -- -- -- 618,018
Cash dividends declared
($.07 per share) -- -- -- -- -- (4,508,392) (4,508,392)
Net income -- -- -- -- -- 20,223,061 20,223,061
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1993 64,503,040 6,450,304 6,928,552 (475,789) -- 89,375,104 102,278,171
Common stock issued in
acquisitions (Note 2) 225,654 22,565 2,765,444 -- -- -- 2,788,009
Amortization of restricted
stock awards (Note 6) -- -- 618,019 -- -- -- 618,019
Cash dividends declared
($.08 per share) -- -- -- -- -- (5,170,505) (5,170,505)
Net income -- -- -- -- -- 22,490,144 22,490,144
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1994 64,728,694 6,472,869 10,312,015 (475,789) -- 106,694,743 123,003,838
Common stock issued
under restricted stock
awards (Note 6) 2,078 208 (208) -- -- -- --
Amortization of restricted
stock awards (Note 6) -- -- 607,025 -- -- -- 607,025
Increase in currency
translation adjustments -- -- -- -- (1,052,081) -- (1,052,081)
Cash dividends declared
($.09 per share) -- -- -- -- -- (5,816,863) (5,816,863)
Net income -- -- -- -- -- 27,730,102 27,730,102
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1995 64,730,772 $6,473,077 10,918,832 (475,789) (1,052,081) 128,607,982 $144,472,021
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
28 Total System Services, Inc.(SM)
Consolidated Statements of Cash Flows
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 27,730,102 22,490,144 20,223,061
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in (income) loss of joint venture (68,666) 12,612 --
Depreciation and amortization 20,285,123 16,389,812 14,981,970
Provision for doubtful accounts 458,606 (559,305) 137,848
Deferred income tax expense 963,384 2,823,772 4,389,755
(Gain) loss on disposal of equipment, net 122,790 (64,539) (335,670)
(Increase) decrease in:
Accounts receivable (13,970,497) (2,630,810) (5,386,678)
Prepaid expenses and other assets (10,049,764) (9,708,812) (6,950,719)
Increase (decrease) in:
Accounts payable 314,885 2,214,514 (1,109,303)
Accrued expenses and other current liabilities 12,137,363 5,772,622 2,722,579
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 37,923,326 36,740,010 28,672,843
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (16,977,970) (8,736,909) (8,034,038)
Purchases of computer software (5,512,297) (3,140,016) (1,908,595)
Additions to internally developed software (2,617,445) (10,623,828) (11,687,596)
Proceeds from disposal of equipment 864,699 111,295 444,321
Proceeds from bonds called -- -- 37,000
Purchases of businesses, net of cash and
cash equivalents acquired -- 463,347 --
Investment in joint venture (3,455,865) (2,735,088) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (27,698,878) (24,661,199) (21,148,908)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 1,965,775 -- --
Principal payments on long-term debt and
capital lease obligations (2,208,457) (1,342,144) (10,729,388)
Dividends paid on common stock (5,816,817) (4,843,399) (4,508,392)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,059,499) (6,185,543) (15,237,780)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,164,949 5,893,268 (7,713,845)
Cash and cash equivalents at beginning of period 14,684,674 8,791,406 16,505,251
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 18,849,623 14,684,674 8,791,406
- ------------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $ 157,130 159,356 645,808
- ------------------------------------------------------------------------------------------------------------------------------------
Cash paid for income taxes $ 16,244,194 9,094,595 8,674,997
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
Total System Services, Inc.(SM) 29
Notes To Consolidated Financial Statements
NOTE 1 Basis of Presentation and Summary of Significant Accounting Policies
Business: Total System Services, Inc. ("TSYS" or "the Company") is an 80.8%
owned subsidiary of Columbus Bank and Trust Company ("CB&T"), which is a wholly
owned subsidiary of Synovus Financial Corp. ("Synovus"), whose stock is traded
on the NYSE under the symbol "SNV." TSYS provides bankcard data processing and
other related services to banks and other institutions.
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 ("CDEC"), Mailtek, Inc. ("Mailtek"), Lincoln Marketing, Inc. ("LMI"),
and Columbus Productions, Inc. ("CPI"). Significant intercompany accounts and
transactions have been eliminated in consolidation.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Investment in Joint Venture: TSYS' 49% investment in Total System Services de
Mexico, S.A. de C.V. ("TSYS de Mexico"), a bankcard data processing operation
located in Mexico, is accounted for using the equity method of accounting.
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.
Computer Software: The Company capitalizes software development costs incurred
from the time technological feasibility of the software product or enhancement
is established until the software is ready for use in providing processing
services to customers. Research and development costs and other computer
software maintenance costs related to software development are expensed as
incurred. Software development costs related to the core of TS2 are amortized
using the greater of (1) the straight-line method over the estimated useful
lives of 10 years or (2) the ratio of current revenues to current and
anticipated revenues. All other software development costs and costs of
purchased computer software are amortized using the greater of (1) the
straight-line method over the estimated useful lives of three to five years or
(2) the ratio of current revenues to current and anticipated revenues.
The carrying value of computer software costs is reviewed for impairment by
the Company, and impairments are recognized when the expected undiscounted
future cash flows derived from such intangible assets are less than their
carrying value. If such review indicates a potential impairment, the Company
uses fair value in determining the amount that should be written off.
Revenue Recognition: The Company's bankcard data processing revenues are derived
from long-term processing contracts with banks and other institutions and are
recognized as revenues at the time the services are performed. The Company's
service contracts generally contain terms ranging from three to ten years.
30 Total System Services, Inc.(SM)
Contract Acquisition Costs: The Company capitalizes certain contract acquisition
costs related to signing a long-term contract. These costs, which primarily
consist of cash payments for rights to provide processing services, incremental
internal conversion and software development costs, and third-party software
development costs, are amortized using the straight-line method over the initial
contract term beginning when the customer's cardholder accounts are converted to
the Company's processing system. The Company evaluates the existence of
impairment on the basis of whether these costs are fully recoverable from
expected undiscounted cash flows of the related contract. If such review
indicates a potential impairment, the Company uses fair value in determining the
amount that should be written off. All costs incurred prior to contract
execution are expensed as incurred.
Goodwill: Goodwill results from the excess of cost over the fair value of net
assets of businesses acquired and is being amortized using the straight-line
method over periods of five to 15 years. The Company reviews goodwill for
impairment on the basis of whether the goodwill is fully recoverable from
expected undiscounted cash flows of the related business units. If such review
indicates a potential impairment, the Company uses fair value in determining the
amount that should be written off.
Income Taxes: Income tax expense reflected in TSYS' consolidated financial
statements has been computed based on the taxable income of TSYS as a separate
entity. A consolidated federal income tax return is filed for Synovus and its
majority owned subsidiaries, including TSYS.
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 ("Statement 109"). Under the
asset and liability method of Statement 109, 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. Under Statement 109, the effect on deferred income tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Cash Flow Reporting: Cash equivalents are considered to be investments with a
maturity of three months or less when purchased.
Net Income per Share: Net income per share is based on the weighted average
number of shares of common stock outstanding during each period, including
shares issued under restricted stock awards. The dilutive impact of contingently
issuable shares and outstanding options to acquire common stock is not
significant to the computation of net income per share.
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, and employee benefits and other current
liabilities approximate fair value due to the short-term maturities of these
assets and liabilities. The investment in joint venture is accounted for by the
equity method and pertains to
Total System Services, Inc.(SM) 31
a privately held company for which a fair value is not readily available. The
Company believes the fair value of its joint venture investment exceeds the
carrying value.
Foreign Currency Translation: Foreign currency financial statements of foreign
joint ventures are translated into U.S. dollars at current exchange rates,
except for revenues, costs and expenses, and net income which are translated at
average exchange rates during each reporting period. Net exchange gains or
losses resulting from the translation of assets and liabilities of equity
investments in foreign joint ventures are accumulated in a separate section of
shareholders' equity titled Cumulative Currency Translation Adjustments.
Reclassifications: Certain reclassifications have been made to the 1994 and 1993
financial statements to conform to the presentation adopted in 1995.
NOTE 2 Relationship with Affiliated Companies
At December 31, 1995, CB&T owned 52,200,646 shares (approximately 80.8%) of
TSYS' common stock.
TSYS has entered into agreements with CB&T and certain of its affiliates,
pursuant to which TSYS performs bankcard data processing services. Such bankcard
data processing service revenues approximated $1,805,000, $1,495,000 and
$1,461,000 during the years ended December 31, 1995, 1994 and 1993,
respectively. Bankcard data processing revenues related to TSYS de Mexico, the
Company's Mexican joint venture, were approximately $8.3 million for the year
ended December 31, 1995. Revenues from other services provided by TSYS to
Synovus and its affiliates approximated $718,000, $614,000 and $203,000 during
the years ended December 31, 1995, 1994 and 1993, respectively.
TSYS maintains an unsecured credit agreement with CB&T. The credit
agreement has a maximum available principal balance of $5.0 million, with
interest at prime. TSYS did not use the credit facility during 1995 or 1994.
In 1995, 1994 and 1993, TSYS received interest income from CB&T amounting
to $837,356, $384,070 and $338,230, respectively. Also, in 1995, 1994 and 1993,
TSYS paid CB&T interest expense of $78,318, $60,193 and $429,136, respectively.
During 1995, 1994 and 1993, Synovus Data Corp. paid TSYS $701,159, $732,136
and $715,254, respectively, for data links, network services and other
miscellaneous items.
TSYS leases a portion of its facilities from Synovus Data Corp. and CB&T,
and leases portions of the buildings it owns to CB&T. TSYS made lease payments
for office facilities to Synovus Data Corp. of $214,650 in 1995, 1994 and 1993.
Lease payments received from CB&T amounted to $20,203 in 1995, $30,716 in 1994,
and $19,088 in 1993; TSYS made lease payments to CB&T of $54,313 in 1995 and
$71,720 in 1994. Before the Company acquired Columbus Productions, Inc. in 1994,
TSYS paid CPI an aggregate amount of $469,422 for printing services in 1993.
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 $1,039,693, $915,215 and $582,300 for the years
ended December 31, 1995, 1994 and 1993, respectively. Synovus paid TSYS
management fees of $361,093 and $409,438 in 1995 and 1994, respectively, for
payroll processing support services.
In July 1995, Synovus formed a separate company, Synovus Administrative
Services Corp. ("SASC"), to provide human resource, payroll, security,
maintenance and other
32 Total Sytem Services, Inc.(SM)
administrative services to TSYS and other affiliated companies. TSYS paid SASC
$3,158,695 for these services in 1995. TSYS received $198,578 in rent from SASC
in 1995.
TSYS maintains deposit accounts with CB&T, the majority of which are
interest-earning and on which TSYS receives market rates of interest. Included
in cash and cash equivalents are deposit balances with CB&T of $16,742,926 and
$13,862,765 at December 31, 1995 and 1994, respectively.
Certain officers of TSYS participate in the Synovus 1994 Long-Term
Incentive Plan. These officers were provided restricted stock awards and
nonqualified options for Synovus stock in 1995 and 1994 as follows:
- --------------------------------------------------------------------------------
Number of Shares
1995 1994
- --------------------------------------------------------------------------------
Restricted stock awards ...... 17,122 12,217
Stock options ................ 127,370 36,651
The restricted stock awards were valued at the price paid for the Synovus
shares which was $389,526 and $210,743 in 1995 and 1994, respectively, and
recognized as compensation expense over the five-year vesting period. The stock
options were granted with an exercise price equal to the market value of Synovus
common stock at the date of grant. The options are exercisable in two or three
years and expire eight years from date of grant.
On January 2, 1994, TSYS acquired Columbus Productions, Inc., provider of
full-service commercial printing and related services, from CB&T in exchange for
202,246 newly issued shares of TSYS common stock with a market value of $2.7
million at the date of acquisition; the assets and liabilities of CPI were
recorded at their historical cost in a manner similar to a pooling of interests.
The Company believes the terms and conditions of transactions between TSYS,
CB&T, Synovus, SASC and other affiliated companies are comparable to those which
could have been obtained in transactions with unaffiliated parties.
NOTE 3 Property and Equipment
Property and equipment balances at December 31 were as follows:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Land ........................ $ 2,482,820 2,255,820
Buildings ................... 38,071,521 33,423,379
Computer equipment .......... 38,122,588 35,574,895
Furniture and other equipment 30,840,053 27,516,732
Construction in progress .... -- 592,964
- --------------------------------------------------------------------------------
109,516,982 99,363,790
Less accumulated depreciation
and amortization ............ 54,944,079 51,468,537
- --------------------------------------------------------------------------------
Property and equipment, net . $ 54,572,903 47,895,253
================================================================================
Depreciation of property and equipment was $9,768,665, $9,802,873 and
$10,381,060 for 1995, 1994 and 1993, respectively.
NOTE 4 Computer Software
Computer software at December 31 is summarized as follows:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
TS2 ......................... $33,048,872 33,048,872
Other internally developed
software including TS2
enhancements ................ 5,346,071 3,803,910
Purchased computer software . 17,137,936 11,780,949
- --------------------------------------------------------------------------------
55,532,879 48,633,731
Less accumulated amortization 16,317,318 9,393,910
- --------------------------------------------------------------------------------
Computer software, net ...... $39,215,561 39,239,821
================================================================================
Total System Services, Inc.(SM) 33
Capitalized software development costs for the years ended December 31, 1995,
1994 and 1993 were $2,617,445, $10,623,828 and $11,687,596, respectively.
Amortization expense related to computer software costs was $7,357,544,
$3,669,448 and $2,174,887 for the years ended December 31, 1995, 1994 and 1993,
respectively.
NOTE 5 Long-Term Debt and Obligations Under Capital Leases
Long-term debt and obligations under capital leases at December 31 consists of
the following:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
9.75% Industrial Development
Authority bonds payable,
principally held by CB&T
and its affiliates ................. $ -- 25,000
Capital lease obligations, with
interest rates ranging from
7.85% to 13.48%, payable
monthly through 1999,
secured by equipment with
a carrying value of $495,264 ....... 582,949 750,775
Note payable with an interest rate
of 9.23%, maturing in 2003 ......... 347,792 386,423
- --------------------------------------------------------------------------------
Total long-term debt and obligations
under capital leases ............... 930,741 1,162,198
Less: current portion .............. 243,786 255,631
- --------------------------------------------------------------------------------
Noncurrent portion of long-
term debt and obligations
under capital leases ............... $686,955 906,567
================================================================================
NOTE 6 Shareholders' Equity
Restricted Stock Awards: The Company has issued its common stock to certain
executive officers under restricted stock awards. The market value of the common
stock at the date of issuance is included as a reduction of additional paid-in
capital in the Company's consolidated balance sheets and is amortized as
compensation expense over the vesting period of the awards. Compensation expense
relating to these awards was $607,025, $618,019 and $618,018 for the years ended
December 31, 1995, 1994 and 1993, respectively, and unamortized compensation at
December 31, 1995, was $1,113,834. Common stock issued under restricted stock
awards is considered outstanding for purposes of the computation of net income
per share. The amounts and terms of common stock issued under restricted awards
are summarized as follows:
- --------------------------------------------------------------------------------
Number Market Value at Vesting
Date of Issuance of Shares Date of Issuance Period
- --------------------------------------------------------------------------------
July 21, 1992 217,600 $1,332,800 60 months
February 24, 1992 262,000 1,801,250 72 months
November 6, 1995 2,078 46,495 36 months
Long-Term Incentive Plan: In 1992, the Total System Services, Inc. Long-Term
Incentive Plan ("LTI Plan") was adopted to enable Total System Services, Inc.
and subsidiaries 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. Four hundred thousand shares of
the Company's common stock are reserved for distribution under the terms of the
34 Total System Services, Inc.(SM)
LTI Plan. During 1994, the Company awarded compensatory options to acquire
99,650 shares of common stock to certain key employees. All options granted were
nonqualified stock options with an exercise price of $6 per share and are
exercisable beginning in June 1997 and expiring in June 2002. The Company is
recording compensation expense of $454,638 for the difference between the
exercise price and the fair market value of the Company's common stock at the
date of grant over the period from the date of grant through June 1997, the
vesting date. As of December 31, 1995, options to acquire 95,600 shares remained
outstanding after cancellations with none of these options exercisable.
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 and
tax bases of assets and liabilities.
Income tax expense for the years ended December 31, 1995, 1994 and 1993,
consists of:
- --------------------------------------------------------------------------------
Current Deferred Total
- --------------------------------------------------------------------------------
1995:
Federal ....... $13,522,207 1,620,553 15,142,760
State ......... 1,491,383 (657,169) 834,214
- --------------------------------------------------------------------------------
$15,013,590 963,384 15,976,974
================================================================================
1994:
Federal ....... $ 9,550,558 2,247,759 11,798,317
State ......... 549,925 576,013 1,125,938
- --------------------------------------------------------------------------------
$10,100,483 2,823,772 12,924,255
================================================================================
1993:
Federal ....... $ 7,953,505 3,155,452 11,108,957
State ......... 303,919 1,234,303 1,538,222
- --------------------------------------------------------------------------------
$ 8,257,424 4,389,755 12,647,179
================================================================================
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 and
equity in income (loss) of joint venture as a result of the following:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Computed "expected"
tax expense ............. $15,273,444 12,395,040 11,504,584
Increase (decrease)
in income taxes
resulting from:
State income tax
expense, net of
federal income
tax benefit ............. 542,239 731,860 999,844
Other, net .............. 161,291 (202,645) 142,751
- --------------------------------------------------------------------------------
$15,976,974 12,924,255 12,647,179
================================================================================
The tax effects of temporary differences that gave rise to the deferred
income tax assets and liabilities at December 31, 1995 and 1994, are presented
below:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Deferred income tax assets,
primarily accruals not
deductible until paid .......... $ 3,392,874 1,173,911
Deferred income tax liabilities:
Computer software
development costs
and other costs ................ (17,653,794) (15,400,212)
Other, net ..................... (1,999,130) (1,688,253)
- --------------------------------------------------------------------------------
Total deferred income
tax liability .................. (19,652,924) (17,088,465)
- --------------------------------------------------------------------------------
Net deferred income
tax liability .................. $(16,260,050) (15,914,554)
================================================================================
Total System Services, Inc.(SM) 35
NOTE 8 Employee Benefit Plans
The Company provides certain benefits to its employees by allowing employees to
participate in certain defined contribution plans. These employee benefit plans
are described as follows:
Profit Sharing Plan: The Company's employees are eligible to participate in the
Synovus Financial Corp./Total System Services, Inc. ("Synovus/TSYS") Profit
Sharing Plan. The Company's contributions to the plan are contingent upon
achievement of certain financial goals. The terms of the plan limit the
Company's contribution to 9% (15% in 1994 and 1993) 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:
- --------------------------------------------------------------------------------
1995 .............. $4,429,998
1994 .............. 4,947,261
1993 .............. 4,435,756
Stock Purchase Plan: The Company maintains stock purchase plans for directors
and employees, whereby TSYS makes contributions equal to one-half of employee
and director voluntary contributions. The funds are used to purchase presently
issued and outstanding shares of TSYS common stock for the benefit of
participants. TSYS' contributions to these plans charged to expense are as
follows:
- --------------------------------------------------------------------------------
1995 .............. $962,829
1994 .............. 692,208
1993 .............. 532,065
Money Purchase Plan: In 1995, the Company's employees became eligible to
participate in the Synovus/TSYS Money Purchase Pension Plan, a defined
contribution pension plan. The terms of the plan provide for the Company to make
annual contributions to the Plan equal to 7% of participant compensation, as
defined. The Company's contribution to the plan charged to expense for the year
ended December 31, 1995, was $3,417,057.
401(k) Plan: Also in 1995, the Company's employees became eligible to
participate in the Synovus/TSYS 401(k) Plan. The terms of the plan allow
employees to contribute up to 10% of pretax compensation with a discretionary
company contribution up to a maximum of 5% of participant compensation, as
defined, based upon the Company's attainment of certain financial goals. The
Company's contribution to the plan charged to expense for the year ended
December 31, 1995, was $1,601,939.
Pension Plan: The Company terminated its defined benefit pension plan during
1995. No significant gain or loss resulted from the Company's termination of the
plan. Total pension expense for 1994 and 1993 was $623,788 and $420,658,
respectively.
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 material to
the Company's consolidated financial statements.
36 Total System Services, Inc.(SM)
NOTE 9 Commitments and Contingencies
Lease Commitments: TSYS is obligated under noncancel-able operating leases for
computer equipment and facilities. Management expects that, as these leases
expire, they will be renewed or replaced by similar leases. The future minimum
lease payments under noncancelable operating leases with remaining terms greater
than one year for the next five years and in the aggregate as of December 31,
1995, are as follows:
- --------------------------------------------------------------------------------
1996 .............. $27,194,187
1997 .............. 22,591,272
1998 .............. 4,927,017
1999 .............. 3,553,809
2000 .............. 1,360,557
- --------------------------------------------------------------------------------
$57,252,868
================================================================================
Total rental expense under all operating leases in 1995, 1994 and 1993 was
$34,862,784, $26,408,605 and $22,017,438, respectively.
Contractual Commitments: In the normal course of its business, the Company
maintains processing contracts with its customers. These processing contracts
contain commitments, including, but not limited to, minimum standards and time
frames against which the Company's performance is measured. In the event the
Company does not meet its contractual commitments with its customers, the
Company may incur penalties and/or certain customers may have the right to
terminate their contracts with the Company. The Company does not believe that it
will fail to meet its contractual commitments to an extent that will result in a
material adverse effect on its financial condition or results of operations.
Contingencies: The Company is subject to lawsuits, claims and other complaints
arising out of the ordinary conduct of its business. In the opinion of
management, based in part upon the advice of legal counsel, all matters are
adequately covered by insurance or, if not covered, are without merit or are of
such kind or involve such amounts as would not have a material effect on the
financial condition or results of operations of the Company if disposed of
unfavorably.
NOTE 10 Supplementary Balance Sheet Information Significant components of other
assets are summarized as follows:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Contract acquisition costs, net ..... $17,628,448 10,383,099
Investment in joint venture, net ..... 4,506,686 2,722,476
Significant components of other current liabilities are summarized as follows:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Accrued salaries and
related liabilities .......... $ 4,523,723 2,529,320
NOTE 11 Major Customers
For the years ended December 31, 1995, 1994 and 1993, two customers accounted
for approximately 34%, 36% and 37% of total revenues, respectively.
Total System Services, Inc.(SM) 37
Report of Independent Auditors
303 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30308
The Board of Directors and Shareholders
Total System Services, Inc.:
We have audited the accompanying consolidated balance sheets of Total System
Services, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders equity, and cash flows
for each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Total System
Services, Inc. and subsidiaries at December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
January 26, 1996
38 Total System Services, Inc.(SM)
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 December 21, 1995,
there were 4,755 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 was declared on December 11, 1995, and was paid
January 2, 1996, to shareholders of record on December 21, 1995. Total dividends
declared in 1995 amounted to $5.8 million, as compared to $5.2 million in 1994.
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, 1995 and 1994.
[Omitted Revenues Graph is represented by the following table.]
Revenues
(Millions of Dollars)
1994 1995
- --------------------------------------------------------------------------------
QTR 1 ............ $41.0 $53.4
QTR 2 ............ 44.8 59.1
QTR 3 ............ 47.9 66.1
QTR 4 ............ 53.8 71.1
[Omitted Net Income Graph is represented by the following table.]
Net Income
(Millions of Dollars)
1994 1995
- --------------------------------------------------------------------------------
QTR 1 ............ $4.3 $4.8
QTR 2 ............ 5.2 6.0
QTR 3 ............ 5.7 7.4
QTR 4 .......... 7.2 9.5
First Second Third Fourth
(in thousands except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------
1995 Revenues ........................... $53,380 59,134 66,108 71,086
Operating income ................... 7,763 10,021 10,746 14,392
Net income ......................... 4,784 6,013 7,390 9,543
Net income per share ............... .08 .09 .11 .15
Cash dividends declared per share .. .0225 .0225 .0225 .0225
Stock prices:
High ............................ 18 1/8 17 1/4 24 1/8 31 5/8
Low ............................. 16 1/8 13 3/8 14 3/4 21 1/4
- ---------------------------------------------------------------------------------------
1994 Revenues ........................... $40,977 44,836 47,938 53,820
Operating income ................... 7,060 8,481 8,517 11,040
Net income ......................... 4,349 5,225 5,717 7,200
Net income per share ............... .07 .08 .09 .11
Cash dividends declared per share .. .0175 .0175 .0225 .0225
Stock prices:
High ............................ 14 1/8 13 16 5/8 19 5/8
Low ............................. 12 3/4 10 1/8 9 5/8 15 1/2
Total System Services, Inc.(SM) 39