SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 2002 or
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from to .
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Commission file number 1-10254
TOTAL SYSTEM SERVICES, INC.
(Exact Name of Registrant as specified in its charter)
Georgia 58-1493818
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1600 First Avenue
Columbus, Georgia 31901
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (706) 649-2204
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.10 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO___________
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).
YES X NO___________
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As of February 17, 2003, 197,049,470 shares of the $.10 par value
common stock of Total System Services, Inc. were outstanding. The aggregate
market value of the shares of $.10 par value common stock of Total System
Services, Inc. held by nonaffiliates on December 31, 2002 was approximately
$505,364,000 (based upon the closing price of such stock on June 28, 2002).
Portions of Registrant's Proxy Statement, including Financial Appendix,
dated March 12, 2003 are incorporated in Parts I, II, III and IV of this report.
Registrant's Documents Incorporated by Reference
Part Number and Item
Document Incorporated Number of Form 10-K
by Reference Into Which Incorporated
- --------------------- -----------------------
Pages F-3 through F-19, F-24 through Part I, Item 1, Business
F-29, pages F-31and F-32, and F-37 through
F-41 of the Financial Appendix to Registrant's
Proxy Statement in connection with its
Annual Shareholders' Meeting to be
held on April 17, 2003
Pages F-12 and F-13, F-24 through Part I, Item 2, Properties
F-29, F-31 and F-32, and
F-37 and F-38 of the Financial
Appendix to Registrant's Proxy Statement
in connection with its Annual Shareholders'
Meeting to be held on April 17, 2003
Pages F-37 and F-38 of the Financial Appendix Part I, Item 3, Legal
to Registrant's Proxy Statement Proceedings
in connection with its Annual Shareholders'
Meeting to be held on April 17, 2003
Page F-44 of the Financial Appendix Part II, Item 5, Market
to Registrant's Proxy Statement in for Registrant's Common
connection with its Annual Shareholders' Equity and Related Stockholder
Meeting to be held on April 17, 2003 Matters
Page F-2 of the Financial Appendix Part II, Item 6, Selected
to Registrant's Proxy Statement Financial Data
in connection with its Annual Shareholders'
Meeting to be held on April 17, 2003
Pages F-3 through F-19 of the Part II, Item 7, Management's
Financial Appendix to Registrant's Discussion and Analysis of
Proxy Statement in connection with its Financial Condition and
Annual Shareholders' Meeting to be held Results of Operations
on April 17, 2003
Pages F-20 through F-42, and F-44 Part II, Item 8, Financial
of the Financial Appendix to Registrant's Statements and Supplementary
Proxy Statement in connection with its Data
Annual Shareholders' Meeting to be held
on April 17, 2003
Pages 3 and 4, 7, and 20 Part III, Item 10,
of Registrant's Proxy Statement in Directors and Executive
connection with its Annual Officers of the Registrant
Shareholders' Meeting to be held
on April 17, 2003
Page 7, pages 10 through 12, and 16 Part III, Item 11,
of Registrant's Proxy Statement Executive Compensation
in connection with its Annual
Shareholders' Meeting to be held
on April 17, 2003
Pages 8 and 9, and 17 and 18 of Part III, Item 12, Security
Registrant's Proxy Statement in connection Ownership of Certain
with its Annual Shareholders' Beneficial Owners and
Meeting to be held on April 17, 2003 Management and Related
Stockholder Matters
Pages 16 through 19 Part III, Item 13,
of Registrant's Proxy Statement and Certain Relationships
pages F-29 through F-31of the Financial and Related Transactions
Appendix to Registrant's Proxy
Statement in connection with its
Annual Shareholders' Meeting to be
held on April 17, 2003
Pages F-20 through F-42 of the Financial Part IV, Item 15, Exhibits,
Appendix to Registrant's Proxy Statement Financial Statement
in connection with its Annual Shareholders' Schedules and Reports
Meeting to be held on April 17, 2003 on Form 8-K
Cross Reference Sheet
Item No. Caption Page No.
Part I
Safe Harbor Statement 1
1. Business 2
2. Properties 5
3. Legal Proceedings 6
4. Submission of Matters to a Vote of 6
Security Holders
Part II
5. Market for Registrant's Common Equity 6
and Related Stockholder Matters
6. Selected Financial Data 7
7. Management's Discussion and Analysis 7
of Financial Condition and Results
of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk 7
8. Financial Statements and Supplementary 8
Data
9. Changes In and Disagreements With Accountants 9
on Accounting and Financial Disclosure
Part III
10. Directors and Executive Officers of 9
the Registrant
11. Executive Compensation 9
12. Security Ownership of Certain 9
Beneficial Owners and Management
and Related Stockholder Matters
13. Certain Relationships and Related 9
Transactions
14. Controls and Procedures 10
Part IV
15. Exhibits, Financial Statement Schedules, 10
and Reports on Form 8-K
PART I
Safe Harbor Statement
Certain statements contained in this document which are not statements
of historical fact constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act (the "Act"). In addition, certain
statements in future filings by Total System Services, Inc. ("TSYS") with the
Securities and Exchange Commission, in press releases, and in oral and written
statements made by or with the approval of TSYS which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Act. Examples of forward-looking statements include, but are not limited to: (i)
projections of revenues, income or loss, earnings or loss per share, the payment
or non-payment of dividends, capital structure and other financial items; (ii)
statements of plans and objectives of TSYS or its management or Board of
Directors, including those relating to products, services or conversions; (iii)
statements of future economic performance; and (iv) statements of assumptions
underlying such statements. Words such as "believes," "anticipates," "expects,"
"intends," "targeted," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying these
statements.
Prospective investors are cautioned that forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those contemplated by the
forward-looking statements. A number of important factors could cause actual
results to differ materially from those contemplated by the forward-looking
statements. Many of these factors are beyond TSYS' ability to control or
predict. These factors include, but are not limited to:
* lower than anticipated internal growth rates for TSYS' existing
clients;
* TSYS' inability to control expenses and increase market share;
* TSYS' inability to successfully bring new products to market,
including, but not limited to, stored value and e-commerce
products, loan processing products and other processing services;
* the inability of TSYS to grow its business through acquisitions or
successfully integrate acquisitions;
* TSYS' inability to increase the revenues derived from international
sources;
* adverse developments with respect to entering into contracts with
new clients and retaining current clients;
* the merger of TSYS clients with entities that are not TSYS clients
or the sale of portfolios by TSYS clients to entities that are not
TSYS clients;
* TSYS' inability to anticipate and respond to technological changes,
particularly with respect to e-commerce;
* adverse developments with respect to TSYS' sub-prime and/or retail
clients;
* adverse developments with respect to the successful conversion of
clients;
* the absence of significant changes in foreign exchange spreads
between the United States and the countries in which TSYS transacts
business, to include Mexico, United Kingdom, Japan, Canada and the
European Union;
1
* changes in consumer spending, borrowing and saving habits, including
a shift from credit to debit cards;
* changes in laws, regulations, credit card association rules or other
industry standards affecting TSYS' business which require significant
product redevelopment efforts;
* the effect of changes in accounting policies and practices as may
be adopted by the Financial Accounting Standards Board or the
Securities and Exchange Commission;
* the costs and effects of litigation;
* adverse developments with respect to the credit card industry in
general;
* TSYS' inability to successfully manage any impact from slowing
economic conditions or consumer spending;
* the occurrence of catastrophic events that would impact TSYS' or
its major customers' operating facilities, communications systems
and technology, or that have a material negative impact on current
economic conditions or levels;
* successfully managing the potential both for patent protection and
patent liability in the context of rapidly developing legal
framework for expansive software patent protection;
* decreases in card activity;
* hostilities in the Middle East or
elsewhere;
* Vital's earnings are lower than anticipated; and
* overall market conditions.
These forward-looking statements speak only as of the date on which the
statements are made, and TSYS undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which the statement is made to reflect the occurrence of unanticipated events.
Item 1. Business
Business. Established in 1983 as an outgrowth of an on-line accounting
and bankcard data processing system developed for Columbus Bank and Trust
Company, TSYS is now one of the world's largest electronic payment processors of
consumer credit, debit, commercial, stored value and retail cards. Based in
Columbus, Georgia, and traded on the New York Stock Exchange under the symbol
"TSS," TSYS provides the electronic link between buyers and sellers with a
comprehensive on-line system of data processing services servicing financial and
nonfinancial institutions throughout the United States, Canada, Mexico,
Honduras, the Caribbean and Europe, representing more than 245 million
cardholder accounts on file as of December 31, 2002. TSYS currently offers
merchant services to financial institutions and other organizations in Japan
through its majority owned subsidiary, GP Network Corporation, and in the United
States through its joint venture, Vital Processing Services L.L.C. TSYS also
offers value added products and services to support its core processing
services. Value added products and services include: risk management tools and
techniques, such as credit evaluation, fraud detection and prevention and
behavior analysis tools; and revenue enhancement tools, such as loyalty programs
and bonus rewards. Synovus Financial Corp., a $19 billion asset, diverse
financial services company, owns 81 percent of TSYS.
2
As of January 1, 2003, TSYS had five wholly owned subsidiaries: (1)
Columbus Depot Equipment Company, which sells and leases computer related
equipment associated with TSYS' transaction processing services; (2) Columbus
Productions, Inc., which provides full-service commercial printing and related
services; (3) TSYS Canada, Inc., which provides programming support and
assistance with the conversion of card portfolios to TS2; (4) TSYS Total Debt
Management, Inc., which provides debt collection and bankruptcy management
services; and (5) ProCard, Inc., which provides software and Internet tools
designed to assist organizations with the management of purchasing, travel and
fleet card programs.
TSYS also holds: (1) a 49% equity interest in a joint venture company
named Total System Services de Mexico, S.A. de C.V., which provides credit card
related services to financial and nonfinancial Mexican institutions; (2) a 50%
interest in Vital Processing Services L.L.C., a joint venture with Visa U.S.A.
Inc., that offers fully integrated merchant transaction and related electronic
transaction processing services to financial and nonfinancial institutions and
their merchant customers; and (3) a 51.46% equity interest in GP Network
Corporation, a company which provides merchant processing services to financial
institutions and retailers in Japan.
The services provided by TSYS are divided into two operating segments,
domestic-based processing services, which accounted for 93% of TSYS' revenues in
2002, and international-based processing services, which accounted for 7% of
TSYS' revenues in 2002. TSYS does not believe that it is subject to any material
risks with respect to its international operations other than foreign exchange
risk as described in Part II, Item 7A under the caption "Quantitative and
Qualitative Disclosures About Market Risk."
Seasonality. 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.
Intellectual Property. TSYS' intellectual property portfolio is a
component of our ability to be a leading electronic payment services provider.
We diligently protect and work to build our intellectual property rights through
patent, servicemark and trade secret laws. We also use various licensed
intellectual property to conduct our business. In addition to using our
intellectual property in our own operations, we grant licenses to certain of our
clients to use our intellectual property.
Major Customers. A significant amount of TSYS' revenues are derived
from long-term contracts with significant customers, including certain major
customers. For the year ended December 31, 2002, Bank of America Corporation and
Providian Financial Corporation accounted for approximately 19% and 13%,
respectively, of TSYS' total revenues. As a result, the loss of Bank of America
Corporation or Providian Financial Corporation, or other major or significant
customers, could have a material adverse effect on TSYS' financial position,
results of operations and cash flows.
3
Competition. TSYS encounters vigorous competition in providing card
processing services from several different sources. Most of the national market
in third party card processors is presently being provided by approximately four
vendors. TSYS believes that as of December 31, 2002 it is the second largest
third party card processor in the United States. In addition, TSYS competes with
in-house processors and software vendors which provide their products to
institutions which process in-house. TSYS is presently encountering, and in the
future anticipates continuing to encounter, substantial competition from card
associations, data processing and bankcard computer service firms and other such
third party vendors located throughout the United States. Based upon available
market share data, TSYS believes that at the end of 2002 it held a 21% share of
the domestic Visa and MasterCard consumer card processing market, an 86% share
of the Visa and MasterCard domestic commercial card processing market, an 18%
share of the domestic retail card processing market and a 4% share of the
domestic off-line debit processing market. In addition to processing cards for
United States clients, TSYS also believes it holds an approximately 25% share of
the Mexican credit card processing market, an approximately 33% share of the
Canadian credit card processing market and an approximately 21% share of the
United Kingdom credit card processing market. TSYS believes that as of December
31, 2002 it is the world's largest third party processor of international
accounts.
TSYS' major competitor in the card processing industry is First Data
Resources, Inc., a wholly owned subsidiary of First Data Corporation, which
provides card processing services, including authorization and data entry
services. The principal methods of competition between TSYS and First Data
Resources are price, quality, features and functionality and reliability of
service. Certain other subsidiaries of First Data Corporation also compete with
TSYS. In addition, there are a number of other companies which have the
necessary financial resources and the technological ability to develop or
acquire products and, in the future, to provide services similar to those being
offered by TSYS.
Regulation and Examination. TSYS is subject to being examined, and is
indirectly regulated, by the Office of the Comptroller of the Currency, the
Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of
Thrift Supervision, the National Credit Union Administration, and the various
state financial regulatory agencies which supervise and regulate the financial
institutions for which TSYS provides electronic payment processing services.
Matters reviewed and examined by these federal and state financial institution
regulatory agencies have included TSYS' internal controls in connection with its
present performance of electronic payment processing services, and the
agreements pursuant to which TSYS provides such services.
As the Federal Reserve Bank of Atlanta has approved Synovus' indirect
ownership of TSYS through Columbus Bank and Trust Company, TSYS is subject to
direct regulation by the Federal Reserve Board. TSYS was formed with the prior
written approval of, and is subject to regulation and examination by, the
Department of Banking and Finance of the State of Georgia as a subsidiary of
Columbus Bank and Trust Company. In addition, as TSYS and its subsidiaries
operate as subsidiaries of Columbus Bank and Trust Company, they are subject to
regulation by the Federal Deposit Insurance Corporation.
4
Employees. As of December 31, 2002, TSYS had 5,121 full-time employees.
Website Access. TSYS' website address is www.tsys.com. You may obtain
free electronic copies of our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports at
the investor relations section of our website under the heading "Financials" and
then under "SEC Filings." These reports are available on our website as soon as
reasonably practicable after we electronically file them with the SEC.
See the "Financial Review" Section on pages F-3 through F-19 and Note
1, Note 4, Note 9, Note 11 and Note 12 of Notes to Consolidated Financial
Statements on pages F-24 through F-29, pages F-31 and F-32, and pages F-37
through F-41 of the Financial Appendix to TSYS' Proxy Statement in connection
with its Annual Shareholders' Meeting to be held on April 17, 2003 which are
specifically incorporated herein by reference.
Item 2. Properties
TSYS owns a 377,000 square foot production center and a 72,000 square
foot production center which are located on a 40.4 acre tract of land in north
Columbus, Georgia. Primarily production centers, these facilities house TSYS'
primary data processing computer operations, statement preparation, mail
handling, microfiche production, purchasing and card production, as well as
other related operations.
TSYS owns a 110,000 square foot building on a 23-acre site in Columbus,
Georgia, which accommodates current and future office space needs, 82,500 square
feet of which houses TSYS' Business Process Management Division. TSYS also owns
a 104,000 square foot building on an 18-acre site in Columbus which functions as
a second data center.
TSYS entered into an operating lease for the purpose of financing its
540,000 square foot campus-type facility on approximately 46 acres of land in
downtown Columbus, Georgia, which lease was renewed for a period of up to twelve
months in November 2002. The campus facility serves as TSYS' corporate
headquarters and houses administrative, client contact and programming team
members. The campus facility consolidated most of TSYS' multiple Columbus
locations.
Columbus Productions, Inc. owns a 61,000 square foot production
facility, located in Columbus, Georgia.
TSYS owns a 40,000 square foot building in York, England, 23,000 square
feet of which are occupied by TSYS, which houses client service and
administrative personnel for TSYS Europe. TSYS Europe is included in the segment
international-based processing services.
All of the properties listed above are utilized by TSYS for
domestic-based processing services with the one exception noted above with
respect to the space occupied by TSYS Europe.
5
All properties owned and leased by TSYS are in good repair and suitable
condition for the purposes for which they are used. In addition to its real
property, TSYS owns and/or leases a substantial amount of computer equipment.
See Note 1, Note 3, Note 4 and Note 9 of Notes to Consolidated
Financial Statements on pages F-24 through F-29, pages F-31 and F-32, and pages
F-37 and F-38 and "Operating Expenses" under the "Financial Review" Section on
pages F-12 and F-13 of the Financial Appendix to TSYS' Proxy Statement which are
specifically incorporated herein by reference.
Item 3. Legal Proceedings
See Note 9 of Notes to Consolidated Financial Statements on pages F-37
and F-38 of the Financial Appendix to TSYS' Proxy Statement which is
specifically incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The "Quarterly Financial Data, Stock Price, Dividend Information
Section" which is set forth on page F-44 of the Financial Appendix to TSYS'
Proxy Statement is specifically incorporated herein by reference.
Equity Compensation Plans. The following table summarizes TSYS' equity
compensation plans by category.
(a) (b) (c)
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under equity
Plan exercise of outstanding outstanding options, compensation plans (excluding
Category options, warrants and warrants and rights securities reflected in column
rights (a))
- -----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 1,915,816 $ 14.67 8,950,733
Equity compensation plans not
approved by security holders37,500 18.50 --
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Total 1,953,316 $ 14.74 8,950,733
- ----------------------------------------------------------------------------------------------------------------------
This plan was adopted by TSYS' board of directors on January 10, 1997
to attract a desirable individual as a director of the company and is
limited to one individual option grant to purchase 37,500 shares of TSYS
stock at fair market value on the date of grant with one-third of such
options becoming exercisable one, two and three years, respectively,
following the date of grant.
6
Item 6. Selected Financial Data
The "Selected Financial Data" Section which is set forth on page F-2 of
the Financial Appendix to TSYS' Proxy Statement is specifically incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The "Financial Review" Section which is set forth on pages F-3 through
F-19 of the Financial Appendix to TSYS' Proxy Statement which includes the
information encompassed within "Management's Discussion and Analysis of
Financial Condition and Results of Operations," is specifically incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Risk. TSYS is exposed to foreign exchange risk because
it has revenues and expenses denominated in foreign currencies including Euro,
British Pound, Mexican Peso, Canadian Dollar and Japanese Yen. These currencies
are translated into U.S. dollars at current exchange rates, except for revenues,
costs and expenses, and net income, which are translated at the average exchange
rate for each reporting period. Net exchange gains or losses resulting from the
translation of assets and liabilities of TSYS' foreign operations, net of tax,
are accumulated in a separate section of shareholders' equity titled accumulated
other comprehensive loss. The amount of other comprehensive income for the year
ended December 31, 2002 was $4,508,235. The amount of other comprehensive loss
for the years ended December 31, 2001 and 2000 was $1,841,657 and $159,973,
respectively. Currently, TSYS does not use financial instruments to hedge its
exposure to exchange rate changes.
The carrying value of the assets of its foreign operations in Europe,
Mexico, Canada and Japan was approximately (in U.S. dollars) $71.7 million, $3.4
million, $15,000 and $7.6 million, respectively, at December 31, 2002.
Interest Rate Risk. TSYS is also exposed to interest rate risk associated
with the investing of available cash and the lease on its campus facilities.
TSYS invests available cash in conservative short-term instruments and is
primarily subject to changes in the prime rate.
The payments under the operating lease arrangement of the campus
facilities are tied to the London Interbank Offered Rate ("LIBOR"). TSYS locks
into interest rates for six-month intervals. The extent that rates change in a
six-month period represents TSYS' exposure. The following represents the
potential effect on operating income of hypothetical shifts in the LIBOR of plus
or minus 50 basis points, 100 basis points and 150 points over a 12-month
period.
7
--------------------------------------------------------------------------------
Effect of Basis Point Change
--------------------------------------------------------------------------------
Increase in basis point of Decrease in basis point of
-------------- ------------- -------------- ----------- ------------ -----------
+ 50 + 100 + 150 + 50 + 100 + 150
-------------- ------------- -------------- ----------- ------------ -----------
Effect on operating income $ (147,000) (295,000) (442,000) 147,000 295,000 442,000
-------------- ------------- -------------- ----------- ------------ -----------
TSYS renewed the lease in November 2002 for a period of up to 12 months.
However, TSYS has the option to either renew the lease subject to prevailing
market rates or purchase the property at the original cost of the property. As
such, TSYS could have a future interest rate risk associated with a future
obligation with respect to the corporate campus. TSYS can withdraw from the
lease agreement by providing 60-days written notice.
Concentration of credit risk. TSYS works to maintain a large and diverse
customer base across various industries to minimize the credit risk of any one
customer to TSYS' accounts receivable amounts. In addition, TSYS performs
ongoing credit evaluations of its customers' and suppliers' financial condition.
Concentration of client base. A significant amount of TSYS' revenues is
derived from long-term contracts with large clients, including certain major
customers. Processing contracts with large clients, representing a significant
portion of TSYS' total revenues, generally provide for discounts on certain
services based on the size and activity of clients' portfolios. Therefore,
electronic payment processing revenues and the related margins are influenced by
the client mix relative to the size of client card portfolios, as well as the
number and activity of individual cardholder accounts processed for each client.
Consolidation among financial institutions has resulted in an increasingly
concentrated client base, which results in a changing client mix toward larger
clients.
TSYS does have two major customers that account for a large portion of
its revenues, which subjects it to credit risk. See Note 11 of Notes to
Consolidated Financial Statements on pages F-38 through F-40 of the Financial
Appendix to TSYS' Proxy Statement which is specifically incorporated herein by
reference for a description of major customers. In addition to its two major
customers, TSYS has other large clients representing a significant portion of
its total revenues. The loss of any one of TSYS' large clients could have a
material adverse effect on its financial position, results of operations and
cash flows.
Item 8. Financial Statements and Supplementary Data
The "Quarterly Financial Data, Stock Price, Dividend Information"
Section, which is set forth on page F-44, and the "Consolidated Balance Sheets,
Consolidated Statements of Income, Consolidated Statements of Cash Flows,
Consolidated Statements of Shareholders' Equity and Comprehensive Income, Notes
to Consolidated Financial Statements and Report of Independent Auditors"
Sections, which are set forth on pages F-20 through F-42 of the Financial
Appendix to
8
TSYS' Proxy Statement are specifically incorporated herein by
reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The "ELECTION OF DIRECTORS" Section which is set forth on pages 3 and
4, the "EXECUTIVE OFFICERS" Section which is set forth on page 7, and the
"SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" Section which is set
forth on page 20 of TSYS' Proxy Statement are specifically incorporated herein
by reference.
Item 11. Executive Compensation
The "DIRECTORS' COMPENSATION" Section which is set forth on page 7, the
"EXECUTIVE COMPENSATION - Summary Compensation Table; Stock Option Exercises and
Grants; and Change in Control Arrangements" Sections which are set forth on
pages 10 through 12, and the "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION" Section which is set forth on page 16 of TSYS' Proxy Statement
are specifically incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information set forth in Part II, Item 5 of this Form 10-K under
the caption "Equity Compensation Plans" is hereby incorporated by reference in
response to this item.
The "STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS" Section which
is set forth on pages 8 and 9, the "RELATIONSHIPS BETWEEN TSYS, SYNOVUS, CB&T
AND CERTAIN OF SYNOVUS' SUBSIDIARIES - Beneficial Ownership of TSYS Stock by
CB&T" Section which is set forth on page 17, and the "RELATIONSHIPS BETWEEN
TSYS, SYNOVUS, CB&T AND CERTAIN OF SYNOVUS' SUBSIDIARIES - Synovus Stock
Ownership of Directors and Management" Section which is set forth on pages 17
and 18 of TSYS' Proxy Statement are specifically incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The "TRANSACTIONS WITH MANAGEMENT" Section which is set forth on page
16, the "RELATIONSHIPS BETWEEN TSYS, SYNOVUS, CB&T AND CERTAIN OF SYNOVUS'
SUBSIDIARIES - Beneficial Ownership of TSYS Stock by CB&T" Section which is set
forth on page 17, the "RELATIONSHIPS BETWEEN TSYS, SYNOVUS, CB&T AND
9
CERTAIN OF SYNOVUS' SUBSIDIARIES - Interlocking Directorates of TSYS, Synovus
and CB&T" Section which is set forth on page 17, and the "RELATIONSHIPS BETWEEN
TSYS, SYNOVUS, CB&T, AND CERTAIN OF SYNOVUS' SUBSIDIARIES - Electronic Payment
Processing Services Provided to CB&T and Certain of Synovus' Subsidiaries; Other
Agreements Between TSYS, Synovus, CB&T and Certain of Synovus' Subsidiaries"
Section which is set forth on pages 18 and 19 of TSYS' Proxy Statement are
specifically incorporated herein by reference.
See also Note 2 of Notes to Consolidated Financial Statements on pages
F-29 through F-31 of the Financial Appendix to TSYS' Proxy Statement which is
specifically incorporated herein by reference.
Item 14. Controls and Procedures
We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures within 90 days of the filing date of this
annual report. This evaluation was carried out under the supervision and with
the participation of our management, including our chief executive officer and
chief financial officer. Based on this evaluation, the chief executive officer
and chief financial officer have concluded that the design and operation of our
disclosure controls and procedures are effective in all material respects,
including those to ensure that information required to be disclosed in reports
filed or submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and is accumulated and communicated to management,
including the chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure. There were
no significant changes to our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following Consolidated Financial Statements of TSYS are
specifically incorporated by reference from pages F-20 through F-42 of the
Financial Appendix to TSYS' Proxy Statement to Item 8, Part II, Financial
Statements and Supplementary Data.
Consolidated Balance Sheets - December 31, 2002 and 2001.
Consolidated Statements of Income - Years Ended December 31,
2002, 2001 and 2000.
Consolidated Statements of Cash Flows - Years Ended December
31, 2002, 2001 and 2000.
10
Consolidated Statements of Shareholders' Equity and
Comprehensive Income - Years Ended December 31, 2002, 2001 and
2000.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
2. Index to Financial Statement Schedules
The following report of independent auditors and consolidated
financial statement schedule of Total System Services, Inc. are included:
Report of Independent Auditors.
Schedule II - Valuation and Qualifying Accounts - Years Ended
December 31, 2002, 2001 and 2000.
All other schedules are omitted because they are inapplicable
or the required information is included in the Notes to Consolidated Financial
Statements.
3. Exhibits
Exhibit
Number Description
------- -----------
3.1 Articles of Incorporation of Total System Services,
Inc. ("TSYS"), as amended, incorporated by reference
to Exhibit 4.1 of TSYS' Registration Statement on
Form S-8 filed with the Commission on April 18, 1997
(File No. 333-25401).
3.2 Bylaws of TSYS, as amended.
10. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.1 Director Stock Purchase Plan of TSYS,
incorporated by reference to Exhibit 10.1 of
TSYS' Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, as
filed with the Commission on March 16, 2000.
10.2 Total System Services, Inc. 2002 Long-Term Incentive
Plan, incorporated by reference to Exhibit 10.2 of
TSYS' Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed with the Commission
on March 19, 2002.
10.3 Synovus Financial Corp. 2002 Long-Term Incentive Plan
in which
11
executive officers of TSYS participate,
incorporated by reference to Exhibit 10.3 of TSYS'
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001, as filed with the Commission on
March 19, 2002.
10.4 Synovus Financial Corp./Total System Services, Inc.
Deferred Compensation Plan, incorporated by reference
to Exhibit 10.4 of TSYS' Annual Report on Form 10-K
for the fiscal year ended December 31, 2001, as filed
with the Commission on March 19, 2002.
10.5 Total System Services, Inc. 1992 Long-Term Incentive
Plan, which was renamed the Total System Services,
Inc. 2000 Long-Term Incentive Plan, incorporated by
reference to Exhibit 10.5 of TSYS' Annual Report on
Form 10-K for the fiscal year ended December 31,
1992, as filed with the Commission on March 18, 1993.
10.6 Total System Services, Inc. Directors'
Deferred Compensation Plan, incorporated by
reference to Exhibit 10.6 of TSYS' Annual
Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed with the
Commission on March 19, 2002.
10.7 Wage Continuation Agreement of TSYS, incorporated by
reference to Exhibit 10.7 of TSYS' Annual Report on
Form 10-K for the fiscal year ended December 31,
1992, as filed with the Commission on March 18, 1993.
10.8 Incentive Bonus Plan of Synovus Financial
Corp. in which executive officers of TSYS
participate, incorporated by reference to
Exhibit 10.8 of TSYS' Annual Report on Form
10-K for the fiscal year ended December 31,
1992, as filed with the Commission on March
18, 1993.
10.9 Agreement in connection with use of
aircraft, incorporated by reference to
Exhibit 10.9 of TSYS' Annual Report on Form
10-K for the fiscal year ended December 31,
1992, as filed with the Commission on March
18, 1993.
10.10 Split Dollar Insurance Agreement of TSYS,
incorporated by reference to Exhibit 10.10
of TSYS' Annual Report on Form 10-K for the fiscal
year ended December 31, 1993, as filed with the
Commission on March 22, 1994.
10.11 Synovus Financial Corp. 1994 Long-Term Incentive
Plan in which executive officers of TSYS participate,
incorporated by reference
12
to Exhibit 10.11 of TSYS' Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, as filed
with the Commission on March 9, 1995.
10.12 Synovus Financial Corp. Executive Bonus Plan in which
executive officers of TSYS participate, incorporated
by reference to Exhibit 10.12 of TSYS' Annual Report
on Form 10-K for the fiscal year ended December 31,
1995, as filed with the Commission on March 19, 1996.
10.13 Change of Control Agreements for executive officers
of TSYS, incorporated by reference to Exhibit 10.13
of TSYS' Annual Report on Form 10-K for the fiscal
year ended December 31, 1995, as filed with the
Commission on March 19, 1996.
10.14 Stock Option Agreement of Samuel A. Nunn,
incorporated by reference to Exhibit 10.14 of TSYS'
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, as filed with the Commission on
March 20, 1997.
10.15 Synovus Financial Corp. Deferred Stock Option Plan
in which executive officers of TSYS participate,
incorporated by reference to Exhibit 10.15 of TSYS'
Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, as filed with the Commission
on March 19, 2002.
10.16 Vital Processing Services, L.L.C. Restricted Unit
Agreement for executive officers of TSYS,
incorporated by reference to Exhibit 10.16 of TSYS'
Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, as filed with the Commission on
March 21, 2001.
10.17 Lease Agreement between First Security Bank, National
Association, and TSYS incorporated by reference to
Exhibit 10.15 of TSYS' Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, as filed
with the Commission on March 23, 1998.
10.18 Synovus Financial Corp. 2000 Long-Term Incentive Plan
in which executive officers of TSYS participate,
incorporated by reference to Exhibit 10.16 of TSYS'
Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, as filed with the Commission on
March 16, 2000.
10.19 Split Dollar Insurance Agreement and related
Executive Benefit
13
Substitution Agreement of Synovus Financial Corp.
in which executive officers of TSYS participate,
incorporated by reference to Exhibit 10.19 of TSYS'
Annual Report on Form 10-K for the fiscal
year ended December 31, 2001, as filed with
the Commission on March 19, 2002.
20.1 Proxy Statement, including Financial Appendix, for
the Annual Meeting of Shareholders of TSYS to be held
on April 17, 2003, certain pages of which are
specifically incorporated herein by reference.
21.1 Subsidiaries of Total System Services, Inc.
23.1 Independent Auditors' Consent.
24.1 Powers of Attorney contained on the signature pages
of the 2002 Annual Report on Form 10-K.
99.1 Annual Report on Form 11-K for the Total System
Services, Inc. Employee Stock Purchase Plan for the
year ended December 31, 2002 (to be filed as an
amendment hereto within 120 days of the end of the
period covered by this report.)
99.2 Annual Report on Form 11-K for the Total System
Services, Inc. Director Stock Purchase Plan for the
year ended December 31, 2002 (to be filed as an
amendment hereto within 120 days of the end of the
period covered by this report.)
99.3 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.4 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On October 15, 2002, TSYS filed a Form 8-K with the Commission
in connection with the announcement of its earnings for the third quarter of
2002.
14
Independent Auditors' Report
The Board of Directors
Total System Services, Inc.:
Under date of January 13, 2003, we reported on the consolidated balance sheets
of Total System Services, Inc. and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of income, cash flows, and
shareholders' equity and comprehensive income for each of the years in the
three-year period ended December 31, 2002, as contained in the Total System
Services, Inc. 2002 Annual Report to Shareholders. These consolidated financial
statements and our report thereon are incorporated by reference in the Total
System Services, Inc. Annual Report on Form 10-K for the year 2002. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule as listed
in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/KPMG LLP
Atlanta, Georgia
January 13, 2003
15
TOTAL SYSTEM SERVICES, INC.
Schedule II
Valuation and Qualifying Accounts
Additions
- ------------------------------------------- ------------------ ------------------------------ ------------------- -------------
Changes in
allowances, charges to
Balance at expenses and changes Balance at
beginning to other accounts -- Deductions-- end
of period describe describe of period
- ------------------------------------------- ------------------ ------------------------------ ------------------- -------------
Year ended December 31, 2000:
Provision for doubtful accounts and
billing adjustments $ 4,426,696 1,825,486(407,704) 5,844,478
-------------- --------- ---------- ---------
$ 4,426,696 1,825,486 (407,704) 5,844.478
============== ========= ========== =========
Transaction processing accruals $ 6,145,862 5,726,889(3,155,295) 8,717,456
-------------- --------- ---------- ---------
$ 6,145,862 5,726,889 (3,155,295) 8,717,456
============== ========= ========== =========
Year ended December 31, 2001:
Provision for doubtful accounts and
billing adjustments $ 5,844,478 569,434(1,043,072) 5,370,840
-------------- --------- ---------- ---------
$ 5,844,478 569,434 (1,043,072) 5,370,840
============== ========= ========== =========
Transaction processing accruals $ 8,717,456 1,438,241(2,864,256) 7,291,441
-------------- --------- ---------- ---------
$ 8,717,456 1,438,241 (2,864,256) 7,291,441
============== ========= ========== =========
Year ended December 31, 2002:
Provision for doubtful accounts and
billing adjustments $ 5,370,840 3,262,830(616,632) 8,017,038
-------------- --------- ---------- ---------
$ 5,370,840 3,262,830 (616,632) 8,017,038
============== ========= ========== =========
Transaction processing accruals $ 7,291,441 6,532,268(8,476,699) 5,347,010
-------------- --------- ---------- ---------
$ 7,291,441 6,532,268 (8,476,699) 5,347,010
============== ========= ========== ==========
Amount reflected includes charges to bad debt expense which are classified
in other operating expenses and the charges for billing adjustments which
are recorded against revenues.
Amount reflected is the change in transaction processing accruals reflected
in other operating expenses.
Accounts deemed to be uncollectible and written off during the year as it
relates to bad debts. Amounts that relate to billing adjustments and
transaction processing accruals reflect actual billing adjustments and
processing errors charged against the allowances.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Total System Services, Inc. has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TOTAL SYSTEM SERVICES, INC.
(Registrant)
March 19, 2003 By: /s/Richard W. Ussery
-----------------------------------------
Richard W. Ussery,
Chairman and
Principal Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James H. Blanchard, Richard W. Ussery and
Philip W. Tomlinson, and each of them, his true and lawful attorney(s)-in-fact
and agent(s), with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments to this report and to file the same, with all exhibits and schedules
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney(s)-in-fact and agent(s) full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney(s)-in-fact and agent(s), or their substitute(s), may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, this report has been signed by the following
persons in the capacities and on the dates indicated.
/s/James H. Blanchard Date: March 19, 2003
- ---------------------------------------------
James H. Blanchard,
Director and Chairman of the
Executive Committee
/s/Richard W. Ussery Date: March 19, 2003
- ---------------------------------------------
Richard W. Ussery,
Chairman of the Board
and Principal Executive Officer
17
/s/Philip W. Tomlinson Date: March 19, 2003
- ---------------------------------------------
Philip W. Tomlinson,
President
and Director
/s/James B. Lipham Date: March 19, 2003
- ---------------------------------------------
James B. Lipham,
Executive Vice President, Treasurer, Principal
Accounting and Financial Officer
/s/Richard Y. Bradley Date: March 19, 2003
- ---------------------------------------------
Richard Y. Bradley,
Director
Date: March __, 2003
- ---------------------------------------------
G. Wayne Clough,
Director
Date: March __, 2003
- ---------------------------------------------
Walter W. Driver, Jr.,
Director
/s/Gardiner W. Garrard, Jr. Date: March 19, 2003
- ---------------------------------------------
Gardiner W. Garrard, Jr.,
Director
Date: March __, 2003
- ---------------------------------------------
Sidney E. Harris,
Director
/s/John P. Illges, III Date: March 19, 2003
- ---------------------------------------------
John P. Illges, III,
Director
Date: March __, 2003
- ---------------------------------------------
Alfred W. Jones III,
Director
18
/s/Mason H. Lampton Date: March 19, 2003
- ---------------------------------------------
Mason H. Lampton,
Director
/s/H. Lynn Page Date: March 19, 2003
- ---------------------------------------------
H. Lynn Page,
Director
Date: March __, 2003
- ---------------------------------------------
W. Walter Miller, Jr.,
Director
/s/William B. Turner Date: March 19, 2003
- ---------------------------------------------
William B. Turner,
Director
/s/James D. Yancey Date: March 19, 2003
- ---------------------------------------------
James D. Yancey,
Director
Date: March __, 2003
- --------------------------------------------
Rebecca K. Yarbrough,
Director
19
Certification of Chief Executive Officer
I, Richard W. Ussery, certify that:
1. I have reviewed this annual report on Form 10-K of Total System
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who
20
have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 19, 2003 /s/Richard W. Ussery
-----------------------------------
Richard W. Ussery
Chief Executive Officer
21
Certification of Chief Financial Officer
I, James B. Lipham, certify that:
1. I have reviewed this annual report on Form 10-K of Total System
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who
22
have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 19, 2003 /s/James B. Lipham
--------------------------
James B. Lipham
Chief Financial Officer
23