EXHIBIT 13.1
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 22.6%
and 21.0%, respectively. The balance sheet data also reflects the continued
strong financial position of TSYS, as evidenced by the current ratio of 1.9:1 at
December 31, 1996, 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 this Annual Report.
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands except share and per share data) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services ........... $ 277,870 218,953 166,194 136,650 123,356
Other services .............................. 33,778 30,755 21,377 15,424 6,307
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues ...................... 311,648 249,708 187,571 152,074 129,663
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense ........ 124,259 94,946 73,051 54,517 43,136
Net occupancy and equipment expense ......... 82,118 64,549 51,283 43,421 39,793
Other operating expenses .................... 53,368 47,291 28,139 21,521 17,712
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses ............ 259,745 206,786 152,473 119,459 100,641
- ------------------------------------------------------------------------------------------------------------------------------------
Equity in income (loss) of joint ventures ... 7,094 69 (13) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income .................... 58,997 42,991 35,085 32,615 29,022
Nonoperating income (expense):
Gain (loss) on disposal of equipment, net ... 31 (123) 65 335 157
Interest income (expense), net .............. 1,416 839 264 (80) (1,121)
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (expense) . 1,447 716 329 255 (964)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes .......... 60,444 43,707 35,414 32,870 28,058
Income taxes ........................................ 21,007 15,977 12,924 12,647 10,489
- ------------------------------------------------------------------------------------------------------------------------------------
Net income .......................... $ 39,437 27,730 22,490 20,223 17,569
====================================================================================================================================
Net income per share ................ $ .31 .21 .17 .16 .14
====================================================================================================================================
Cash dividends declared per share ................... $ .045 .045 .040 .035 .035
====================================================================================================================================
Weighted average outstanding shares ................. 129,287,493 129,263,226 129,259,124 128,811,280 128,106,672
====================================================================================================================================
- -------------------------------------------------------------------------------
December 31,
--------------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Total assets ............................. $246,759 199,000 165,042 133,339 122,048
Working capital .......................... 46,218 37,687 33,421 30,594 31,850
Total long-term debt ..................... 676 931 1,162 1,707 12,282
Shareholders' equity ..................... 178,878 144,472 123,004 102,278 85,945
17
TOTAL SYSTEM SERVICES, INC.(SM) 1996 ANNUAL REPORT
Financial Review
This Financial Review provides a discussion of the results of operations,
financial condition, liquidity and capital resources of TSYS and creates
awareness of the factors that have affected its recent earnings, as well as
those factors that may affect its future earnings. The accompanying Consolidated
Financial Statements and related Notes, and Selected Financial Data are an
integral part of this Financial Review and should be read in conjunction with
it.
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 to financial
institutions and other organizations across the United States and in Mexico,
Puerto Rico and Canada.
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 shopping season. Furthermore, the conversion of
cardholder accounts for new customers to THE TOTAL SYSTEM, as well as the
deconversion of cardholder accounts of existing customers, also impacts the
results of operations from period to period. Another factor, among others, which
may affect TSYS' revenues and results of operations from time to time is the
sale by a customer of its card portfolio or a segment of its accounts to a party
which processes cardholder accounts internally or uses another processor. The
financial services industry continues to consolidate which could favorably or
unfavorably impact TSYS' financial condition or results of operations.
The average number of cardholder accounts on file increased 35.7% to 72.0
million in 1996, compared to 53.1 million in 1995, which represented a 35.2%
increase over 39.5 million in 1994. At December 31, 1996, TSYS' cardholder
accounts on file were approximately 79.4 million, up from 63.3 million and 44.1
million at December 31, 1995 and 1994, respectively.
During 1996, the majority of the growth in cardholder accounts is primarily
a result of portfolio growth of existing customers. In addition, approximately
6.5 million cardholder accounts of new customers were added to THE TOTAL SYSTEM.
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. On May 1, 1996, the joint venture, known as Vital Processing
Services L.L.C. ("Vital"), became operational and began offering fully
integrated merchant transaction and related electronic information services to
financial and nonfinancial institutions and their merchant customers. Vital is
structured with its own management team and separate Board of Directors and has
its corporate headquarters in Tempe, Arizona, with other locations in Columbus,
Georgia, and Atlanta, Georgia. TSYS and Visa are equal owners in the joint
venture.
Revenues and expenses associated with TSYS' merchant operations through
April 1996 are included in TSYS' revenues and expenses. However, since Vital
became operational May 1, 1996, TSYS' share of its results of operations are
included in equity in the income of joint ventures. The change in classification
of the Company's revenues and expenses from its merchant operations to an equity
interest in the Vital joint venture affects the comparability of prior periods
presented in the Company's statements of income.
Since 1994, TSYS has been servicing commercial cards which include
purchasing cards, corporate cards and company business cards for employees. At
December 31, 1996, TSYS was processing approximately 3.1 million commercial card
accounts, a 42.5% increase over the approximately 2.0 million being processed at
year-end 1995, representing a 53.8% increase over the 1.3 million at year-end
1994. Commercial card revenue is included in revenues from bankcard processing.
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, 1996, 1995 and 1994, two customers accounted for approximately 29%,
34% and 36% 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
financial condition and results of operations.
During 1996, TSYS successfully converted approximately 4.5 million
cardholder accounts for Bank of America. TSYS' conversion schedule for 1997
anticipates converting all of Bank of America's remaining accounts. In addition,
Bankcard Revenues (Millions of Dollars)
96......................$277.9
95......................$219.0
94......................$166.2
93......................$136.7
92......................$123.4
Operating Income (Millions of Dollars)
96.....................$59.0
95.....................$43.0
94.....................$35.1
93.....................$32.6
92.....................$29.0
19
TOTAL SYSTEM SERVICES, INC.(SM) 1996 ANNUAL REPORT
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 1996 1995
Years Ended December 31, vs vs
1996 1995 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services ...................... 89.2% 87.7 88.6 26.9 31.7
Other services ......................................... 10.8 12.3 11.4 9.8 43.9
- -----------------------------------------------------------------------------------------------------
Total revenues ................................. 100.0 100.0 100.0 24.8 33.1
- -----------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense ................... 39.9 38.0 38.9 30.9 30.0
Net occupancy and equipment expense .................... 26.3 25.8 27.3 27.2 25.9
Other operating expenses ............................... 17.1 19.0 15.0 12.9 68.1
- -----------------------------------------------------------------------------------------------------
Total operating expenses ....................... 83.3 82.8 81.2 25.6 35.6
- -----------------------------------------------------------------------------------------------------
Equity in income (loss) of joint ventures .............. 2.2 0.0 (0.0) nm nm
- -----------------------------------------------------------------------------------------------------
Operating income ............................... 18.9 17.2 18.8 37.2 22.5
- -----------------------------------------------------------------------------------------------------
Nonoperating income (expense):
Gain (loss) on disposal of equipment, net .............. 0.0 (0.0) 0.0 nm nm
Interest income (expense), net ......................... 0.5 0.3 0.1 68.6 nm
- -----------------------------------------------------------------------------------------------------
Total nonoperating income ...................... 0.5 0.3 0.1 101.9 118.2
- -----------------------------------------------------------------------------------------------------
Income before income taxes ..................... 19.4 17.5 18.9 38.3 23.4
Income taxes ................................................... 6.7 6.4 6.9 31.5 23.6
- -----------------------------------------------------------------------------------------------------
Net income ..................................... 12.7% 11.1 12.0 42.2 23.3
=====================================================================================================
nm = not meaningful
during the second quarter of 1996, TSYS and Bank of America amended their
processing agreement to, among other things, eliminate the financial penalties
and termination rights associated with prior conversion delays. Management
believes all of Bank of America's cardholder accounts will be successfully
converted to TS2.
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 nec-
20
essary for on-line communications and use of TSYS applications; Mailtek and LMI
provide TSYS customers and others with mail and correspondence processing
services and account solicitation 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 1996 to 83.3%,
compared to 82.8% and 81.2% for 1995 and 1994, 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 transaction 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 1996, the average number of employees increased to
2,498, compared to 2,087 in 1995 and 1,874 in 1994. 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.
Employment costs related to internally developed software and contract
acquisition costs capitalized in 1996 were $4.9 million, compared to $8.4
million and $14.5 million in 1995 and 1994, respectively, the majority of which
related to the development of TS2. These decreases in capitalization are a major
component of the increases in employment expense, particularly in comparing 1995
to 1994. Since the completion of core TS2, employment expenses capitalized
relate primarily to enhancements to TS2 and costs associated with the conversion
to TS2 of customers under long-term contracts.
Due to the importance of technology to our business, a large portion of
TSYS' employees are programmers - approximately 33.1% in 1996, compared to 35.7%
and 31.6% in 1995 and 1994, respectively. To expand our programmer base, the
state of Georgia has offered an incentive program called Intellectual Capital
Partnership Program ("ICAPP"). ICAPP is a commitment of up to $23 million for
classrooms, teachers, computer equipment and high-tech training designed to meet
TSYS' growth needs for technical analysts, computer systems personnel and
mainframe programmers into the next century.
Net occupancy and equipment expense increased 27.2% in 1996 over 1995,
compared to 25.9% in 1995 over 1994. Equipment and software rentals, which
represents the largest component of net occupancy and equipment expense,
increased $11.1 million, or 34.1% in 1996, compared to 1995, and $8.5 million,
or 35.1% in 1995 compared to 1994. Substantial new, technologically advanced
equipment was leased in order to meet growth needs in 1996 and anticipated
future growth, including 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
21
TOTAL SYSTEM SERVICES, INC.(SM) 1996 ANNUAL REPORT
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. During 1996, TSYS made a
strategic decision to remain in Columbus, Georgia, and build a new campus-type
facility on approximately 50 acres of land north of downtown Columbus. The new
facility will consolidate most of TSYS' multiple Columbus locations and will
facilitate future growth. In addition, TSYS began developing plans to expand its
operations center in north Columbus during 1997. This expansion, while not
finalized, will include additional space for the card production services now
located in downtown Columbus. The expansion is also expected to include
additional space for statement printing and data processing functions. A
separate building will be constructed on the North Center property in 1997 to
serve as LMI's headquarters. In 1995, a new, 110,000 square-foot building was
purchased to accommodate current office space needs and provide space for future
growth in technical staff.
Other operating expenses increased 12.9% in 1996 compared to 1995 and 68.1%
in 1995 compared to 1994. Management fees were paid to an affiliate for human
resources, maintenance, security, communications, corporate education, travel
and administration. These fees were paid for only the second half of 1995 but
were paid for a full year in 1996 and therefore increased 171.7% in 1996 over
1995. However, if the fee paid in 1996 is compared to an annualized fee for
1995, the increase would be 35.9% and is a significant factor in the increase in
other operating expenses. Of the remaining components in other operating
expenses, the fluctuations varied. For example, certain direct business expenses
such as supplies and telecommunications grew collectively 5.2% or $1.0 million.
Partially offsetting this growth is a reduction in certain professional fees and
local taxes.
Factors contributing to the increase in other operating expenses in 1995
included the volume of supplies related to the processing of accounts due to the
growth in number of accounts serviced, coupled with an increase in the cost of
supplies, especially paper. 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 being
processed.
Operating Income
Operating income increased 37.2% to $59.0 million in 1996, compared to $43.0
million in 1995, an increase of 22.5% over 1994. Equity in income of TSYS' two
joint
22
ventures contributed significantly to the increase in 1996 over 1995 as Vital
became operational during 1996 and the Mexican joint venture had its first full
year of operations in 1996. Excluding the equity income, operating income
increased 20.9% to $51.9 million in 1996, primarily due to increased revenues
combined with a focus on expense control. The operating income margin increased
to 18.9% in 1996, compared to 17.2% and 18.8% in 1995 and 1994, respectively.
Nonoperating Income (Expense)
Interest income (expense), net, includes interest expense of $62,872, $156,692
and $151,584 and interest income of $1,478,572, $996,373 and $415,565 for 1996,
1995 and 1994, respectively.
Interest expense decreased in 1996 due to the decreasing level of
outstanding debt. Interest expense increased only 3.4% in 1995, as compared to
1994, due to new debt obtained in early 1995 and repaid in November 1995.
Although the Company has not yet finalized the design or the financing of its
new real estate development projects, financing costs will likely increase in
1997.
Interest income increased 48.4% in 1996, as compared to 1995, and increased
139.8% in 1995, compared to 1994. The changes are the result of both
fluctuations in cash available for investment and short-term interest rates.
Additionally, in the third quarter of 1996, $5.0 million was invested in a
six-month certificate of deposit at a higher rate of interest.
Income Taxes
Income tax expense was $21.0 million, $16.0 million and $12.9 million in 1996,
1995 and 1994, respectively, representing effective tax rates of 34.8%, 36.6%
and 36.5%. The decline in TSYS' effective tax rate for 1996, as compared to 1995
and 1994, is attributable to certain effective income tax planning strategies,
including the identification and recognition of research and experimentation
credits for ongoing development activities and a reduction in state income
taxes.
Net Income
Net income increased 42.2% to $39.4 million ($.31 per share) in 1996, compared
to a 23.3% increase to $27.7 million ($.21 per share) for 1995, up from $22.5
million ($.17 per share) in 1994.
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 joint ventures, contract acquisitions and short-term
investments; and the payment of cash dividends.
23
TOTAL SYSTEM SERVICES, INC.(SM) 1996 ANNUAL REPORT
During 1996, TSYS purchased and leased computer hardware and related
equipment including software. Capital expenditures for property and equipment
were $19.4 million in 1996, compared to $17.0 million in 1995, and $8.7 million
in 1994. Expenditures for purchased computer software were $9.0 million in 1996,
compared to $5.5 million in 1995 and $3.1 million in 1994. Additions to
internally developed computer software, principally TS2 and enhancements to TS2,
were less than $200,000 in 1996, $2.6 million in 1995, and $10.6 million in
1994.
Costs to develop the core TS2 bankcard processing and support software were
capitalized, and amortization began in October 1994 over a useful life of ten
years. Amortization of TS2 resulted in amortization expense of $3.3 million in
1996 and 1995 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 long-term contracts
to TS2 are capitalized as contract acquisition costs and are amortized over the
life of the processing contracts. Capitalized conversion costs, included in
contract acquisition costs, at December 31, 1996, 1995 and 1994, amounted to
$8.4 million, $5.4 million and $2.5 million, respectively. Amortization of
specific capitalized conversion costs commenced in April 1996 and totaled
$204,000 in 1996.
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 20 banks in Mexico. TSYS de Mexico performs card and statement production
services, while subcontracting bankcard processing to TSYS. TSYS' total capital
investment in TSYS de Mexico is $6.2 million, representing an equity interest of
49%. At December 31, 1996, currency translation adjustments decreased the
Company's equity investment in TSYS de Mexico by $1.9 million and resulted in a
cumulative currency translation adjustment, net of income taxes, of $1.2
million. Effective in 1997, Mexico's highly inflationary economy will require
any foreign currency fluctuations above the valuation at December 31, 1996, to
be reflected in TSYS' results of operations.
TSYS de Mexico continues to perform as expected, although current
production volumes are showing signs of decreasing. The Mexican economy
continues to stabilize relative to 1995; however, there remains uncertainty in
the Mexican economy which management continues to monitor.
The joint venture between TSYS and Visa U.S.A., known as Vital Processing
Services L.L.C., became operational May 1, 1996, merging the companies' merchant
and point-of-sale processing operations. TSYS contributed cash of $2.5 million,
as well as $1.4 million in equipment and other assets, to the joint venture.
TSYS and Visa are equal owners in the joint venture.
24
In each quarter of 1996, the Board of Directors declared a dividend on
TSYS' common stock of $.011 per share. Total dividends declared in 1996 and 1995
were $5.8 million, compared to $5.2 million in 1994. In 1996, a stock dividend
was distributed, effecting a two-for-one stock split. (See Note 7 to
Consolidated Financial Statements.)
During 1996, TSYS reevaluated its business insurance risks and determined
it was more cost effective to accept the financial impact for normal risks
associated with its business as a processor of significant transaction levels
and utilize insurance to protect TSYS from catastrophic events. As a result,
TSYS increased its coverage for errors and omissions and raised its deductible
amount.
During 1996, TSYS announced its decision to remain in Columbus, Georgia,
and build a new campus-type facility on approximately 50 acres of land north of
downtown Columbus. The decision was based on a commitment by the state of
Georgia to provide collegiate high-tech education and cooperation by the city of
Columbus in making available a suitable building site. The campus facility will
consolidate most of TSYS' multiple Columbus locations and will facilitate future
growth. The campus development will be a multi-building, multi-year phased
project with initial construction scheduled to begin by mid 1997. Preliminary
cost estimates for the first phase are expected to be $75-100 million over a two
to three year period. In addition, the proposed expansion of the Company's
operations center is expected to cost $20-25 million. Financing for these
projects is expected to be through the internal generation of funds and the use
of funds from external sources, possibly through the issuance of industrial
revenue bonds.
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 1.9:1. At December 31, 1996,
TSYS had working capital of $46.2 million, compared to $37.7 million in 1995 and
$33.4 million in 1994.
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 1996, 1995 or 1994.
25
TOTAL SYSTEM SERVICES, INC.(SM) 1996 ANNUAL REPORT
Consolidated Balance Sheets
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (includes $25.1 million and $16.7 million
on deposit with a related party in 1996 and 1995, respectively) 27,496,057 18,849,623
Short-term investments with a related party 5,000,000 --
Accounts receivable, net of allowance for doubtful accounts of
$704,000 and $714,000 in 1996 and 1995, respectively 59,202,399 49,614,779
Prepaid expenses and other current assets 6,624,482 9,362,500
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 98,322,938 77,826,902
Property and equipment, net (Note 3) 62,955,926 54,572,903
Computer software, net (Note 4) 39,720,484 39,215,561
Other assets (Notes 5 and 11) 45,759,735 27,384,435
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 246,759,083 198,999,801
====================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 4,695,970 5,811,334
Accrued salaries and related liabilities 6,422,199 4,523,723
Accrued employee benefits 14,590,362 10,412,551
Current portion of long-term debt and obligations under capital leases (Note 6) 201,274 243,786
Other current liabilities 26,195,540 19,148,536
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 52,105,345 40,139,930
Long-term debt and obligations under capital leases,
excluding current portion (Note 6) 474,513 686,955
Deferred income taxes (Note 8) 15,301,478 13,700,895
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 67,881,336 54,527,780
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (Notes 2 and 7):
Common stock $.10 par value. Authorized 300,000,000 shares;
129,483,522 and 129,461,544 issued in 1996 and 1995, respectively;
129,289,680 and 129,266,744 outstanding in 1996 and 1995, respectively 12,948,352 12,946,154
Additional paid-in capital 5,353,972 4,445,755
Treasury stock, at cost (473,544) (475,789)
Cumulative currency translation adjustments (1,178,182) (1,052,081)
Retained earnings 162,227,149 128,607,982
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 178,877,747 144,472,021
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10)
Total liabilities and shareholders' equity $ 246,759,083 198,999,801
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
26
Consolidated Statements of Income
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Bankcard data processing services (includes $24.9 million, $10.2 million
and $1.6 million from related parties for the years ended
December 31, 1996, 1995, and 1994, respectively) $277,869,778 218,953,101 166,194,263
Other services 33,778,571 30,754,596 21,376,564
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues (Notes 2 and 12) 311,648,349 249,707,697 187,570,827
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 124,258,754 94,946,370 73,050,930
Net occupancy and equipment expense 82,117,603 64,548,541 51,282,584
Other operating expenses 53,368,464 47,291,267 28,138,822
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (Note 2) 259,744,821 206,786,178 152,472,336
- ------------------------------------------------------------------------------------------------------------------------------------
Equity in income (loss) of joint ventures (Note 5) 7,093,600 68,666 (12,612)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 58,997,128 42,990,185 35,085,879
- ------------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense):
Gain (loss) on disposal of equipment, net 31,576 (122,790) 64,539
Interest income (expense), net (includes $1.4 million,
$759,000 and $324,000 from a related party for the
years ended December 31, 1996, 1995 and 1994) 1,415,700 839,681 263,981
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (Note 2) 1,447,276 716,891 328,520
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 60,444,404 43,707,076 35,414,399
Income taxes (Note 8) 21,007,223 15,976,974 12,924,255
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 39,437,181 27,730,102 22,490,144
====================================================================================================================================
Net income per share $ .31 .21 .17
====================================================================================================================================
Weighted average shares outstanding 129,287,493 129,263,226 129,259,124
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
27
TOTAL SYSTEM SERVICES, INC.(SM) 1996 ANNUAL REPORT
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1996, 1995 and 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative
Additional Currency
Common Stock Paid-in Treasury Translation Retained
Shares Amount Capital Stock Adjustment Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1993 129,006,080 $12,900,608 478,248 (475,789) -- 89,375,104 $102,278,171
Common stock issued in
acquisitions 451,308 45,130 2,742,879 -- -- -- 2,788,009
Amortization of restricted
stock awards (Note 7) -- -- 618,019 -- -- -- 618,019
Cash dividends declared
($.040 per share) -- -- -- -- -- (5,170,505) (5,170,505)
Net income -- -- -- -- -- 22,490,144 22,490,144
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1994 129,457,388 12,945,738 3,839,146 (475,789) -- 106,694,743 123,003,838
Common stock issued
under restricted stock
awards (Note 7) 4,156 416 (416) -- -- -- --
Amortization of restricted
stock awards (Note 7) -- -- 607,025 -- -- -- 607,025
Increase in cumulative currency
translation adjustments -- -- -- -- (1,052,081) -- (1,052,081)
Cash dividends declared
($.045 per share) -- -- -- -- -- (5,816,863) (5,816,863)
Net income -- -- -- -- -- 27,730,102 27,730,102
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1995 129,461,544 12,946,154 4,445,755 (475,789) (1,052,081) 128,607,982 144,472,021
Common stock issued in
acquisitions 21,978 2,198 310,302 -- -- -- 312,500
Common stock issued
through exercise of
stock option -- -- 315 2,245 -- -- 2,560
Amortization of restricted
stock awards (Note 7) -- -- 582,267 -- -- -- 582,267
Increase in cumulative currency
translation adjustments -- -- -- -- (126,101) -- (126,101)
Cash dividends declared
($.045 per share) -- -- -- -- -- (5,818,014) (5,818,014)
Tax benefits associated
with stock awards -- -- 15,333 -- -- -- 15,333
Net income -- -- -- -- -- 39,437,181 39,437,181
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 129,483,522 $12,948,352 5,353,972 (473,544) (1,178,182) 162,227,149 $178,877,747
===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 39,437,181 27,730,102 22,490,144
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in (income) loss of joint ventures (7,093,600) (68,666) 12,612
Depreciation and amortization 23,106,775 20,285,123 16,389,812
Provision for doubtful accounts 94,500 458,606 (559,305)
Deferred income tax expense 1,600,583 963,384 2,823,772
(Gain) loss on disposal of equipment, net (31,576) 122,790 (64,539)
(Increase) in:
Accounts receivable (9,682,120) (13,970,497) (2,630,810)
Prepaid expenses and other assets (1,600,679) (94,883) (2,589,668)
Increase (decrease) in:
Accounts payable (1,115,364) 314,885 2,214,514
Accrued expenses and other liabilities 13,338,079 12,137,363 5,772,622
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 58,053,779 47,878,207 43,859,154
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (19,426,253) (16,977,970) (8,736,909)
Additions to computer software (9,195,856) (8,129,742) (13,763,844)
Proceeds from disposal of equipment 657,699 864,699 111,295
Purchases of businesses, net of cash and cash equivalents acquired -- -- 463,347
Investment in joint ventures (2,482,939) (3,455,865) (2,735,088)
Additions to contract acquisition costs (7,889,846) (9,954,881) (7,119,144)
Purchase of short-term investment (5,000,000) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (43,337,195) (37,653,759) (31,780,343)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt -- 1,965,775 --
Principal payments on long-term debt and capital lease obligations (254,954) (2,208,457) (1,342,144)
Dividends paid on common stock (5,817,756) (5,816,817) (4,843,399)
Proceeds from exercise of stock option 2,560 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,070,150) (6,059,499) (6,185,543)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 8,646,434 4,164,949 5,893,268
Cash and cash equivalents at beginning of period 18,849,623 14,684,674 8,791,406
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 27,496,057 18,849,623 14,684,674
====================================================================================================================================
Cash paid for interest $ 62,129 157,130 159,356
====================================================================================================================================
Cash paid for income taxes $ 22,890,244 16,244,194 9,094,595
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
29
TOTAL SYSTEM SERVICES, INC.(SM) 1996 ANNUAL REPORT
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 80.7%
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 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 Ventures: TSYS' 49% investment in Total System Services de
Mexico, S.A. de C.V. ("TSYS de Mexico"), a bankcard data processing operation
located in Mexico, is accounted for using the equity method of accounting, as is
TSYS' 50% investment in Vital Processing Services L.L.C. ("Vital"), a merchant
processing operation headquartered in Tempe, Arizona.
Property and Equipment: Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation expense is computed
using the straight-line method over the estimated useful lives of the assets.
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 computer software
maintenance costs which relate 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 life of 10
years or (2) the ratio of current revenues to current and anticipated revenues.
All other software development costs and costs of purchased computer software
are amortized using the greater of (1) the straight-line method over the
estimated useful 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 operating 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
Contract Acquisition Costs: The Company capitalizes certain contract acquisition
costs related to signing or renewing long-term contracts. These costs, which
primarily consist of cash payments for rights to provide processing services,
incremental internal conversion and software development costs, and third-party
software development costs, are amortized using the straight-line method over
the contract term beginning when the customer's cardholder accounts are
converted to the Company's processing system. The Company evaluates the carrying
value of contract acquisition costs for impairment on the basis of whether these
costs are fully recoverable from expected undiscounted operating 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 operating 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 is computed based on the taxable income of TSYS as a separate entity.
A consolidated federal income tax return is filed for Synovus and its majority
owned subsidiaries, including TSYS.
The Company accounts for income taxes in accordance with the 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 ventures is accounted for by the
equity method and pertains to privately held companies for which a fair value is
not readily available. The Company believes the fair values of its investment in
joint ventures exceed the carrying value.
31
TOTAL SYSTEM SERVICES, INC.(SM) 1996 ANNUAL REPORT
Foreign Currency Translation: Foreign currency financial statements of the
Company's Mexican joint venture 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 are accumulated in a separate section of shareholders' equity titled
Cumulative Currency Translation Adjustments.
Reclassifications: Certain reclassifications have been made to the 1995 and 1994
financial statements to conform to the presentation adopted in 1996.
NOTE 2 Relationship with Affiliated Companies
At December 31, 1996, CB&T owned 104,401,292 shares (approximately 80.7%) of
TSYS common stock.
TSYS has entered into agreements with CB&T and certain of its affiliates,
pursuant to which TSYS performs bankcard data processing services. Such bankcard
data processing service revenues were $1,809,847, $1,805,280 and $1,495,391
during the years ended December 31, 1996, 1995 and 1994, respectively.
Miscellaneous data processing services performed by TSYS for certain Synovus
nonbanking affiliates generated revenues of $128,411, $113,568 and $107,166
during the years ended December 31, 1996, 1995 and 1994, 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 $18,201,357 and $8,281,777 for the years ended December 31, 1996
and 1995, respectively. Bankcard data processing revenues related to Vital, the
Company's joint venture with Visa, were $4,755,406 for the year ended December
31, 1996. Revenues from other services provided by TSYS to Synovus and its
affiliates were $920,703, $718,281 and $614,333 during the years ended December
31, 1996, 1995 and 1994, 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 1996 or 1995.
In 1996, 1995 and 1994, TSYS received interest income from CB&T amounting
to $1,392,543, $837,356 and $384,070, respectively. Also, in 1995 and 1994, TSYS
paid CB&T interest expense of $78,318 and $60,193, respectively.
During 1996, 1995 and 1994, Synovus Data Corp. paid TSYS $303,554, $701,159
and $732,136, 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 $240,000 in 1996 and $214,650 in
1995 and 1994. Lease payments made to CB&T amounted to $53,790 in 1996, $54,313
in 1995 and $71,720 in 1994. Lease payments received from CB&T amounted to
$11,628 in 1996, $20,203 in 1995, and $30,716 in 1994.
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 $1,079,706, $1,039,693 and $915,215 for the years
ended December 31, 1996, 1995 and 1994, 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 Service Corp.
("SSC"), to provide human resource, payroll, security, maintenance and other
administrative services to TSYS and other affiliated companies. TSYS paid
SSC $8,583,648 and $3,158,695 for these services in 1996 and 1995,
respectively. TSYS received $107,449 and $198,578
32
in rent from SSC in 1996 and 1995, respectively. TSYS made lease payments to SSC
for $34,472 in 1996.
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 $25,136,569 and
$16,742,926 at December 31, 1996 and 1995, respectively.
TSYS also has a $5.0 million certificate of deposit with CB&T, which is
included in short-term investments.
Certain officers of TSYS participate in the Synovus 1994 Long-Term
Incentive Plan. These officers were granted restricted stock awards and
nonqualified options for Synovus common stock in 1996, 1995 and 1994 as follows:
- --------------------------------------------------------------------------------
Number of Shares
1996 1995 1994
- --------------------------------------------------------------------------------
Restricted stock awards ................. 35,349 25,683 18,326
Stock options ........................... 227,896 191,055 54,977
The restricted stock awards were valued at the price paid for the Synovus
shares which was $764,422, $389,526 and $210,743 in 1996, 1995 and 1994,
respectively, and are being amortized as compensation expense over the five-year
vesting period. The stock options were granted with an exercise price equal to
the fair market value of Synovus common stock at the date of grant. The options
vest and are exercisable over three years and expire eight years from date of
grant.
The Company believes the terms and conditions of transactions between TSYS,
CB&T, Synovus, SSC and other affiliated companies are comparable to those which
could have been obtained in transactions with unaffiliated parties.
NOTE 3 Property and Equipment
Property and equipment balances at December 31 are as follows:
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Land .......................................... $ 2,482,820 2,482,820
Buildings ..................................... 43,387,052 38,071,521
Computer equipment ............................ 42,024,097 38,122,588
Furniture and other equipment ................. 33,424,802 30,840,053
Construction in progress ...................... 78,361 --
- -------------------------------------------------------------------------------
121,397,132 109,516,982
Less accumulated depreciation
and amortization ...................... 58,441,206 54,944,079
- -------------------------------------------------------------------------------
Property and equipment, net ................... $ 62,955,926 54,572,903
===============================================================================
Depreciation and amortization of property and equipment was $10,478,116,
$9,768,665 and $9,802,873 for the years ended December 31, 1996, 1995 and 1994,
respectively.
NOTE 4 Computer Software
Computer software at December 31 is summarized as follows:
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
TS2 ........................................... $33,048,872 33,048,872
Other internally developed
software including TS2
enhancements ............................ 5,523,804 5,346,071
Purchased computer software.................... 25,864,700 17,137,936
- -------------------------------------------------------------------------------
64,437,376 55,532,879
Less accumulated amortization ................ 24,716,892 16,317,318
- -------------------------------------------------------------------------------
Computer software, net........................ $39,720,484 39,215,561
===============================================================================
Capitalized software development costs for the years ended December 31,
1996, 1995 and 1994, were $177,732, $2,617,445 and $10,623,828, respectively.
Amortization expense related to purchased computer software costs was
$4,146,670, $3,350,507 and $2,300,386 for the years ended December 31, 1996,
1995 and 1994, respectively. Amortization of developed software was $4,483,193,
$4,007,037 and $1,369,062 for the years ended December 31, 1996, 1995 and 1994,
respectively.
NOTE 5 Investment in Joint Ventures
In 1994, the Company acquired a 49% equity interest in Total System de Mexico, a
joint venture which processes
33
TOTAL SYSTEM SERVICES, INC.(SM) 1996 ANNUAL REPORT
cardholder and merchant accounts for 20 banks in Mexico. Effective May 1, 1996,
Vital began operations. Vital, a 50/50 joint venture with Visa U.S.A., combined
the front-end authorization and back-end accounting and settlement processing of
merchants. The unaudited condensed financial statement information for the
combined joint ventures as of December 31, 1996, and for the year then ended is
as follows:
- --------------------------------------------------------------------------------
Balance Sheet Data:
Current assets ................................... $ 29,292,567
Total assets ..................................... 41,312,690
Liabilities (all current) ....................... 10,187,539
Statement of Income Data:
Revenues .......................................... 95,625,643
Operating income ................................. 15,201,419
Income before income taxes........................ 16,162,670
Net income* ....................................... 14,292,665
Equity in income of joint ventures ................ 7,093,600
*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.
The Company had contributed cash and other assets totaling approximately
$10.1 million to the two joint ventures as of December 31, 1996.
NOTE 6 Long-Term Debt and
Obligations Under Capital Leases
Long-term debt and obligations under capital leases at December 31 consist of
the following:
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
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 $299,398 ................ $ 359,269 582,949
Note payable with an interest rate
of 9.23%, maturing in 2003 ................... 316,518 347,792
- -------------------------------------------------------------------------------
Total long-term debt and obligations
under capital leases ......................... 675,787 930,741
Less current portion ........................... 201,274 243,786
- -------------------------------------------------------------------------------
Noncurrent portion of long-
term debt and obligations
under capital leases ......................... $ 474,513 686,955
===============================================================================
NOTE 7 Shareholders' Equity
Stock Split: In April 1996, a two-for-one common stock split was effected in the
form of a 100% stock dividend. All share and shareholders' equity amounts
included herein have been restated to reflect the split for all periods
presented. Prior to the split, TSYS' charter was amended to increase authorized
shares from 100 million to 300 million.
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 $456,619, $529,982 and $618,019 for the years ended
December 31, 1996, 1995 and 1994, respectively, and unamortized compensation at
December 31, 1996, was $531,566. 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 435,200 $1,332,800 60 months
February 24, 1992 524,000 1,801,250 72 months
November 6, 1995 4,156 46,495 36 months
34
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. As of December 31, 1996,
446,544 shares of the Company's common stock remained available for distribution
under the terms of the LTI Plan. During 1994, the Company awarded compensatory
options to acquire 199,300 shares of common stock to certain key employees. All
options granted were nonqualified compensatory stock options with an exercise
price of $3 per share and are exercisable beginning in June 1997 and expiring in
June 2002. The Company is recording compensation expense of $375,781 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, 1996, options to acquire 189,000
shares remained outstanding after cancellations with none of these options
exercisable.
NOTE 8 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.
The components of income tax expense included in the Consolidated
Statements of Income are as follows:
- --------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Current income tax
expense:
Federal ............. $17,710,103 13,522,207 9,550,558
State ............... 1,696,537 1,491,383 549,925
- --------------------------------------------------------------------------------
Total current income
tax expense ......... 19,406,640 15,013,590 10,100,483
- --------------------------------------------------------------------------------
Deferred income tax
expense:
Federal ............. 1,470,806 885,272 2,247,759
State ............... 129,777 78,112 576,013
- --------------------------------------------------------------------------------
Total deferred income
tax expense ......... 1,600,583 963,384 2,823,772
- --------------------------------------------------------------------------------
Total income tax
expense ............. $21,007,223 15,976,974 12,924,255
================================================================================
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, 1996 1995 1994
- --------------------------------------------------------------------------------
Computed "expected"
income tax
expense ................. $ 21,155,541 15,273,444 12,395,040
Increase (decrease) in
income tax expense
resulting from:
State income tax
expense, net
of federal income
tax benefit ..... 1,187,104 1,020,172 731,860
Other, net ...... (1,335,422) (316,642) (202,645)
- -------------------------------------------------------------------------------
Total income tax
expense ................. $ 21,007,223 15,976,974 12,924,255
===============================================================================
35
TOTAL SYSTEM SERVICES, INC.(sm) 1996 ANNUAL REPORT
The tax effects of the significant components of deferred income tax assets and
liabilities are presented in the following table:
- --------------------------------------------------------------------------------
Years Ended December 31, 1996 1995
- --------------------------------------------------------------------------------
Deferred income tax assets:
Primarily accruals not
deductible until paid ............ $ 4,556,046 5,314,057
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Computer software
development costs ................ (16,617,264) (17,927,787)
Other, net ....................... (3,240,260) (1,087,165)
- --------------------------------------------------------------------------------
Total deferred income
tax liability .................... (19,857,524) (19,014,952)
- --------------------------------------------------------------------------------
Net deferred income
tax liability .................... $(15,301,478) (13,700,895)
================================================================================
NOTE 9 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) 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:
- --------------------------------------------------------------------------------
1996 ..................... $5,270,884
1995 ..................... 4,429,998
1994 ..................... 4,947,261
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 contributions to the plan charged to expense are as
follows:
- --------------------------------------------------------------------------------
1996 ............................ $ 3,925,699
1995 ............................ 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 contributions to the plan charged to expense are as follows:
- --------------------------------------------------------------------------------
1996 ........................... $ 3,976,544
1995 ........................... 1,601,939
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:
- --------------------------------------------------------------------------------
1996 ........................... $ 1,226,340
1995 ........................... 962,829
1994 ........................... 692,208
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 was $623,788.
36
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.
NOTE 10 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. 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,
1996, are as follows:
- --------------------------------------------------------------------------------
1997 ................. $26,377,431
1998 ................. 20,496,750
1999 ................. 15,219,022
2000 ................. 9,246,338
2001 ................. 1,027,191
- -------------------------------------------------------------------------------
$72,366,732
===============================================================================
Total rental expense under all operating leases in 1996, 1995 and 1994 was
$45,990,637, $34,862,784 and $26,408,605, 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 11 Supplementary Balance Sheet Information Significant components of other
assets are summarized as follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Contract acquisition costs, net .............. $19,645,910 17,628,448
Investment in joint ventures, net .............. 15,347,876 4,506,686
NOTE 12 Major Customers
For the years ended December 31, 1996, 1995 and 1994, two customers accounted
for approximately 29%, 34%, and 36% of total revenues, respectively.
37
TOTAL SYSTEM SERVICES, INC.(SM) 1996 ANNUAL REPORT
Report of Independent Auditors
KPMG Peat Marwick LLP 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, 1996 and 1995, 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, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Total System
Services, Inc. and subsidiaries at December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
January 22, 1997
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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 20, 1996,
there were 6,484 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 9, 1996, and was paid
January 2, 1997, to shareholders of record on December 20, 1996. Total dividends
declared in 1996 and 1995 amounted to $5.8 million. 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, 1996 and 1995.
Revenues Net Income
(Millions of Dollars) (Millions of Dollars)
1996 1995 1996 1995
Quarter 4 $85.9 $71.1 Quarter 4 $14.2 $ 9.5
Quarter 3 $80.2 $66.1 Quarter 3 $11.3 $ 7.4
Quarter 2 $74.5 $59.1 Quarter 2 $ 7.9 $ 6.0
Quarter 1 $71.1 $53.4 Quarter 1 $ 6.0 $ 4.8
First Second Third Fourth
(in thousands except per share data) Quarter Quarter Quarter Quarter
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1996 Revenues ...................... $71,102 74,489 80,179 85,878
Operating income ................. 8,579 11,654 17,269 21,495
Net income ....................... 5,969 7,900 11,347 14,221
Net income per share ............. .05 .06 .09 .11
Cash dividends declared per share. .011 .011 .012 .011
Stock prices:
High............................ 21 27 3/8 26 1/4 29 3/4
Low ............................ 11 1/2 20 20 1/2 25 3/8
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1995 Revenues ...................... $53,380 59,134 66,108 71,086
Operating income ................. 7,562 9,558 11,075 14,796
Net income ....................... 4,784 6,013 7,390 9,543
Net income per share ............. .04 .05 .06 .07
Cash dividends declared per share. .011 .011 .012 .011
Stock prices:
High............................ 9 1/8 8 5/8 12 1/8 15 7/8
Low............................. 8 1/8 6 3/4 7 3/8 10 5/8
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