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 1997 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to__________ .
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 incorporation (I.R.S. Employer
or organization) Identification No.)
1200 Sixth 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
- --------------------------- -----------------------------------------
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___________
-----------------
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. [ ]
As of February 12, 1998, 129,331,775 shares of the $.10 par value
common stock of Total System Services, Inc. were outstanding, and the aggregate
market value of the shares of $.10 par value common stock of Total System
Services, Inc. held by non-affiliates was approximately $537,383,000 (based upon
the closing per share price of such stock on said date.)
Portions of the 1997 Annual Report to Shareholders of Registrant are
incorporated in Parts I, II, III and IV of this report. Portions of the Proxy
Statement of Registrant dated March 12, 1998 are incorporated in Part III 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 22 through 27, 32 through Part I, Item 1, Business
34, and 36 of Registrant's
1997 Annual Report to Shareholders
Pages 32 through 36, and 40 and 41 of Part I, Item 2, Properties
Registrant's 1997 Annual
Report to Shareholders
Pages 40 and 41 of Registrant's 1997 Part I, Item 3, Legal
Annual Report to Shareholders Proceedings
Page 43 of Registrant's 1997 Part II, Item 5, Market
Annual Report to Shareholders for Registrant's Common
Equity and Related Stock-
holder Matters
Page 21 of Registrant's 1997 Part II, Item 6, Selected
Annual Report to Shareholders Financial Data
Pages 22 through 27 of Registrant's Part II, Item 7, Management's
1997 Annual Report to Shareholders Discussion and Analysis of
Financial Condition and
Results of Operations
Pages 28 through 43 Part II, Item 8, Financial
of Registrant's 1997 Annual Statements and Supplementary
Report to Shareholders Data
Pages 2 through 4, 7, and 18 Part III, Item 10,
of Registrant's Proxy Statement in Directors and Executive
connection with the Annual Meeting Officers of the Registrant
of Shareholders to be held
on April 16, 1998
Pages 7 through 11, and 14 Part III, Item 11,
of Registrant's Proxy Statement Executive Compensation
in connection with the Annual Meeting
of Shareholders to be held on
April 16, 1998
Pages 5 and 16, and 15 through 17 of Part III, Item 12, Security
Registrant's Proxy Statement in Ownership of Certain
connection with the Annual Meeting of Beneficial Owners and
shareholders to be Management
held on April 16, 1998
Pages 14 and 15, and 17 and 18 Part III, Item 13,
of Registrant's Proxy Statement in Certain Relationships
connection with the Annual Meeting and Related Transactions
of Shareholders to be held on
April 16, 1998 and pages 34 through 36
of Registrant's 1997
Annual Report to Shareholders
Pages 28 through 42 of Registrant's Part IV, Item 14, Exhibits,
1997 Annual Report to Shareholders Financial Statement
Schedules and Reports
on Form 8-K
Cross Reference Sheet
Item No. Caption Page No.
- -------- ---------------- ---------
Part I
1. Business 2
2. Properties 4
3. Legal Proceedings 5
4. Submission of Matters to a Vote of 5
Security Holders
Part II
5. Market for Registrant's Common Equity 5
and Related Stockholder Matters
6. Selected Financial Data 5
7. Management's Discussion and Analysis 5
of Financial Condition and Results
of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk 5
8. Financial Statements and Supplementary 6
Data
9. Changes In and Disagreements With Accountants 6
on Accounting and Financial Disclosure
Part III
10. Directors and Executive Officers of 6
the Registrant
11. Executive Compensation 6
12. Security Ownership of Certain 6
Beneficial Owners and Management
13. Certain Relationships and Related 7
Transactions
Part IV
14. Exhibits, Financial Statement Schedules, 7
and Reports on Form 8-K
PART I
Certain statements contained in this Annual Report on Form 10-K and the
exhibits hereto 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.(R) ("TSYS (R)") 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 or services; (iii) statements of future economic
performance; and (iv) statements of assumptions underlying such statements.
Words such as "believes," "anticipates," "expects," "intends," "targeted," and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from those in such statements. Factors
that could cause actual results to differ from those discussed in the
forward-looking statements include, but are not limited to: (i) the strength of
the U.S. economy in general and other relevant economies; (ii) the financial
performance of current and future client contracts; (iii) inflation, interest
rate and foreign exchange rate fluctuations; (iv) timely and successful
implementation of processing systems to provide new products, improved
functionality and increased efficiencies; (v) changes in consumer spending,
borrowing and saving habits; (vi) technological changes; (vii) acquisitions;
(viii) the ability to increase market share and control expenses; (ix) changes
in laws, regulations, credit card association rules or other industry standards
affecting TSYS' business which require significant product redevelopment
efforts; (x) the effect of changes in accounting policies and practices, as may
be adopted by the regulatory agencies as well as the Financial Accounting
Standards Board; (xi) changes in TSYS' organization, compensation and benefit
plans; (xii) the costs and effects of litigation and of unexpected or adverse
outcomes in such litigation; (xiii) failure to successfully implement TSYS' Year
2000 modification plans substantially as scheduled and budgeted; and (xiv) the
success of TSYS at managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and TSYS undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
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Synovus Financial Corp., Synovus, Columbus Bank and Trust Company and CB&T are
federally registered service marks of Synovus Financial Corp. TSYS, TS2, Total
System Services, Inc. and THE TOTAL SYSTEM are federally registered service
marks of Total System Services, Inc.
1
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(R), TSYS is now one of the world's largest credit, debit, commercial,
and private-label card processing companies. Based in Columbus, Georgia, and
traded on the New York Stock Exchange under the symbol "TSS," TSYS provides a
comprehensive on-line system of data processing services marketed as THE TOTAL
SYSTEM(R) servicing issuing institutions throughout the United States, Puerto
Rico, Canada and Mexico, representing approximately 93 million cardholder
accounts. TSYS provides card production, domestic and international clearing,
statement preparation, customer service support and management support. Synovus
Financial Corp.(R), a $9.3 billion asset, multi-financial services company, owns
80.7 percent of TSYS.
During 1997, TSYS had four wholly owned subsidiaries: (1) Columbus Depot
Equipment Company(sm) ("CDEC (sm)"), which sells and leases computer related
equipment associated with TSYS' bankcard data processing services; (2) Mailtek,
Inc.(sm) ("Mailtek"), which provides full-service direct mail production
services and offers data processing, list management, laser printing, computer
output microfiche, card embossing, encoding and mailing services; (3) TSYS Total
Solutions, Inc.(sm) ("TSI") (formerly Lincoln Marketing, Inc.), which provides
correspondence, fulfillment, telemarketing, data processing and mailing
services; and (4) Columbus Productions, Inc.(sm) ("CPI"), which provides
full-service commercial printing and related services. On December 31, 1997,
Mailtek was merged into TSI, and TSI continues to provide the services formerly
provided by Mailtek.
TSYS also holds a 49% equity interest in a joint venture company named
Total System Services de Mexico, S.A. de C.V.("TSM"), which provides credit card
related processing services to Mexican banks, and a 50% interest in Vital
Processing Services L.L.C., a joint venture with Visa U.S.A. Inc. that combines
the front-end authorization and back-end accounting and settlement processing of
financial and nonfinancial institutions and their merchant customers.
Seasonality. Due to the 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.
Service Marks. TSYS owns the federally registered service marks TSYS, TS2,
Total System Services, Inc. and THE TOTAL SYSTEM, to which TSYS believes strong
customer identification attaches. TSYS also owns other service marks. Management
does not believe the loss of such marks would have a material impact on the
business of TSYS.
Major Customers. A significant amount of TSYS' revenues are derived from
certain major customers who are processed under long-term contracts. For the
year ended December 31, 1997, AT&T Universal Card Services Corp. and NationsBank
accounted for 14.35% and 11.13%, respectively, of TSYS' total revenues. As a
result, the loss of one of
2
TSYS' major customers could have a material adverse effect on TSYS' financial
condition and results of operations.
Competition. TSYS encounters vigorous competition in providing bankcard
data processing services from several different sources. The national market in
third party bankcard data processors is presently being provided by
approximately five vendors. TSYS believes that it is the second largest third
party bankcard processor in the United States. In addition, TSYS competes
against 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 bankcard associations,
data processing and bankcard computer service firms and other such third party
vendors located throughout the United States.
TSYS' major competitor in the bankcard data processing industry is First
Data Resources, Inc., a wholly owned subsidiary of First Data Corporation, which
is headquartered in Omaha, Nebraska, and provides bankcard data 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 ("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
banks, savings institutions and credit unions for which TSYS provides bankcard
data 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 bankcard data 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 CB&T, TSYS is subject to direct regulation by the
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 CB&T and is authorized to engage in only
those activities which CB&T itself is authorized to engage in directly, which
includes the bankcard and other data processing services presently being
provided by TSYS. As TSYS and its subsidiaries operate as subsidiaries of CB&T,
they are subject to regulation by the Federal Deposit Insurance Corporation.
Employees. As of February 28, 1998, TSYS had 3,158 full-time employees and
128 part-time employees.
See the "Financial Review" Section on pages 22 through 27 and Note 1, Note
4 and Note 9 of Notes to Consolidated Financial Statements on pages 32 through
34, page 36,
3
and pages 40 and 41 of TSYS' 1997 Annual Report to Shareholders which are
specifically incorporated herein by reference.
Item 2. Properties.
TSYS owns its 73,000 square foot South Center located at 1000 Fifth Avenue,
Columbus, Georgia 31901, and owns its 60,000 square foot Annex Building located
at 420 10th Street, Columbus, Georgia 31901. TSYS also owns a warehouse
facility, various other tracts of real estate located near or adjacent to its
South Center and Annex Building which are used for parking and/or future
expansion needs, and leases additional office space in Columbus, Georgia,
Atlanta, Georgia, and Jacksonville, Florida.
The approximately 32,000 square foot Columbus Depot, located at 1200 Sixth
Avenue, Columbus, Georgia 31901, which is owned by TSYS and is on the National
Register of Historic Places, houses TSYS' executive offices and several
corporate divisions.
TSYS also owns a 252,000 square foot production center which is located on
a 40.4 acre tract of land in north Columbus, Georgia ("North Center"). Primarily
a production center, this facility houses TSYS' primary data processing computer
operations, statement preparation, mail handling, microfiche production and
purchasing, as well as other related operations. TSYS began expanding the North
Center in 1997 to add additional space to house TSYS' card production services.
A separate 72,000 square foot building was completed on the North Center
property in 1997 to serve as TSI's headquarters.
TSYS owns a 110,000 square foot building on a 23-acre site in Columbus,
Georgia, which accommodates current and future office space needs for technical
staff.
During 1997, TSYS entered into an operating lease for the purpose of
financing its 540,000 square foot new campus-type facility on approximately 46
acres of land in downtown Columbus, Georgia. The campus facility will
consolidate most of TSYS' multiple Columbus locations and will facilitate future
growth. The campus development will be a multi year phased project.
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 2, Note 3, Note 4 and Note 9 of Notes to Consolidated
Financial Statements on pages 32 through 36, and pages 40 and 41 of TSYS' 1997
Annual Report to Shareholders which are specifically incorporated herein by
reference.
4
Item 3. Legal Proceedings.
See Note 9 of Notes to Consolidated Financial Statements on pages 40 and 41
of TSYS' 1997 Annual Report to Shareholders 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 43 of TSYS' 1997 Annual Report to Shareholders is
specifically incorporated herein by reference.
On November 6, 1995, TSYS issued 4,156 shares of TSYS Common Stock to an
individual for no monetary consideration in connection with his employment by
TSYS.
On January 29, 1996, TSYS issued 21,978 shares to the two former
shareholders of Mailtek. These shares were issued pursuant to the Acquisition
Agreement between TSYS, Mailtek and the shareholders of Mailtek pursuant to
which TSYS purchased all 10,000 of the issued and outstanding shares of $.05 par
value common stock of Mailtek on July 15, 1992.
All of the shares of TSYS Common Stock referenced above were issued
pursuant to the exemption from registration set forth in Section 4(2) of the
Securities Act of 1933 as they were issued to a limited number of persons.
Item 6. Selected Financial Data.
The "Selected Financial Data" Section which is set forth on page 21 of
TSYS' 1997 Annual Report to Shareholders 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 22 through 27 of
TSYS' 1997 Annual Report to Shareholders, 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.
None.
5
Item 8. Financial Statements and Supplementary Data.
The "Quarterly Financial Data, Stock Price, Dividend Information" Section,
which is set forth on page 43, and the "Consolidated Balance Sheets,
Consolidated Statements of Income, Consolidated Statements of Shareholders'
Equity, Consolidated Statements of Cash Flows, Notes to Consolidated Financial
Statements and Report of Independent Auditors" Sections, which are set forth on
pages 28 through 42 of TSYS' 1997 Annual Report to Shareholders 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 - Information Concerning Number and
Classification of Directors and Nominees" Section which is set forth on pages 2
and 3, the "ELECTION OF DIRECTORS - Information Concerning Directors and
Nominees for Class III Directors - General Information" Section which is set
forth on pages 3 and 4, the "ELECTION OF DIRECTORS - 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 18 of TSYS' Proxy
Statement in connection with the Annual Meeting of Shareholders of TSYS to be
held on April 16, 1998 are specifically incorporated herein by reference.
Item 11. Executive Compensation.
The "EXECUTIVE COMPENSATION - Summary Compensation Table; Stock Option
Exercises and Grants; Compensation of Directors; Change in Control Arrangements;
and Compensation Committee Interlocks and Insider Participation" Sections which
are set forth on pages 7 through 11, and page 14 of TSYS' Proxy Statement in
connection with the Annual Meeting of Shareholders of TSYS to be held on April
16, 1998 are specifically incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The "ELECTION OF DIRECTORS - Information Concerning Directors and Nominees
for Class III Directors - TSYS Common Stock Ownership of Directors and
Management" Section which is set forth on pages 5 and 6, the "RELATIONSHIPS
BETWEEN TSYS, SYNOVUS, CB&T AND CERTAIN OF SYNOVUS' SUBSIDIARIES - Beneficial
Ownership of TSYS Common Stock by CB&T" Section which is set forth on page 15,
and the "RELATIONSHIPS BETWEEN TSYS, SYNOVUS, CB&T AND CERTAIN OF SYNOVUS'
SUBSIDIARIES - Synovus Common Stock Ownership of Directors and Management"
Section which is set forth on pages 16 and 17 of TSYS' Proxy Statement in
connection with
6
the Annual Meeting of Shareholders of TSYS to be held on April 16, 1998 are
specifically incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The "EXECUTIVE COMPENSATION - Compensation Committee Interlocks and Insider
Participation" Section which is set forth on page 14, "EXECUTIVE COMPENSATION -
Transactions with Management" Section which is set forth on pages 14 and 15, the
"RELATIONSHIPS BETWEEN TSYS, SYNOVUS, CB&T AND CERTAIN OF SYNOVUS' SUBSIDIARIES
- - Beneficial Ownership of TSYS Common Stock by CB&T" Section which is set forth
on page 15, the "RELATIONSHIPS BETWEEN TSYS, SYNOVUS, CB&T AND CERTAIN OF
SYNOVUS' SUBSIDIARIES - Interlocking Directorates of TSYS, Synovus and CB&T"
Section which is set forth on page 15, and the "RELATIONSHIPS BETWEEN TSYS,
SYNOVUS, CB&T, AND CERTAIN OF SYNOVUS' SUBSIDIARIES - Bankcard Data Processing
Services Provided to CB&T and Certain of Synovus' Subsidiaries; Other Agreements
Between TSYS, Synovus, CB&T and Certain of Synovus' Subsidiaries" Section which
is set forth on pages 17 and 18 of TSYS' Proxy Statement in connection with the
Annual Meeting of Shareholders of TSYS to be held on April 16, 1998 are
specifically incorporated herein by reference.
See also Note 2 of Notes to Consolidated Financial Statements on pages 34
through 36 of TSYS' 1997 Annual Report to Shareholders which is specifically
incorporated herein by reference.
PART IV
Item 14. 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 28 through 42 of TSYS' 1997
Annual Report to Shareholders to Item 8, Part II, Financial Statements and
Supplementary Data.
Consolidated Balance Sheets - December 31, 1997 and 1996.
Consolidated Statements of Income - Years Ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows - Years Ended December
31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
7
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, 1997, 1996 and 1995.
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 with the
Commission on April 18, 1997 (File No. 333-25401).
3.2 Bylaws of TSYS, as amended, incorporated by reference to
Exhibit 3.2 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. 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, 1992, as filed
with the Commission on March 18, 1993.
10.2 Group "Y" Key Executive Restricted Stock Bonus Plan of TSYS,
incorporated by reference to Exhibit 10.2 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.
10.3 1985 Key Employee Restricted Stock Bonus Plan of TSYS,
incorporated by reference to Exhibit 10.3 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.
8
10.4 1990 Key Employee Restricted Stock Bonus Plan of TSYS,
incorporated by reference to Exhibit 10.4 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.
10.5 Total System Services, Inc. 1992 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 Excess Benefit Agreement of TSYS, incorporated by reference
to Exhibit 10.6 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.
10.7 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 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.
9
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 Lease Agreement between First Security Bank, National
Association, and TSYS.
11.1 Statement re Computation of Per Share Earnings.
13.1 Certain specified pages of TSYS' 1997 Annual Report to
Shareholders which are specifically incorporated herein by
reference.
20.1 Proxy Statement for the Annual Meeting of Shareholders of
TSYS to be held on April 16, 1998, 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
1997 Annual Report on Form 10-K.
27.1 Financial Data Schedule (for SEC use only).
27.2 Amended and Restated Financial Data Schedule (for SEC use
only).
27.3 Amended and Restated Financial Data Schedule (for SEC use
only).
27.4 Amended and Restated Financial Data Schedule (for SEC use
only).
99.1 Annual Report on Form 11-K for the Total System Services,
Inc. Employee Stock Purchase Plan for the year ended
December 31, 1997 (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, 1997 (to be filed as an amendment hereto within
120 days of the end of the period covered by this report.)
(b) Reports on Form 8-K
On November 25, 1997, TSYS filed a Form 8-K with the
Commission in connection with the announcement of the signing of a seven year
credit card processing agreement with Canadian Tire Acceptance Limited and the
signing of a six year credit
10
card processing agreement with BB&T Corporation.
On December 22, 1997, TSYS filed a Form 8-K with the
Commission in connection with the announcement of the signing of a ten year
credit card processing agreement with Royal Bank of Canada.
On March 9, 1998, TSYS filed a Form 8-K with the Commission in
connection with the announcement that it is engaged in negotiations with Sears,
Roebuck and Co. to support Sears' private-label credit card accounts.
filings\TSYS\TSYS97.10K
11
Report of Independent Auditors
The Board of Directors
Total System Services, Inc.
Under date of January 23, 1998, we reported on the consolidated balance sheets
of Total System Services, Inc. and subsidiaries as of December 31, 1997 and
1996, 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,
1997, as contained in the Total System Services, Inc. 1997 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 1997. 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 Peat Marwick LLP
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 23, 1998
TOTAL SYSTEM SERVICES, INC.
Schedule II
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
---------------------------
Charged
Balance at Charged to to other Balance at
beginning costs and accounts-- Deductions-- end of
of period expenses describe describe period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for doubtful accounts $ 255,768 509,500 - (50,894)<F1> $ 714,374
============ =========== =========== ============== ===========
Year ended December 31, 1996:
Allowance for doubtful accounts $ 714,374 94,500 - (104,392)<F1> $ 704,482
============ =========== =========== ============== ===========
Year ended December 31, 1997:
Allowance for doubtful accounts $ 704,482 94,000 - (62,523)<F1> $ 735,959
============ =========== =========== ============== ===========
<FN>
<F1> Accounts deemed to be uncollectible and written off during the year.
</FN>
</TABLE>
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 23, 1998 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 23, 1998
- ------------------------------------------------
James H. Blanchard,
Director and Chairman of the
Executive Committee
/s/Richard W. Ussery Date: March 23, 1998
- ------------------------------------------------
Richard W. Ussery,
Chairman of the Board
and Principal Executive Officer
14
/s/Philip W. Tomlinson Date: March 23, 1998
- --------------------------------------------------
Philip W. Tomlinson,
President
and Director
/s/James B. Lipham Date: March 23, 1998
- -------------------------------------------------
James B. Lipham,
Executive Vice President, Treasurer, Principal
Accounting and Financial Officer
/s/Griffin B. Bell Date: March 23, 1998
- -------------------------------------------------
Griffin B. Bell,
Director
/s/Richard Y. Bradley Date: March 23, 1998
- -------------------------------------------------
Richard Y. Bradley,
Director
/s/Gardiner W. Garrard, Jr., Date: March 23, 1998
- --------------------------------------------------
Gardiner W. Garrard, Jr.,
Director
/s/John P. Illges, III Date: March 23, 1998
- --------------------------------------------------
John P. Illges, III,
Director
/s/Mason H. Lampton Date: March 23, 1998
- --------------------------------------------------
Mason H. Lampton,
Director
/s/Samuel A. Nunn Date: March 23, 1998
- ---------------------------------------------------
Samuel A. Nunn,
Director
/s/H. Lynn Page Date: March 23, 1998
- -------------------------------------------------
H. Lynn Page,
Director
/s/W. Walter Miller, Jr. Date: March 23, 1998
- -------------------------------------------------
W. Walter Miller, Jr.,
Director
/s/William B. Turner Date: March 23, 1998
- -------------------------------------------------
William B. Turner,
Director
/s/James D. Yancey Date: March 23, 1998
- --------------------------------------------------
James D. Yancey,
Director
filings/TSYS.\confo.sig
LEASE AGREEMENT
Dated as of November 24, 1997
between
FIRST SECURITY BANK, NATIONAL ASSOCIATION,
not individually,
but solely as the Owner Trustee
under the TSYS Trust 1997-1,
as Lessor
and
TOTAL SYSTEM SERVICES, INC.,
as Lessee
- --------------------------------------------------------------------------------
This Lease Agreement is subject to a security interest in favor of NATIONSBANK
OF TEXAS, N.A., as the agent for the Lenders and respecting the Security
Documents, as the agent for the Lenders and the Holders, to the extent of their
interests (the "Agent") under a Security Agreement dated as of November 24,
1997, between First Security Bank, National Association, not individually except
as expressly stated therein, but solely as the Owner Trustee under the TSYS
Trust 1997-1 and the Agent, as amended, modified, extended, supplemented,
restated and/or replaced from time to time in accordance with the applicable
provisions thereof. This Lease Agreement has been executed in several
counterparts. To the extent, if any, that this Lease Agreement constitutes
chattel paper (as such term is defined in the Uniform Commercial Code as in
effect in any applicable jurisdiction), no security interest in this Lease
Agreement may be created through the transfer or possession of any counterpart
other than the original counterpart containing the receipt therefor executed by
the Agent on the signature page hereof.
TABLE OF CONTENTS
ARTICLE I...................................................................1
1.1 Definitions....................................................1
1.2 Interpretation.................................................2
ARTICLE II..................................................................2
2.1 Property.......................................................2
2.2 Lease Term.....................................................2
2.3 Title..........................................................2
2.4 Lease Supplements; Memorandum of Lease.........................3
ARTICLE III.................................................................3
3.1 Rent...........................................................3
3.2 Payment of Basic Rent..........................................3
3.3 Supplemental Rent..............................................4
3.4 Performance on a Non-Business Day..............................4
3.5 Rent Payment Provisions........................................4
ARTICLE IV..................................................................5
4.1 Taxes; Utility Charges.........................................5
ARTICLE V...................................................................5
5.1 Quiet Enjoyment................................................5
ARTICLE VI..................................................................5
6.1 Net Lease......................................................5
6.2 No Termination or Abatement....................................6
ARTICLE VII.................................................................7
7.1 Ownership of the Properties....................................7
ARTICLE VIII................................................................8
8.1 Condition of the Properties....................................8
8.2 Possession and Use of the Properties...........................9
8.3 Integrated Properties.........................................10
ARTICLE IX.................................................................10
9.1 Compliance With Legal Requirements, Insurance Requirements
and Manufacturer's Specifications and Standards................10
ARTICLE X..................................................................11
10.1 Maintenance and Repair; Return...............................11
10.2 Environmental Inspection.....................................12
ARTICLE XI.................................................................12
11.1 Modifications................................................12
ARTICLE XII................................................................13
12.1 Warranty of Title............................................13
ARTICLE XIII...............................................................14
13.1 Permitted Contests Other Than in Respect of Indemnities......14
ARTICLE XIV................................................................14
14.1 Public Liability and Workers' Compensation Insurance.........14
14.2 Permanent Hazard and Other Insurance.........................15
14.3 Coverage.....................................................16
ARTICLE XV.................................................................17
15.1 Casualty and Condemnation....................................17
15.2 Environmental Matters........................................19
15.3 Notice of Environmental Matters..............................19
ARTICLE XVI................................................................20
16.1 Termination Upon Certain Events..............................20
16.2 Procedures...................................................20
ARTICLE XVII...............................................................21
17.1 Lease Events of Default......................................21
17.2 Surrender of Possession......................................24
17.3 Reletting....................................................24
17.4 Damages......................................................24
17.5 Power of Sale................................................25
17.6 Final Liquidated Damages.....................................25
17.7 Environmental Costs..........................................26
17.8 Waiver of Certain Rights.....................................27
17.9 Assignment of Rights Under Contracts.........................27
17.10 Remedies Cumulative.........................................27
ARTICLE XVIII..............................................................27
18.1 Lessor's Right to Cure Lessee's Lease Defaults...............27
ARTICLE XIX................................................................28
19.1 Provisions Relating to Lessee's Exercise of its Purchase
Option.......................................................28
19.2 No Purchase or Termination With Respect to Less than All
of a Property................................................28
ARTICLE XX.................................................................28
20.1 Purchase Option or Sale Option-General Provisions............28
20.2 Lessee Purchase Option.......................................29
20.3 Third Party Sale Option......................................30
ARTICLE XXI................................................................31
21.1 [Intentionally Omitted]......................................31
ARTICLE XXII...............................................................31
22.1 Sale Procedure...............................................31
22.2 Application of Proceeds of Sale..............................34
22.3 Indemnity for Excessive Wear.................................34
22.4 Appraisal Procedure..........................................34
22.5 Certain Obligations Continue................................35
ARTICLE XXIII..............................................................35
23.1 Holding Over.................................................35
ARTICLE XXIV...............................................................36
24.1 Risk of Loss.................................................36
ARTICLE XXV................................................................36
25.1 Assignment...................................................36
25.2 Subleases....................................................36
ARTICLE XXVI...............................................................37
26.1 No Waiver....................................................37
ARTICLE XXVII..............................................................37
27.1 Acceptance of Surrender......................................37
27.2 No Merger of Title...........................................37
ARTICLE XXVIII.............................................................38
28.1 Notices......................................................38
ARTICLE XXIX...............................................................38
29.1 Miscellaneous................................................38
29.2 Amendments and Modifications.................................38
29.3 Successors and Assigns.......................................38
29.4 Headings and Table of Contents...............................38
29.5 Counterparts.................................................38
29.6 GOVERNING LAW................................................38
29.7 Calculation of Rent..........................................39
29.8 Memoranda of Lease and Lease Supplements.....................39
29.9 Allocations between the Lenders and the Holders..............39
29.10 Limitations on Recourse.....................................39
29.11 WAIVERS OF JURY TRIAL.......................................39
29.12 Exercise of Lessor Rights...................................40
29.13 Submission to Jurisdiction; Venue; Arbitration..............40
29.14 USURY SAVINGS PROVISION.....................................41
30.1 ACKNOWLEDGMENT OF HEAD LEASE; BOND DOCUMENTS.................42
EXHIBITS
EXHIBIT A - Lease Supplement No. ____
EXHIBIT B-1 - Memorandum of Lease
EXHIBIT B-2 Memorandum of Lease and Lease Supplement No. ___
LEASE AGREEMENT
THIS LEASE AGREEMENT dated as of November 24, 1997 (as amended,
modified, extended, supplemented, restated and/or replaced from time to time,
this "Lease") is between FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national
banking association, having its principal office at 79 South Main Street, Salt
Lake City, Utah 84111, not individually, but solely as the Owner Trustee under
the TSYS Trust 1997-1, as lessor (the "Lessor"), and TOTAL SYSTEM SERVICES,
INC., a Georgia corporation, having its principal place of business at Total
System Services, Inc., 1200 Sixth Avenue, Columbus, Georgia 31901, as lessee
(the "Lessee").
W I T N E S S E T H:
A. WHEREAS, subject to the terms and conditions of the Participation
Agreement, the Agency Agreement and the related Operative Agreements and Bond
Documents, Lessor will (i) acquire Bonds from the Bond Trustee on behalf of the
Development Authority, the proceeds of which will be used to (x) purchase or
ground lease various parcels of real property, some of which will (or may) have
existing Improvements thereon, from one (1) or more third parties designated by
Lessee and (y) fund the acquisition, installation, testing, use, development,
construction, operation, maintenance, repair, refurbishment and restoration of
the Properties by the Construction Agent and (ii) lease such Properties from the
Development Authority under the Head Lease for sublease to Lessee pursuant to
this Lease; and
B. WHEREAS, the Basic Term shall commence with respect to each Property
upon the Land Closing Date with respect thereto; provided, Basic Rent with
respect thereto shall not be payable until the applicable Rent Commencement
Date; and
C. WHEREAS, Lessor desires to sublease to Lessee, and Lessee desires to
sublease from Lessor, each Property pursuant to this Lease;
NOW, THEREFORE, in consideration of the foregoing, and of other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
1.1 Definitions.
Capitalized terms used but not otherwise defined in this Lease
have the respective meanings specified in Appendix A to the Participation
Agreement of even date herewith (as such may be amended, modified, extended,
supplemented, restated and/or replaced from time to time, the "Participation
Agreement") among Lessee, the Construction Agent, First Security Bank, National
Association, not individually, except as expressly stated therein, as the Owner
Trustee under the TSYS Trust 1997-1, the Holders, the Lenders and the Agent.
1.2 Interpretation.
The rules of usage set forth in Appendix A to the Participation
Agreement shall apply to this Lease.
ARTICLE II
2.1 Property.
Subject to the terms and conditions hereinafter set forth and
contained in the respective Lease Supplement relating to each Property, Lessor
hereby leases to Lessee and Lessee hereby leases from Lessor, each Property.
2.2 Lease Term.
This Lease shall be effective and the obligations of the
parties hereunder shall commence on the date first set forth above (the
"Effective Date"). On the Effective Date (if not previously delivered), the
parties hereto shall execute and deliver a memorandum of Lease in recordable
form and in the form of Exhibit B-1 hereto. The basic term of this Lease with
respect to each Property (the "Basic Term") shall begin upon the Date of
Beneficial Occupancy for such Property (in each case the "Basic Term
Commencement Date") and shall end on the third annual anniversary of the Basic
Term Commencement Date (the "Basic Term Expiration Date"), unless the Basic Term
is earlier terminated or the term of this Lease is renewed (as described below)
in accordance with the provisions of this Lease; provided that such Basic Term
Expiration Date shall in no event exceed the Expiration Date. Notwithstanding
the foregoing, Lessee shall be obligated to pay Basic Rent on the Rent
Commencement Date with respect to such Property whether or not the Date of
Beneficial Occupancy has occurred and, without further action, shall be deemed
to have irrevocably accepted each Property hereunder on the Date of Beneficial
Occupancy.
2.3 Title.
Lessor has only such interest in the Property as arising under
the Head Lease. Each Property is leased to Lessee without any representation or
warranty, express or implied, by Lessor and subject to the rights of parties in
possession (if any), the existing state of title (including without limitation
the Permitted Liens) and all applicable Legal Requirements. Lessee shall in no
event have any recourse against Lessor for any defect in Lessor's title to any
Property (other than for Lessor Liens) or as a result of the lack of validity or
enforceability of any provision of the Head Lease, and the obligations of Lessee
hereunder, including without limitation with respect to the payment of all Rent,
shall remain in full force and effect.
2.4 Lease Supplements; Memorandum of Lease.
On or prior to the Date of Beneficial Occupancy with respect
to any Property, Lessee and Lessor shall each execute and deliver (i) a Lease
Supplement for the Property to be leased effective as of such Date of Beneficial
Occupancy in substantially the form of Exhibit A hereto and (ii) a Memorandum of
Lease and Lease Supplement (in recordable form) in substantially the form of
Exhibit B-2 hereto. Lessee hereby irrevocably appoints Lessor as Lessee's
attorney-in-fact, with power of substitution, in the name of Lessor or the name
of Lessee or otherwise, to execute any Lease Supplement which Lessee fails or
refuses to sign in accordance with the terms of this Section 2.4 (including
without limitation any Lease Supplement required in connection with any
Construction Period Property upon the occurrence of an Agency Agreement Event of
Default).
ARTICLE III
3.1 Rent.
(a) Lessee shall pay Basic Rent in arrears on each Payment
Date, and on any date on which this Lease shall terminate with respect
to any or all Properties during the Term; provided, however, with
respect to each individual Property, Lessee shall have no obligation to
pay Basic Rent with respect to such Property until the Rent
Commencement Date with respect to such Property (notwithstanding that
Basic Rent for such Property shall accrue from and including the
Scheduled Interest Payment Date immediately preceding such Rent
Commencement Date).
(b) Basic Rent shall be due and payable in lawful money of the
United States and shall be paid by wire transfer of immediately
available funds on the due date therefor (or within the applicable
grace period) to such account or accounts at such bank or banks as
Lessor shall from time to time direct.
(c) Lessee's inability or failure to take possession of all or
any portion of any Property when delivered by Lessor, whether or not
attributable to any act or omission of Lessor, the Construction Agent,
Lessee or any other Person or for any other reason whatsoever, shall
not delay or otherwise affect Lessee's obligation to pay Rent for such
Property in accordance with the terms of this Lease.
3.2 Payment of Basic Rent.
Basic Rent shall be paid absolutely net to Lessor or its
designee, so that this Lease shall yield to Lessor the full amount thereof,
without setoff, deduction or reduction.
3.3 Supplemental Rent.
Lessee shall pay to the Person entitled thereto any and all
Supplemental Rent when and as the same shall become due and payable, and if
Lessee fails to pay any Supplemental Rent, Lessor shall have all rights, powers
and remedies provided for herein or by law or equity or otherwise in the case of
nonpayment of Basic Rent. All such payments of Supplemental Rent shall be in the
full amount thereof, without setoff, deduction or reduction. Lessee shall pay to
Lessor or other obligee, as Supplemental Rent due and owing to Lessor or such
other obligee, among other things, on demand, to the extent permitted by
applicable Legal Requirements, (a) any and all unpaid fees, charges, payments,
amounts and other obligations (other than the obligations of Lessor to pay the
principal amount of the Loans and the Holder Amount) due and owing by Lessor, in
any capacity, under the Credit Agreement, under the Trust Agreement and/or under
any other Operative Agreement or Bond Document (including without limitation any
amounts owing to the Lenders under Section 2.11, Section 2.12 and Section 9.5 of
the Credit Agreement and any amounts owing to the Holders under Section 3.9 or
Section 3.10 of the Trust Agreement) and (b) interest at the applicable Overdue
Rate on any installment of Basic Rent for the period for which the same shall be
overdue and on any payment of Supplemental Rent not paid when due or demanded by
the appropriate Person for the period from the due date or the date of any such
demand, as the case may be, until the same shall be paid. It shall be an
additional Supplemental Rent obligation of Lessee to pay or cause to be paid to
the appropriate Person all amounts under the Head Lease (other than rental
payable under Section 5.3(a) of the Head Lease in amounts sufficient to pay
principal and interest on the Bonds) when such become due and owing from time to
time. The expiration or other termination of Lessee's obligations to pay Basic
Rent hereunder shall not limit or modify the obligations of Lessee with respect
to Supplemental Rent. Unless expressly provided otherwise in this Lease, in the
event of any failure on the part of Lessee to pay and discharge any Supplemental
Rent as and when due, Lessee shall also promptly pay and discharge any fine,
penalty, interest or cost which may be assessed or added for nonpayment or late
payment of such Supplemental Rent, all of which shall also constitute
Supplemental Rent.
3.4 Performance on a Non-Business Day.
If any Basic Rent is required hereunder on a day that is not a
Business Day, then such Basic Rent shall be due on the corresponding Scheduled
Interest Payment Date. If any Supplemental Rent is required hereunder on a day
that is not a Business Day, then such Supplemental Rent shall be due on the next
succeeding Business Day.
3.5 Rent Payment Provisions.
Lessee shall make payment of all Basic Rent and Supplemental
Rent when due (subject to the applicable grace periods) regardless of whether
any of the Operative Agreements or Bond Documents pursuant to which same is
calculated and is owing shall have been rejected, avoided or disavowed in any
bankruptcy or insolvency proceeding involving any of the parties to any of the
Operative Agreements or Bond Documents. Such provisions of such Operative
Agreements and Bond Documents and their related definitions are incorporated
herein by reference and shall survive any termination, amendment or rejection of
any such Operative Agreements and Bond Documents.
ARTICLE IV
4.1 Taxes; Utility Charges.
Lessee shall pay or cause to be paid all Impositions with
respect to the Properties and/or the use, occupancy, operation, repair, access,
maintenance or operation thereof and all charges for electricity, power, gas,
oil, water, telephone, sanitary sewer service and all other rents, utilities and
operating expenses of any kind or type used in or on any Property and related
real property during the Term. Upon Lessor's request, Lessee shall provide from
time to time Lessor with evidence of all such payments referenced in the
foregoing sentence. Lessee shall be entitled to receive any credit or refund
with respect to any Imposition or utility charge paid by Lessee. Unless an Event
of Default shall have occurred and be continuing, the amount of any credit or
refund received by Lessor on account of any Imposition or utility charge paid by
Lessee, net of the costs and expenses incurred by Lessor in obtaining such
credit or refund, shall be promptly paid over to Lessee. All charges for
Impositions or utilities imposed with respect to any Property for a period
during which this Lease expires or terminates shall be adjusted and prorated on
a daily basis between Lessor and Lessee, and each party shall pay or reimburse
the other for such party's pro rata share thereof.
ARTICLE V
5.1 Quiet Enjoyment.
Subject to the rights of Lessor contained in Sections 17.2,
17.3 and 20.3 and the other terms of this Lease and the other Operative
Agreements and Bond Documents and so long as no Event of Default shall have
occurred and be continuing, Lessee shall peaceably and quietly have, hold and
enjoy its subleasehold interest in each Property for the applicable Term, free
of any claim or other action by Lessor or anyone rightfully claiming by, through
or under Lessor (other than Lessee) with respect to any matters arising from and
after the applicable Basic Term Commencement Date.
ARTICLE VI
6.1 Net Lease.
This Lease shall constitute a net lease, and the obligations
of Lessee hereunder are absolute and unconditional. Lessee shall pay all
operating expenses arising out of the use, operation and/or occupancy of each
Property whether arising hereunder, under the Head Lease or otherwise. Any
present or future law to the contrary notwithstanding, this Lease shall not
terminate, nor shall Lessee be entitled to any abatement, suspension, deferment,
reduction, setoff, counterclaim, or defense with respect to the Rent, nor shall
the obligations of Lessee hereunder be affected (except as expressly herein
permitted and by performance of the obligations in connection therewith) for any
reason whatsoever, including without limitation by reason of: (a) any damage to
or destruction of any Property or any part thereof; (b) any taking of any
Property or any part thereof or interest therein by Condemnation or otherwise;
(c) any prohibition, limitation, restriction or prevention of Lessee's use,
occupancy or enjoyment of any Property or any part thereof, or any interference
with such use, occupancy or enjoyment by any Person or for any other reason; (d)
any title defect, Lien or any matter affecting title to any Property (whether
related to the interest of the Development Authority, the interest therein of
the Lessor purported to be created by the Head Lease or otherwise); (e) any
temporary or permanent eviction or the exercise of any other rights by a holder
of paramount title or otherwise; (f) any default by Lessor hereunder; (g) any
action for bankruptcy, insolvency, reorganization, liquidation, dissolution or
other proceeding relating to or affecting the Agent, any Lender, Lessor, Lessee,
any Holder or any Governmental Authority; (h) the impossibility or illegality of
performance by Lessor, Lessee or both; (i) any action of any Governmental
Authority or any other Person; (j) Lessee's acquisition of ownership of all or
part of any Property; (k) breach of any warranty or representation with respect
to any Property or any Operative Agreement or Bond Document; (l) any defect in
the condition, quality or fitness for use of any Property or any part thereof;
(m) any Default or Event of Default under the Head Lease or any other
circumstance arising under or related to the Head Lease or any other Bond
Document (including without limitation the lack of validity or enforceability of
any provision thereof); or (n) any other cause or circumstance whether similar
or dissimilar to the foregoing and whether or not Lessee shall have notice or
knowledge of any of the foregoing. The parties intend that the obligations of
Lessee hereunder shall be covenants, agreements and obligations that are
separate and independent from any obligations of Lessor hereunder or under the
Head Lease and shall continue unaffected unless such covenants, agreements and
obligations shall have been modified or terminated in accordance with an express
provision of this Lease. Lessee acknowledges that this Lease is in all respects
subject and subordinate to the Head Lease and the Bond Mortgage Instrument, and
to the extent the Bond Mortgage Instrument or Head Lease places burdens,
restrictions or obligations on the Development Authority or Lessor, as the case
may be, in excess of or varying from the burdens and obligations on Lessee
hereunder, Lessee agrees, in addition to its obligations hereunder, that it
shall perform, satisfy and comply with such burdens, restrictions and
obligations. Lessor and Lessee acknowledge and agree that the provisions of this
Section 6.1 have been specifically reviewed and subject to negotiation.
6.2 No Termination or Abatement.
Lessee shall remain obligated under this Lease in accordance
with its terms and shall not take any action to terminate, rescind or avoid this
Lease, notwithstanding any action for bankruptcy, insolvency, reorganization,
liquidation, dissolution, or other proceeding affecting any Person or any
Governmental Authority, or any action with respect to this Lease or any
Operative Agreement which may be taken by any trustee, receiver or liquidator of
any Person or any Governmental Authority or by any court with respect to any
Person, or any Governmental Authority. Lessee hereby waives all right (a) to
terminate or surrender this Lease (except as permitted under the terms of the
Operative Agreements) or (b) to avail itself of any abatement, suspension,
deferment, reduction, setoff, counterclaim or defense with respect to any Rent.
Lessee shall remain obligated under this Lease in accordance with its terms and
Lessee hereby waives any and all rights now or hereafter conferred by statute or
otherwise to modify or to avoid strict compliance with its obligations under
this Lease. Notwithstanding any such statute or otherwise, Lessee shall be bound
by all of the terms and conditions contained in this Lease.
ARTICLE VII
7.1 Ownership of the Properties.
(a) Lessor and Lessee intend that for federal and all state
and local income tax purposes, and bankruptcy purposes this Lease will
be treated as a financing arrangement and Lessee will be treated as the
owner of the Properties and will be entitled to all tax benefits
ordinarily available to owners of property similar to the Properties
for such tax purposes. Notwithstanding the foregoing, neither party
hereto has made, nor shall be deemed to have made, any representation
or warranty as to the availability of any of the foregoing treatments
under applicable accounting rules, tax, bankruptcy, regulatory,
commercial or real estate law or under any other set of rules. Lessee
shall claim the cost recovery deductions associated with each Property,
and Lessor shall not, to the extent not prohibited by Law, take on its
tax return a position inconsistent with Lessee's claim of such
deductions.
(b) For income tax purposes and bankruptcy purposes, Lessor
and Lessee intend this Lease to constitute a finance lease and not a
true lease. Lessor and Lessee further intend and agree that, for the
purpose of securing Lessee's obligations hereunder, (i) this Lease
shall be deemed to be a security agreement and financing statement
within the meaning of Article 9 of the Uniform Commercial Code
respecting each of the Properties and all proceeds (including without
limitation insurance proceeds thereof) to the extent such is personal
property and an irrevocable grant and conveyance of a lien and mortgage
on each of the Properties and all proceeds (including without
limitation insurance proceeds thereof) to the extent such is real
property; (ii) the acquisition of title or other interest in each
Property referenced in Article II shall be deemed to be a grant by
Lessee to Lessor of, and Lessee hereby grants to Lessor, a lien on and
security interest, mortgage lien and deed of trust in all of Lessee's
right, title and interest in and to each Property and all proceeds
(including without limitation insurance proceeds thereof) of the
conversion, voluntary or involuntary, of the foregoing into cash,
investments, securities or other property, whether in the form of cash,
investments, securities or other property, and an assignment of all
rents, profits and income produced by each Property; and (iii)
notifications to Persons holding such property, and acknowledgments,
receipts or confirmations from financial intermediaries, bankers or
agents (as applicable) of Lessee shall be deemed to have been given for
the purpose of perfecting such lien, security interest, mortgage lien
and deed of trust under applicable law. Lessor and Lessee shall
promptly take such actions as may be necessary or advisable in either
party's opinion (including without limitation the filing of Uniform
Commercial Code Financing Statements, Uniform Commercial Code Fixture
Filings and memoranda of this Lease and the various Lease Supplements)
to ensure that the lien, security interest, lien, mortgage lien and
deed of trust in each Property and the other items referenced above
will be deemed to be a perfected lien, security interest, mortgage lien
and deed of trust of first priority under applicable law and will be
maintained as such throughout the Term.
ARTICLE VIII
8.1 Condition of the Properties.
LESSEE ACKNOWLEDGES AND AGREES THAT IT IS LEASING EACH
PROPERTY "AS-IS WHERE-IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS
OR IMPLIED) BY LESSOR AND IN EACH CASE SUBJECT TO (A) THE EXISTING STATE OF
TITLE INCLUDING WITHOUT LIMITATION THE HEAD LEASE FROM THE DEVELOPMENT AUTHORITY
TO THE LESSOR, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF (IF ANY), (C)
ANY STATE OF FACTS REGARDING ITS PHYSICAL CONDITION OR WHICH AN ACCURATE SURVEY
MIGHT SHOW, (D) ALL APPLICABLE LEGAL REQUIREMENTS AND (E) VIOLATIONS OF LEGAL
REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF AND/OR THE DATE OF THE
APPLICABLE LEASE SUPPLEMENT. NONE OF LESSOR, THE DEVELOPMENT AUTHORITY, THE
AGENT, ANY LENDER OR ANY HOLDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY
REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) OR SHALL BE DEEMED TO
HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE,
CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF ANY PROPERTY
(OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT
WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY PROPERTY (OR ANY PART
THEREOF), AND NONE OF LESSOR, THE DEVELOPMENT AUTHORITY, THE AGENT, ANY LENDER
OR ANY HOLDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREON
OR THE FAILURE OF ANY PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL
REQUIREMENT. LESSEE HAS OR PRIOR TO THE BASIC TERM COMMENCEMENT DATE WILL HAVE
BEEN AFFORDED FULL OPPORTUNITY TO INSPECT EACH PROPERTY AND THE IMPROVEMENTS
THEREON (IF ANY), IS OR WILL BE (INSOFAR AS LESSOR, THE DEVELOPMENT AUTHORITY,
THE AGENT, EACH LENDER AND EACH HOLDER ARE CONCERNED) SATISFIED WITH THE RESULTS
OF ITS INSPECTIONS AND IS ENTERING INTO THIS LEASE SOLELY ON THE BASIS OF THE
RESULTS OF ITS OWN INSPECTIONS, AND ALL RISKS INCIDENT TO THE MATTERS DESCRIBED
IN THE PRECEDING SENTENCE, AS BETWEEN LESSOR, THE DEVELOPMENT AUTHORITY, THE
AGENT, THE LENDERS AND THE HOLDERS, ON THE ONE HAND, AND LESSEE, ON THE OTHER
HAND, ARE TO BE BORNE BY LESSEE.
8.2 Possession and Use of the Properties.
(a) At all times during the Term with respect to each
Property, Lessee shall cause such Property to be a Permitted Facility
and such Property be used by Lessee in the ordinary course of its
business. Lessee shall pay, or cause to be paid, all charges and costs
required in connection with the use of the Properties as contemplated
by this Lease. Lessee shall not commit or permit any waste of the
Properties or any part thereof.
(b) The address stated in Section 28.1 of this Lease is the
principal place of business and chief executive office of Lessee (as
such terms are used in Section 9-103(3) of the Uniform Commercial Code
of any applicable jurisdiction), and Lessee will provide Lessor with
prior written notice of any change of location of its chief place of
business or chief executive office. Regarding a particular Property,
each Lease Supplement shall correctly identify the initial location of
the related Equipment and Improvements (if any) and shall contain an
accurate legal description for the related parcel of Land. The
Equipment and Improvements respecting each particular Property will be
located only at the location identified in the applicable Lease
Supplement.
(c) Lessee will not attach or incorporate any item of
Equipment to or in any other item of equipment or personal property or
to or in any real property (except the Land identified in the Lease
Supplement in which such Equipment is also described) in a manner that
could give rise to the assertion of any Lien on such item of Equipment
by reason of such attachment or the assertion of a claim that such item
of Equipment has become a fixture and is subject to a Lien in favor of
a third party that is prior to the Liens thereon created by the
Operative Agreements.
(d) On or prior to the Date of Beneficial Occupancy for each
Property, Lessor and Lessee shall execute a Lease Supplement in regard
to such Property which shall contain an Equipment Schedule that has a
complete description of each item of Equipment which is then a part of
the Property, an Improvement Schedule that has a complete description
of each Improvement which is then a part of the Property and a legal
description of the Land to be leased hereunder as of such date.
Simultaneously with the execution and delivery of each Lease
Supplement, such Equipment, Improvements, Land, and any Equipment and
Improvements which may be acquired by Lessor or have been financed
through the use of proceeds from the acquisition of Bonds pursuant to
the Operative Agreements and the Bond Documents after the Date of
Beneficial Occupancy shall be deemed to have been accepted by Lessee
for all purposes of this Lease and to be subject to this Lease.
(e) At all times during the Term with respect to each
Property, Lessee will comply with all obligations under and (to the
extent no Event of Default exists and provided that such exercise will
not impair the value, utility or remaining useful life of such
Property) shall be permitted to exercise all rights and remedies under,
all operation and easement agreements and related or similar agreements
applicable to such Property.
8.3 Integrated Properties.
On the Rent Commencement Date for each Property, Lessee shall
cause such Property to constitute (and for the duration of the Term shall
continue to constitute) all of the equipment, facilities, rights, other personal
property and other real property necessary or appropriate to operate, utilize,
maintain and control a Permitted Facility in a commercially reasonable manner.
ARTICLE IX
9.1 Compliance With Legal Requirements, Insurance Requirements
and Manufacturer's Specifications `and Standards.
Subject to the terms of Article XIII relating to permitted
contests, Lessee, at its sole cost and expense, shall (a) comply with all
applicable Legal Requirements (including without limitation all Environmental
Laws), all Insurance Requirements relating to the Properties and all
manufacturer's specifications and standards, including without limitation the
acquisition, installation, testing, use, development, construction, operation,
maintenance, repair, refurbishment and restoration thereof, whether or not
compliance therewith shall require structural or extraordinary changes in any
Property or interfere with the use and enjoyment of any Property, and (b)
procure, maintain and comply with all licenses, permits, orders, approvals,
consents and other authorizations required for the acquisition, installation,
testing, use, development, construction, operation, maintenance, repair,
refurbishment and restoration of the Properties, unless the failure to comply
with such Legal Requirement or to procure, maintain and comply with such items
identified in subparagraphs (a) and (b) could not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect. In addition,
Lessee agrees to take such action as is required to cause or permit (x) Lessor
to comply with each and every provision of the Head Lease and (y) the
Development Authority to comply with each and every provision of the Bond
Mortgage Instrument. Lessor agrees to take such actions at the cost and expense
of Lessee as may be reasonably requested by Lessee in connection with the
compliance by Lessee with its obligations under this Section 9.1.
ARTICLE X
10.1 Maintenance and Repair; Return.
(a) Lessee, at its sole cost and expense, shall maintain each
Property in good condition, repair and working order (ordinary wear and
tear excepted) and in the repair and condition as when originally
delivered to Lessor and make all necessary repairs thereto and
replacements thereof, of every kind and nature whatsoever, whether
interior or exterior, ordinary or extraordinary, structural or
nonstructural or foreseen or unforeseen, in each case as required by
Section 9.1 and on a basis consistent with the operation and
maintenance of properties or equipment comparable in type and function
to the applicable Property, such that such Property is capable of being
immediately utilized by a third party and in compliance with standard
industry practice subject, however, to the provisions of Article XV
with respect to Casualty and Condemnation.
(b) Lessee shall not use or locate any component of any
Property outside of the State of Georgia. Lessee shall not move or
relocate any component of any Property beyond the boundaries of the
Land (comprising part of such Property) described in the applicable
Lease Supplement.
(c) If any component of any Property becomes worn out, lost,
destroyed, damaged beyond repair or otherwise permanently rendered
unfit for use, Lessee, at its own expense, will within a reasonable
time replace such component with a replacement component which is free
and clear of all Liens (other than Permitted Liens) and has a value,
utility and useful life at least equal to the component replaced
(assuming the component replaced had been maintained and repaired in
accordance with the requirements of this Lease). All components which
are added to any Property shall immediately become the property of (and
title thereto shall vest in) the Development Authority and shall be
deemed incorporated in such Property and subject to the terms of the
Head Lease and this Lease as if originally leased thereunder and
hereunder.
(d) Upon reasonable advance notice, the Development Authority,
Lessor and their respective agents shall have the right to inspect each
Property and all maintenance records with respect thereto at any
reasonable time during normal business hours but shall not, in the
absence of an Event of Default, materially disrupt the business of
Lessee.
(e) [Intentionally Omitted]
(f) Lessor shall under no circumstances be required to build
any improvements or install any equipment on any Property, make any
repairs, replacements, alterations or renewals of any nature or
description to any Property, make any expenditure whatsoever in
connection with this Lease or maintain any Property in any way. Lessor
shall not be required to maintain, repair or rebuild all or any part of
any Property, and Lessee waives the right to (i) require Lessor to
maintain, repair, or rebuild all or any part of any Property, or (ii)
make repairs at the expense of Lessor pursuant to any Legal
Requirement, Insurance Requirement, contract, agreement, covenant,
condition or restriction at any time in effect.
(g) Lessee shall, upon the expiration or earlier termination
of this Lease with respect to a Property, if Lessee shall not have
exercised its Purchase Option with respect to such Property (or
Lessor's leasehold interest therein as the case may be) and purchased
such Property (or Lessor's leasehold interest therein as the case may
be), surrender such Property to Lessor pursuant to (i) the exercise of
the applicable remedies upon the occurrence of a Lease Event of Default
or (ii) the second paragraph of Section 22.1(a) hereof, or the third
party purchaser, as the case may be, subject to Lessee's obligations
under this Lease (including without limitation the obligations of
Lessee at the time of such surrender under Sections 9.1, 10.1(a)-(f),
10.2, 11.1, 12.1, 22.1 and 23.1).
10.2 Environmental Inspection.
If Lessee has not given notice of exercise of its Purchase
Option on the Expiration Date pursuant to Section 20.1 or for whatever reason
Lessee does not purchase a Property in accordance with the terms of this Lease,
then not more than one hundred twenty (120) days nor less than sixty (60) days
prior to the Expiration Date, Lessee at its expense shall cause to be delivered
to Lessor a Phase I environmental site assessment recently prepared (no more
than thirty (30) days prior to the date of delivery) by an independent
recognized professional reasonably acceptable to the Agent, and in form, scope
and content reasonably satisfactory to the Agent.
ARTICLE XI
11.1 Modifications.
(a) Subject in all events to the Head Lease and the Bond
Documents, Lessee at its sole cost and expense, at any time and from
time to time without the consent of Lessor may make modifications,
alterations, renovations, improvements and additions to any Property or
any part thereof and substitutions and replacements therefor
(collectively, "Modifications"), and Lessee shall make any and all
Modifications required to be made pursuant to all Legal Requirements,
Insurance Requirements and manufacturer's specifications and standards;
provided, that: (i) no Modification shall materially impair the value,
utility or useful life of any Property from that which existed
immediately prior to such Modification; (ii) each Modification shall be
done expeditiously and in a good and workmanlike manner; (iii) no
Modification shall adversely affect the structural integrity of any
Property; (iv) to the extent required by Section 14.2(a), Lessee shall
maintain builders' risk insurance at all times when a Modification is
in progress; (v) subject to the terms of Article XIII relating to
permitted contests, Lessee shall pay all costs and expenses and
discharge any Liens arising with respect to any Modification; (vi) each
Modification shall comply with the requirements of this Lease
(including without limitation Sections 8.2 and 10.1); and (vii) no
Improvement shall be demolished or otherwise rendered unfit for use
unless Lessee shall finance the proposed replacement Modification
outside of this lease facility. All Modifications shall immediately and
without further action upon their incorporation into the applicable
Property (1) become property of the Development Authority, (2) be
subject to the Head Lease and this Lease and (3) be titled in the name
of the Development Authority. Lessee shall not remove or attempt to
remove any Modification from any Property. Lessee, at its own cost and
expense, will pay for the repairs of any damage to any Property caused
by the removal or attempted removal of any Modification.
(b) The construction process provided for in the Agency
Agreement is acknowledged by Lessor and the Agent to be consistent with
and in compliance with the terms and provisions of this Article XI.
ARTICLE XII
12.1 Warranty of Title.
(a) Title in each Property (including without limitation all
Equipment, all Improvements, all replacement components to each
Property and all Modifications) shall immediately and without further
action vest in and such shall become the property of the Development
Authority and be subject to the terms of the Head Lease and this Lease
(provided, that it is acknowledged that Lessor's interest in any
Property and each component thereof is further subject to the terms and
conditions of the Head Lease and the Bond Mortgage Instrument and the
interests of the Development Authority) from and after the date hereof
or such date of incorporation into any Property. Lessee agrees that,
subject to the terms of Article XIII relating to permitted contests,
Lessee shall not directly or indirectly create or allow to remain, and
shall promptly discharge at its sole cost and expense, any Lien,
defect, attachment, levy, title retention agreement or claim upon any
Property, any component thereof or any Modifications or any Lien,
attachment, levy or claim with respect to the Rent or with respect to
any amounts held by Lessor, the Agent or any Holder pursuant to any
Operative Agreement, other than Permitted Liens and Lessor Liens.
Lessee shall promptly notify Lessor in the event it receives actual
knowledge that a Lien other than a Permitted Lien or Lessor Lien has
occurred with respect to a Property, the Rent or any other such
amounts, and Lessee represents and warrants to, and covenants with,
Lessor that the Liens in favor of Lessor created by the Operative
Agreements are (and until the financing parties under the Operative
Agreements have been paid in full shall remain) first priority
perfected Liens subject only to Permitted Liens and Lessor Liens.
(b) Nothing contained in this Lease shall be construed as
constituting the consent or request of the Development Authority or
Lessor, expressed or implied, to or for the performance by any
contractor, mechanic, laborer, materialman, supplier or vendor of any
labor or services or for the furnishing of any materials for any
construction, alteration, addition, repair or demolition of or to any
Property or any part thereof. NOTICE IS HEREBY GIVEN THAT NEITHER THE
DEVELOPMENT AUTHORITY NOR THE LESSOR IS OR SHALL BE LIABLE FOR ANY
LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR
TO ANYONE HOLDING A PROPERTY OR ANY PART THEREOF THROUGH OR UNDER
LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR,
SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF THE
DEVELOPMENT AUTHORITY OR LESSOR IN AND TO ANY PROPERTY.
ARTICLE XIII
13.1 Permitted Contests Other Than in Respect of Indemnities.
Except to the extent otherwise provided for in Section 13 of
the Participation Agreement, Lessee, on its own or on Lessor's or the
Development Authority's behalf, as the case may be, but at Lessee's sole cost
and expense, may contest, by appropriate administrative or judicial proceedings
conducted in good faith and with due diligence, the amount, validity or
application, in whole or in part, of any Legal Requirement, or utility charges
payable pursuant to Section 4.1 or any Lien, attachment, levy, encumbrance or
encroachment, and Lessor agrees not to pay, settle or otherwise compromise any
such item, provided, that (a) the commencement and continuation of such
proceedings shall suspend the collection of any such contested amount from, and
suspend the enforcement thereof against, the applicable Properties, the
Development Authority, the Lessor, each Holder, the Agent and each Lender; (b)
there shall not be imposed a Lien (other than Permitted Liens) on any Property
and no part of any Property nor any Rent (or amount due under the Head Lease or
with respect to the Bonds) would be in any danger of being sold, forfeited, lost
or deferred; (c) at no time during the permitted contest shall there be a risk
of the imposition of criminal liability or material civil liability on the
Development Authority, the Lessor, any Holder, the Agent or any Lender for
failure to comply therewith; and (d) in the event that, at any time, there shall
be a material risk of extending the application of such item beyond the end of
the Term, then Lessee shall deliver to Lessor an Officer's Certificate
certifying as to the matters set forth in clauses (a), (b) and (c) of this
Section 13.1. Lessor, at Lessee's sole cost and expense, shall execute and
deliver to Lessee such authorizations and other documents as may reasonably be
required in connection with any such contest and, if reasonably requested by
Lessee, shall join as a party therein at Lessee's sole cost and expense.
ARTICLE XIV
14.1 Public Liability and Workers' Compensation Insurance.
During the Term for each Property, Lessee shall procure and
carry, at Lessee's sole cost and expense, commercial general liability and
umbrella liability insurance for claims for injuries or death sustained by
persons or damage to property while on such Property or respecting the Equipment
and such other public liability coverages as are then customarily carried by
similarly situated companies conducting business similar to that conducted by
Lessee. Such insurance shall be on terms and in amounts that are no less
favorable than insurance maintained by Lessee with respect to similar properties
and equipment that it owns and are then carried by similarly situated companies
conducting business similar to that conducted by Lessee, and in no event shall
have a minimum combined single limit per occurrence coverage (i) for commercial
general liability of less than $1,000,000 and (ii) for umbrella liability of
less than $50,000,000. The policies shall name Lessee as the insured and shall
be endorsed to name the Development Authority, the Bond Trustee, the Lessor, the
Holders, the Agent and the Lenders as additional insureds. The policies shall
also specifically provide that such policies shall be considered primary
insurance which shall apply to any loss or claim before any contribution by any
insurance which the Development Authority, the Bond Trustee, the Lessor, any
Holder, the Agent or any Lender may have in force. In the operation of the
Properties, Lessee shall comply with applicable workers' compensation laws and
protect the Development Authority, the Bond Trustee, the Lessor, each Holder,
the Agent and each Lender against any liability under such laws.
14.2 Permanent Hazard and Other Insurance.
(a) During the Term for each Property, Lessee shall keep such
Property insured against all risk of physical loss or damage by fire
and other risks and shall maintain builders' risk insurance during
construction of any Improvements or Modifications in each case in
amounts no less than the replacement value thereof and on terms that
(i) are no less favorable than insurance covering other similar
properties owned by Lessee and (ii) are then carried by similarly
situated companies conducting business similar to that conducted by
Lessee. The policies shall name Lessee as the insured and shall be
endorsed to name Lessor, the Holders and the Agent (on behalf of the
Lenders and the Holders) (and such other parties as may be required
under the terms of the Head Lease) as a named additional insured and
loss payee, to the extent of their respective interests; provided, so
long as no Event of Default exists, any loss payable under the
insurance policies required by this Section for losses up to $1,000,000
will be paid to Lessee.
(b) If, during the Term with respect to a Property the area in
which such Property is located is designated a "flood-prone" area
pursuant to the Flood Disaster Protection Act of 1973, or any
amendments or supplements thereto or is in a zone designated A or V,
then Lessee shall comply with the National Flood Insurance Program as
set forth in the Flood Disaster Protection Act of 1973. In addition,
Lessee will fully comply with the requirements of the National Flood
Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as
each may be amended from time to time, and with any other Legal
Requirement, concerning flood insurance to the extent that it applies
to any such Property. During the Term, Lessee shall, in the operation
and use of each Property, maintain workers' compensation insurance
consistent with that carried by similarly situated companies conducting
business similar to that conducted by Lessee and containing minimum
liability limits of no less than $100,000. In the operation of each
Property, Lessee shall comply with workers' compensation laws
applicable to Lessee, and protect the Development Authority, the Bond
Trustee, the Lessor, each Holder, the Agent and each Lender against any
liability under such laws.
14.3 Coverage.
(a) As of the date of this Lease and annually thereafter
during the Term, Lessee shall furnish the Bond Trustee and the Agent
with certificates prepared by the insurers or insurance broker of
Lessee showing the insurance required under Sections 14.1 and 14.2 to
be in effect, naming (to the extent of their respective interests)
Lessor, the Holders, the Agent and the Lenders as additional insureds
and loss payees and evidencing the other requirements of this Article
XIV. All such insurance shall be at the cost and expense of Lessee and
provided by nationally recognized, financially sound insurance
companies having an A+ or better rating by A.M. Best's Key Rating
Guide. Lessee shall cause such certificates to include a provision for
thirty (30) days' advance written notice by the insurer to the Bond
Trustee and the Agent in the event of cancellation or material
alteration of such insurance. If an Event of Default has occurred and
is continuing and Lessor so requests, Lessee shall deliver to the Agent
originals of all insurance policies required by Sections 14.1 and 14.2.
(b) Lessee agrees that the insurance policy or policies
required by Sections 14.1, 14.2(a) and 14.2(b) shall include an
appropriate clause pursuant to which any such policy shall provide that
it will not be invalidated should Lessee or any Contractor, as the case
may be, waive, at any time, any or all rights of recovery against any
party for losses covered by such policy or due to any breach of
warranty, fraud, action, inaction or misrepresentation by Lessee or any
Person acting on behalf of Lessee. Lessee hereby waives any and all
such rights against the Development Authority, the Bond Trustee, the
Lessor, the Holders, the Agent and the Lenders to the extent of
payments made to any such Person under any such policy.
(c) Neither Lessor nor Lessee shall carry separate insurance
concurrent in kind or form or contributing in the event of loss with
any insurance required under this Article XIV, except that Lessor may
carry separate liability insurance at Lessor's sole cost so long as (i)
Lessee's insurance is designated as primary and in no event excess or
contributory to any insurance Lessor may have in force which would
apply to a loss covered under Lessee's policy and (ii) each such
insurance policy will not cause Lessee's insurance required under this
Article XIV to be subject to a coinsurance exception of any kind.
(d) Lessee shall pay as they become due all premiums for the
insurance required by Section 14.1 and Section 14.2, shall renew or
replace each policy prior to the expiration date thereof or otherwise
maintain the coverage required by such Sections without any lapse in
coverage.
ARTICLE XV
15.1 Casualty and Condemnation.
(a) Subject to the terms of the Bond Documents and the
provisions of the Agency Agreement and this Article XV and Article XVI
(in the event Lessee delivers, or is obligated to deliver or is deemed
to have delivered, a Termination Notice), and prior to the occurrence
and continuation of a Default or an Event of Default, Lessee shall be
entitled to receive (and Lessor hereby irrevocably assigns to Lessee
all of Lessor's right, title and interest in) any condemnation
proceeds, award, compensation or insurance proceeds under Sections
14.2(a) or (b) hereof to which Lessee or Lessor may become entitled by
reason of their respective interests in a Property (i) if all or a
portion of such Property is damaged or destroyed in whole or in part by
a Casualty or (ii) if the use, access, occupancy, easement rights or
title to such Property or any part thereof is the subject of a
Condemnation; provided, however, if a Default or an Event of Default
shall have occurred and be continuing or if such award, compensation or
insurance proceeds shall exceed $1,000,000, then such award,
compensation or insurance proceeds shall be paid directly to Lessor or,
if received by Lessee, shall be held in trust for Lessor, and shall be
paid over by Lessee to Lessor and held in accordance with the terms of
this paragraph (a). All amounts held by Lessor hereunder on account of
any award, compensation or insurance proceeds either paid directly to
Lessor or turned over to Lessor shall be held as security for the
performance of Lessee's obligations hereunder and under the other
Operative Agreements.
(b) Lessee may appear in any proceeding or action to
negotiate, prosecute, adjust or appeal any claim for any award,
compensation or insurance payment on account of any such Casualty or
Condemnation and shall pay all expenses thereof. At Lessee's reasonable
request, and at Lessee's sole cost and expense, Lessor and the Agent
shall participate in any such proceeding, action, negotiation,
prosecution or adjustment. Lessor and Lessee agree that this Lease
shall control the rights of Lessor and Lessee in and to any such award,
compensation or insurance payment.
(c) If Lessee shall receive notice of a Casualty or a
Condemnation of a Property or any interest therein where the claim for
loss with respect to the affected Property is estimated to equal or
exceed twenty-five percent (25%) of the Property Cost of such Property
(provided, if the Head Lease shall be in force and effect, where such
claim is estimated to exceed 25% of "Project Costs" as determined under
the Bond Documents), Lessee shall give notice thereof to Lessor and to
the Agent promptly after Lessee's receipt of such notice. In the event
such a Casualty or Condemnation occurs (regardless of whether Lessee
gives notice thereof), then Lessee shall be deemed to have delivered a
Termination Notice to Lessor and the Agent and the provisions of
Sections 16.1 and 16.2 shall apply.
(d) In the event of a Casualty or a Condemnation (regardless
of whether notice thereof must be given pursuant to paragraph (c)),
this Lease shall terminate with respect to the applicable Property in
accordance with Section 16.1 if Lessee, within thirty (30) days after
such occurrence, delivers to Lessor and the Agent a notice to such
effect.
(e) If pursuant to this Section 15.1 this Lease shall continue
in full force and effect following a Casualty or Condemnation with
respect to the affected Property, Lessee shall, at its sole cost and
expense and using, if available, the proceeds of any award,
compensation or insurance with respect to such Casualty or Condemnation
(including without limitation any such award, compensation or insurance
which has been received by the Agent and which should be turned over to
Lessee pursuant to the terms of the Operative Agreements, and if not
available or sufficient, using its own funds), promptly and diligently
repair any damage to the applicable Property caused by such Casualty or
Condemnation in conformity with the requirements of Sections 10.1 and
11.1, using the as-built Plans and Specifications or manufacturer's
specifications for the applicable Improvements, Equipment or other
components of the applicable Property (as modified to give effect to
any subsequent Modifications, any Condemnation affecting the applicable
Property and all applicable Legal Requirements), so as to restore the
applicable Property to substantially the same remaining economic value,
useful life, utility, condition, operation and function as existed
immediately prior to such Casualty or Condemnation (assuming all
maintenance and repair standards have been satisfied). In such event,
title to the applicable Property shall remain with the Development
Authority and be subject to the Head Lease and this Lease.
(f) In no event shall a Casualty or Condemnation affect
Lessee's obligations to pay Rent pursuant to Article III.
(g) Notwithstanding anything to the contrary set forth in
Section 15.1(a) or Section 15.1(e), if during the Term with respect to
a Property a Casualty occurs with respect to such Property or Lessee
receives notice of a Condemnation with respect to such Property, and
following such Casualty or Condemnation, the applicable Property cannot
reasonably be restored, repaired or replaced on or before the day one
hundred eighty (180) days prior to the Expiration Date or the date nine
(9) months after the occurrence of such Casualty or Condemnation (if
such Casualty or Condemnation occurs during the Term) to the
substantially same remaining economic value, useful life, utility,
condition, operation and function as existed immediately prior to such
Casualty or Condemnation (assuming all maintenance and repair standards
have been satisfied) or on or before such day such Property is not in
fact so restored, repaired or replaced, then Lessee shall be required
to exercise its Purchase Option for such Property on the next Payment
Date (notwithstanding the limits on such exercise contained in Section
20.2) and pay Lessor the Termination Value for such Property; provided,
if any Default or Event of Default has occurred and is continuing,
Lessee shall also promptly (and in any event within three (3) Business
Days) pay Lessor any award, compensation or insurance proceeds received
on account of any Casualty or Condemnation with respect to any
Property; provided, further, that if no Default or Event of Default has
occurred and is continuing, any Excess Proceeds shall be paid to
Lessee. If a Default has occurred and is continuing and any Loans,
Holder Advances or other amounts are owing with respect thereto, then
any Excess Proceeds (to the extent of any such Loans, Holder Advances
or other amounts owing with respect thereto) shall be paid to Lessor,
held as security for the performance of Lessee's obligations hereunder
and under the other Operative Agreements and applied to such
obligations upon the exercise of remedies in connection with the
occurrence of an Event of Default.
15.2 Environmental Matters.
Promptly upon Lessee's actual knowledge of the presence of
Hazardous Substances in any portion of any Property or Properties in
concentrations and conditions that constitute an Environmental Violation and
which, in the reasonable opinion of Lessee, the cost to undertake any legally
required response, clean up, remedial or other action will or might result in a
cost to Lessee of more than $15,000, Lessee shall notify Lessor in writing of
such condition. In the event of any Environmental Violation (regardless of
whether notice thereof must be given), Lessee shall, not later than thirty (30)
days after Lessee has actual knowledge of such Environmental Violation, either
deliver to Lessor a Termination Notice with respect to the applicable Property
or Properties pursuant to Section 16.1, if applicable, or, at Lessee's sole cost
and expense, promptly and diligently undertake and complete any response, clean
up, remedial or other action (including without limitation the pursuit by Lessee
of appropriate action against any off-site or third party source for
contamination) necessary to remove, cleanup or remediate the Environmental
Violation in accordance with all Environmental Laws. Any such undertaking shall
be timely completed in accordance with prudent industry standards. If Lessee
does not deliver a Termination Notice with respect to such Property pursuant to
Section 16.1, Lessee shall, upon completion of remedial action by Lessee, cause
to be prepared by a reputable environmental consultant acceptable to Lessor a
report describing the Environmental Violation and the actions taken by Lessee
(or its agents) in response to such Environmental Violation, and a statement by
the consultant that the Environmental Violation has been remedied in full
compliance with applicable Environmental Law. Not less than sixty (60) days
prior to any time that Lessee elects to cease operations with respect to any
Property or to remarket any Property pursuant to Section 20.1 hereof or any
other provision of any Operative Agreement, Lessee at its expense shall cause to
be delivered to Lessor a Phase I environmental site assessment respecting such
Property recently prepared (no more than thirty (30) days prior to the date of
delivery) by an independent recognized professional acceptable to the Agent and
in form, scope and content satisfactory to the Agent. Notwithstanding any other
provision of any Operative Agreement, if Lessee fails to comply with the
foregoing obligation regarding the Phase I environmental site assessment, Lessee
shall be obligated to purchase such Property for its Termination Value and shall
not be permitted to exercise (and Lessor shall have no obligation to honor any
such exercise) any rights under any Operative Agreement regarding a sale of such
Property to a Person other than Lessee or any Affiliate of Lessee.
15.3 Notice of Environmental Matters.
Promptly, but in any event within five (5) days from the date
Lessee has actual knowledge thereof, Lessee shall provide to Lessor written
notice of any pending or threatened claim, action or proceeding involving any
Environmental Law or any Release on or in connection with any Property or
Properties. All such notices shall describe in reasonable detail the nature of
the claim, action or proceeding and Lessee's proposed response thereto. In
addition, Lessee shall provide to Lessor, within five (5) Business Days of
receipt, copies of all material written communications with any Governmental
Authority relating to any Environmental Law in connection with any Property.
Lessee shall also promptly provide such detailed reports of any such material
environmental claims as may reasonably be requested by Lessor.
ARTICLE XVI
16.1 Termination Upon Certain Events.
If Lessee has delivered, or is deemed to have delivered,
written notice of a termination of this Lease with respect to the applicable
Property to Lessor and the Agent in the form described in Section 16.2(a) (a
"Termination Notice") pursuant to the provisions of this Lease, then (a)
following the applicable Casualty or Condemnation, this Lease shall terminate
with respect to the affected Property on the applicable Termination Date or (b)
pursuant to the second sentence of Section 15.2, due to the occurrence of an
Environmental Violation, this Lease shall terminate with respect to the affected
Property.
16.2 Procedures.
(a) A Termination Notice shall contain: (i) notice of
termination of this Lease with respect to the affected Property on a
Payment Date not more than sixty (60) days after Lessor's receipt of
such Termination Notice (the "Termination Date"); and (ii) a binding
and irrevocable agreement of Lessee to pay the Termination Value (x)
for Lessor's leasehold interest under the Head Lease in the applicable
Property (and/or other rights arising thereunder) (together, the "Head
Lease Leasehold Interest") and (y) for the Bonds (and other rights in
connection therewith under the Bond Documents) the proceeds of which
were used to acquire and/or construct such Property, including the
Land, related Equipment, Improvements thereon and Transaction Expenses
related thereto (together, the "Related Bonds" and together with the
Head Lease Leasehold Interest in any Property, the "Related Property
and Bond Interest") and purchase such Lessor's Related Property and
Bond Interest on such Termination Date.
(b) On each Termination Date, Lessee shall pay to Lessor the
Termination Value for Lessor's Related Property and Bond Interest in
the applicable Property, and Lessor shall convey its Head Lease
Leasehold Interest in such Property or the remaining portion thereof,
if any, and the Related Bonds to Lessee (or Lessee's designee), all in
accordance with Section 20.2.
ARTICLE XVII
17.1 Lease Events of Default.
If any one (1) or more of the following events (each a "Lease
Event of Default") shall occur:
(a) Lessee shall fail to make payment of (i) any Basic Rent
(except as set forth in clause (ii)) within three (3) days after the
same has become due and payable or (ii) any Termination Value, on the
date any such payment is due and payable, or any payment of Basic Rent
or Supplemental Rent due on the due date of any such payment of
Termination Value, or any amount due on the Expiration Date;
(b) Lessee shall fail to make payment of any Supplemental Rent
(other than Supplemental Rent referred to in Section 17.1(a)(ii)) which
has become due and payable within three (3) days after receipt of
notice that such payment is due;
(c) Lessee shall fail to maintain insurance as required by
Article XIV of this Lease or to deliver any requisite annual
certificate with respect thereto within ten (10) days of the date such
certificate is due under the terms hereof;
(d) (i) Lessee shall fail to observe or perform any term,
covenant or condition of Lessee under this Lease or any other Operative
Agreement to which Lessee is a party other than those set forth in
Sections 17.1(a), (b) or (c) hereof, or Lessee shall fail to pay, or
cause to be paid, any Imposition or shall fail to observe any Legal
Requirement regarding any Property, in each case after thirty (30) days
from the earlier to occur of Lessee's knowledge of such Default or
written notice from the Agent of such Default so long as during such
thirty (30) day period Lessee proceeds in good faith and with due
diligence to cure such Default or (ii) any representation or warranty
made by Lessee set forth in this Lease or in any other Operative
Agreement or in any document entered into in connection herewith or
therewith or in any document, certificate or financial or other
statement delivered in connection herewith or therewith shall be false
or inaccurate in any material respect when made; provided, however, if
the Default was not intentional and is reasonably susceptible to cure
and the related representation or warranty could not reasonably be
expected to be a material inducement to the Lessor or any other Person
to enter into the transactions contemplated by the Participation
Agreement (or a basis on which to take or refrain from taking any
significant action hereunder or under any other Operative Agreement)
and no adverse effect (other than a de minimis adverse effect) has
resulted or would be expected to result from such default, then Lessee
shall have thirty (30) days to cure such Default so long as it proceeds
in good faith and with due diligence to cure such Default and no other
Default arises hereunder;
(e) [Intentionally Omitted];
(f) Lessee or any of its Subsidiaries shall default (beyond
applicable periods of grace and/or notice and cure) in the payment when
due of any principal of or interest on any Indebtedness having an
outstanding principal amount of at least $5,000,000; or any event or
condition shall occur which results in the acceleration of the maturity
of any Indebtedness having an outstanding principal amount of at least
$5,000,000 of Lessee or any of its Subsidiaries or enables the holder
of any such Indebtedness or any Person acting on such holder's behalf
to accelerate the maturity thereof;
(g) The liquidation or dissolution of Lessee or any of its
Material Subsidiaries, or the suspension of the business of Lessee or
any of its Material Subsidiaries, or the filing by Lessee or any of its
Material Subsidiaries of a voluntary petition or an answer seeking
reorganization, arrangement, readjustment of its debts or for any other
relief under the United States Bankruptcy Code, as amended, or under
any other insolvency act or law, state or federal, now or hereafter
existing, or any other action of Lessee or any of its Material
Subsidiaries indicating its consent to, approval of or acquiescence in,
any such petition or proceeding; the application by Lessee or any of
its Material Subsidiaries for, or the appointment by consent or
acquiescence of Lessee or any of its Material Subsidiaries of a
receiver, a trustee or a custodian of Lessee or any of its Material
Subsidiaries for all or a substantial part of its property; the making
by Lessee or any of its Material Subsidiaries of any assignment for the
benefit of creditors; the inability of Lessee or any of its Material
Subsidiaries or the admission by Lessee or any of its Material
Subsidiaries in writing of its inability to pay its debts as they
mature; or Lessee or any of its Material Subsidiaries taking any
corporate action to authorize any of the foregoing;
(h) The filing of an involuntary petition against Lessee or
any of its Material Subsidiaries in bankruptcy or seeking
reorganization, arrangement, readjustment of its debts or for any other
relief under the United States Bankruptcy Code, as amended, or under
any other insolvency act or law, state or federal, now or hereafter
existing; or the involuntary appointment of a receiver, a trustee or a
custodian of Lessee or any of its Material Subsidiaries for all or a
substantial part of its property; or the issuance of a warrant of
attachment, execution or similar process against any substantial part
of the property of Lessee or any of its Material Subsidiaries, and the
continuance of any of such events for ninety (90) days undismissed or
undischarged;
(i) The adjudication of Lessee or any of its Material
Subsidiaries as bankrupt or insolvent;
(j) The entering of any order in any proceedings against
Lessee or any Material Subsidiary decreeing the dissolution,
divestiture or split-up of Lessee or any Material Subsidiary, and such
order remains in effect for more than sixty (60) days;
(k) Any report, certificate, financial statement or other
instrument delivered to Lessor or the Agent by or on behalf of Lessee
pursuant to the terms of this Lease or any other Operative Agreement or
Bond Document is false or misleading in any material respect when made
or delivered; provided, however, if the Default was not intentional and
is reasonably susceptible to cure and the related report, certificate,
financial statement or other instrument could not reasonably be
expected to be a material inducement to the Lessor or any other Person
to enter into the transactions contemplated by the Participation
Agreement (or a basis on which to take or refrain from taking any
significant action hereunder or under any other Operative Agreement)
and no adverse effect (other than a de minimis adverse effect) has
resulted or would be expected to result from such Default, then Lessee
shall have thirty (30) days to cure such Default so long as Lessee
proceeds in good faith and with due diligence to cure such Default and
no other Default arises hereunder;
(l) Any default (attributable to a Lease Default, Lease Event
of Default, Guaranty Default or Guaranty Event of Default) shall occur
under the Head Lease or any other Bond Document after the expiration of
any express cure or grace periods;
(m) A final judgment or judgments for the payment of money
shall be rendered by a court or courts against Lessee or any of its
Material Subsidiaries in excess of $1,000,000 in the aggregate, and (i)
the same shall not be discharged (or provision shall not be made for
such discharge), or a stay of execution thereof shall not be procured,
within thirty (30) days from the date of entry thereof, or (ii) Lessee
or any of its Material Subsidiaries shall not, within said period of
thirty (30) days, or such longer period during which execution of the
same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal, or (iii) such judgment or
judgments shall not be discharged (or provisions shall not be made for
such discharge) within thirty (30) days after a decision has been
reached with respect to such appeal and the related stay has been
lifted;
(n) Lessee or any member of the Controlled Group shall fail to
pay when due an amount or amounts aggregating in excess of $2,000,000
which it shall have become liable to pay to the PBGC or to a Pension
Plan under Title IV of ERISA; or notice of intent to terminate a
Pension Plan or Pension Plans having aggregate Unfunded Liabilities in
excess of $1,000,000 shall be filed under Title IV of ERISA by Lessee
or any member of the Controlled Group, any plan administrator or any
combination of the foregoing; or the PBGC shall institute proceedings
under Title IV of ERISA to terminate or to cause a trustee to be
appointed to administer any such Pension Plan or Pension Plans or a
proceeding shall be instituted by a fiduciary of any such Pension Plan
or Pension Plans against Lessee or any member of the Controlled Group
to enforce Section 515 or 4219(c)(5) of ERISA; or a condition shall
exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any such Pension Plan or Pension Plans must be
terminated;
(o) A Change of Control shall have occurred with respect to
the Lessee;
(p) Lessee or any Material Subsidiary shall have violated any
Environmental Law, or such Environmental Violation, in the reasonable
opinion of Lessor, will require response, clean-up, remedial or other
action which will or might result in a cost in excess of $500,000; and
(q) Any Operative Agreement or Bond Document shall cease to be
in full force and effect as a result of any act, omission or breach by
the Construction Agent, the Lessee or the Guarantor of any of their
respective obligations under the Operative Agreements.
then, in any such event, Lessor may, in addition to the other rights and
remedies provided for in this Article XVII and in Section 18.1, terminate this
Lease by giving Lessee five (5) days notice of such termination, and this Lease
shall terminate, and all rights of Lessee under this Lease shall cease. Lessee
shall, to the fullest extent permitted by law, pay as Supplemental Rent all
costs and expenses incurred by or on behalf of Lessor, including without
limitation reasonable fees and expenses of counsel, as a result of any Lease
Event of Default hereunder.
17.2 Surrender of Possession.
If a Lease Event of Default shall have occurred and be
continuing, and whether or not this Lease shall have been terminated pursuant to
Section 17.1, Lessee shall, upon thirty (30) days written notice, surrender to
Lessor possession of the Properties. Lessor may enter upon and repossess the
Properties by such means as are available at law or in equity, and may remove
Lessee and all other Persons and any and all personal property and Lessee's
equipment and personalty and severable Modifications from the Properties. Lessor
shall have no liability by reason of any such entry, repossession or removal
performed in accordance with applicable law. Upon the written demand of Lessor,
Lessee shall return the Properties promptly to Lessor, in the manner and
condition required by, and otherwise in accordance with the provisions of,
Section 22.1(c) hereof.
17.3 Reletting.
If a Lease Event of Default shall have occurred and be
continuing, and whether or not this Lease shall have been terminated pursuant to
Section 17.1, Lessor may, but shall be under no obligation to, relet any or all
of the Properties, for the account of Lessee or otherwise, for such term or
terms (which may be greater or less than the period which would otherwise have
constituted the balance of the Term) and on such conditions (which may include
concessions or free rent) and for such purposes as Lessor may determine, and
Lessor may collect, receive and retain the rents resulting from such reletting.
Lessor shall not be liable to Lessee for any failure to relet any Property or
for any failure to collect any rent due upon such reletting.
17.4 Damages.
Neither (a) the termination of this Lease as to all or any of
the Properties pursuant to Section 17.1; (b) the repossession of all or any of
the Properties; nor (c) the failure of Lessor to relet all or any of the
Properties, the reletting of all or any portion thereof, nor the failure of
Lessor to collect or receive any rentals due upon any such reletting, shall
relieve Lessee of its liabilities and obligations hereunder, all of which shall
survive any such termination, repossession or reletting. If any Lease Event of
Default shall have occurred and be continuing and notwithstanding any
termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay
to Lessor all Rent and other sums due and payable hereunder to and including
without limitation the date of such termination. Thereafter, on the days on
which the Basic Rent or Supplemental Rent, as applicable, are payable under this
Lease or would have been payable under this Lease if the same had not been
terminated pursuant to Section 17.1 and until the end of the Term hereof or what
would have been the Term in the absence of such termination, Lessee shall pay
Lessor, as current liquidated damages (it being agreed that it would be
impossible accurately to determine actual damages), an amount equal to the Basic
Rent and Supplemental Rent that are payable under this Lease or would have been
payable by Lessee hereunder if this Lease had not been terminated pursuant to
Section 17.1, less the net proceeds, if any, which are actually received by
Lessor with respect to the period in question of any reletting of any Property
or any portion thereof; provided, that Lessee's obligation to make payments of
Basic Rent and Supplemental Rent under this Section 17.4 shall continue only so
long as Lessor shall not have received the amounts specified in Section 17.6. In
calculating the amount of such net proceeds from reletting, there shall be
deducted all of Lessor's, any Holder's, the Agent's and any Lender's reasonable
expenses in connection therewith, including without limitation repossession
costs, brokerage or sales commissions, fees and expenses for counsel and any
necessary repair or alteration costs and expenses incurred in preparation for
such reletting. To the extent Lessor receives any damages pursuant to this
Section 17.4, such amounts shall be regarded as amounts paid on account of Rent.
Lessee specifically acknowledges and agrees that its obligations under this
Section 17.4 shall be absolute and unconditional under any and all circumstances
and shall be paid and/or performed, as the case may be, without notice or demand
and without any abatement, reduction, diminution, setoff, defense, counterclaim
or recoupment whatsoever.
17.5 Power of Sale.
Without limiting any other remedies set forth in this Lease,
in the event that a court of competent jurisdiction rules that this Lease
constitutes a mortgage, deed of trust or other secured financing as is the
intent of the parties, then Lessor and Lessee agree that Lessee has granted,
pursuant to Section 7.1(b) hereof and each Lease Supplement, a Lien against its
interest in the Properties WITH POWER OF SALE, and that, upon the occurrence and
during the continuance of any Lease Event of Default, Lessor shall have the
power and authority, to the extent provided by law, after prior notice and lapse
of such time as may be required by law, to foreclose its interest (or cause such
interest to be foreclosed) in all or any part of the Properties.
17.6 Final Liquidated Damages.
If a Lease Event of Default shall have occurred and be
continuing, whether or not this Lease shall have been terminated pursuant to
Section 17.1 and whether or not Lessor shall have collected any current
liquidated damages pursuant to Section 17.4, Lessor shall have the right to
recover, by demand to Lessee and at Lessor's election, and Lessee shall pay to
Lessor, as and for final liquidated damages, but exclusive of the indemnities
payable under Section 13 of the Participation Agreement, and in lieu of all
current liquidated damages beyond the date of such demand (it being agreed that
it would be impossible accurately to determine actual damages) the Termination
Value and all other amounts then due and owing by Lessee under the Operative
Agreements. Upon payment of the amounts specified pursuant to the first sentence
of this Section 17.6, Lessee shall be entitled to receive from Lessor, either at
Lessee's request or upon Lessor's election, in either case at Lessee's cost, an
assignment of (i) Lessor's Head Lease Leasehold Interest related to the
Properties and, to the extent necessary or desirable, in recordable form and
otherwise in conformity with local custom and free and clear of the Lien of this
Lease (including without limitation the release of any memoranda of Lease and/or
the Lease Supplement recorded in connection therewith) and any Lessor Liens
other than Liens arising under the Bond Documents and (ii) the Related Bonds.
The Lessor's Head Lease Leasehold Interest in the Properties shall be conveyed
to Lessee "AS-IS, WHERE-IS" and in their then present physical condition, and
the Head Lease Leasehold Interest in the Properties and the Related Bonds
otherwise shall be conveyed without representation or warranty of any kind
except a warranty against Lessor's Liens.
Notwithstanding the foregoing, if a Lease Event of Default
shall have occurred and be continuing, then, in lieu of Termination Value under
the preceding paragraph, Lessor shall have the right to recover and Lessee shall
pay to Lessor, as and for final liquidated damages, but exclusive of the
indemnities payable under Section 13 of the Participation Agreement and
otherwise pursuant to any Operative Agreement and in lieu of all current
liquidated damages beyond the date of such demand (it being agreed that it would
be impossible accurately to determine actual damages), an amount equal to the
Maximum Residual Guaranty Amount; together with all accrued but unpaid Basic
Rent and Supplemental Rent and all other amounts then due and owing by Lessee or
subsequently arising pursuant to any indemnity provision of any Operative
Agreement; provided, however, in such case, Lessee shall not be entitled to
receive an assignment of Lessor's Head Lease Leasehold Interest in the
Properties or any Related Bonds.
If any statute or rule of law shall limit the amount of such
final liquidated damages to less than the amount agreed upon, Lessor shall be
entitled to the maximum amount allowable under such statute or rule of law;
provided, however, Lessee shall not be entitled to receive an assignment of
Lessor's Head Lease Leasehold Interest in the Properties or the Related Bonds
unless Lessee shall have paid in full the Termination Value and all other
amounts then due and owing by Lessee under the Operative Agreements. Lessee
specifically acknowledges and agrees that its obligations under this Section
17.6 shall be absolute and unconditional under any and all circumstances and
shall be paid and/or performed, as the case may be, without notice or demand and
without any abatement, reduction, diminution, setoff, defense, counterclaim or
recoupment whatsoever. Nothing herein or in any Operative Agreement shall be
construed to limit any amount payable by the Construction Agent or the Lessee to
any Person pursuant to any indemnity or similar provision under any Operative
Agreement.
17.7 Environmental Costs.
If a Lease Event of Default shall have occurred and be
continuing, and whether or not this Lease shall have been terminated pursuant to
Section 17.1, Lessee shall pay directly to any third-party (or at Lessor's
election, reimburse Lessor) for the cost of any environmental testing and/or
remediation work undertaken respecting any Property, as such testing or work is
deemed appropriate in the reasonable judgment of Lessor and shall indemnify and
hold harmless the Lessor and each other Indemnified Person therefrom. Lessee
shall pay all amounts referenced in the immediately preceding sentence within
ten (10) days of any request by Lessor for such payment. The provisions of this
Section 17.7 shall not limit the obligations of Lessee under any Operative
Agreement regarding indemnification obligations, environmental testing,
remediation and/or work.
17.8 Waiver of Certain Rights.
If this Lease shall be terminated pursuant to Section 17.1,
Lessee waives, to the fullest extent permitted by Law, (a) any notice of
re-entry or the institution of legal proceedings to obtain re-entry or
possession; (b) any right of redemption, re-entry or possession; (c) the benefit
of any laws now or hereafter in force exempting property from liability for rent
or for debt; and (d) any other rights which might otherwise limit or modify any
of Lessor's rights or remedies under this Article XVII.
17.9 Assignment of Rights Under Contracts.
If a Lease Event of Default shall have occurred and be
continuing, and whether or not this Lease shall have been terminated pursuant to
Section 17.1, Lessee shall upon Lessor's demand immediately assign, transfer and
set over to Lessor all of Lessee's right, title and interest in and to each
agreement executed by Lessee in connection with the acquisition, installation,
testing, use, development, construction, operation, maintenance, repair,
refurbishment and restoration of the Properties (including without limitation
all right, title and interest of Lessee with respect to all warranty,
performance, service and indemnity provisions), as and to the extent that the
same relate to the acquisition, installation, testing, use, development,
construction, operation, maintenance, repair, refurbishment and restoration of
the Properties or any of them.
17.10 Remedies Cumulative.
The remedies herein provided shall be cumulative and in
addition to (and not in limitation of) any other remedies available at law,
equity or otherwise, including without limitation any mortgage foreclosure
remedies.
ARTICLE XVIII
18.1 Lessor's Right to Cure Lessee's Lease Defaults.
Lessor, without waiving or releasing any obligation or Lease
Event of Default, may (but shall be under no obligation to) remedy any Lease
Event of Default for the account and at the sole cost and expense of Lessee,
including without limitation the failure by Lessee to maintain the insurance
required by Article XIV, and may, to the fullest extent permitted by law, and
notwithstanding any right of quiet enjoyment in favor of Lessee, enter upon any
Property, or real property owned or leased by Lessee and take all such action
thereon as may be necessary or appropriate therefor. No such entry shall be
deemed an eviction of any lessee. All out-of-pocket costs and expenses so
incurred (including without limitation fees and expenses of counsel), together
with interest thereon at the Overdue Rate from the date on which such sums or
expenses are paid by Lessor, shall be paid by Lessee to Lessor on demand.
ARTICLE XIX
19.1 Provisions Relating to Lessee's Exercise of its Purchase Option.
Subject to Section 19.2, in connection with any termination of
this Lease with respect to any Property pursuant to the terms of Section 16.2,
or in connection with Lessee's exercise of its Purchase Option, upon the date on
which this Lease is to terminate with respect to any Property, and upon tender
by Lessee of the amounts set forth in Sections 16.2(b) or 20.2, as applicable,
Lessor shall execute and deliver to Lessee (or to Lessee's designee) at Lessee's
cost and expense an assignment of Lessor's entire Head Lease Leasehold Interest
in (i) such Property and, to the extent necessary or desirable, in recordable
form and otherwise in conformity with local custom and free and clear of any
Lessor Liens attributable to Lessor other than any Liens arising under the Bond
Documents but without any other warranties (of title or otherwise) from Lessor
and (ii) the Related Bonds. Such Head Lease Leasehold Interest shall be conveyed
to Lessee "AS-IS, "WHERE-IS" and in then present physical condition, and the
Head Lease Leasehold Interest and the Related Bonds otherwise shall be conveyed
without representation or warranty of any kind except a warranty against
Lessor's Liens. Any assignment of Lessor's Related Property and Bond Interest
shall contain an express assumption of the obligations of the Lessor thereunder
and of any and all other obligations under any Bond Documents.
19.2 No Purchase or Termination With Respect to Less than All of a
Property.
Lessee shall not be entitled to exercise its Purchase Option or the
Sale Option separately with respect to Lessor's Head Lease Leasehold Interest in
a Property and the Related Bonds but shall be required to exercise its Purchase
Option or the Sale Option with respect to Lessor's Head Lease Leasehold Interest
in all Properties and the Related Bonds.
ARTICLE XX
20.1 Purchase Option or Sale Option-General Provisions.
Not less than one hundred twenty (120) days and no more than
one hundred eighty (180) days prior to the Expiration Date or (respecting the
Purchase Option only) any Payment Date after the Construction Period for all
Properties, Lessee may give Lessor and the Agent irrevocable written notice (the
"Election Notice") that Lessee is electing to exercise either (a) the option to
purchase all, but not less than all, the Lessor's Head Lease Leasehold Interest
in Properties, together with the Related Bonds, on the Expiration Date or on the
Payment Date specified in the Election Notice (the "Purchase Option") or (b)
with respect to an Election Notice given in connection with the Expiration Date
only, the option to remarket all, but not less than all, of such Related
Property and Bond Interest under the Head Lease to a Person other than Lessee or
any Affiliate of Lessee and cause a sale of such Related Property and Bond
Interest to occur on the Expiration Date pursuant to the terms of Section 22.1
(the "Sale Option"). If Lessee does not give an Election Notice indicating the
Purchase Option or the Sale Option at least one hundred twenty (120) days and
not more than one hundred eighty (180) days prior to the Expiration Date, then,
unless such Expiration Date is the final Expiration Date to which the Term may
be extended, the term of this Lease shall be extended in accordance with Section
2.2 hereof; if such Expiration Date is the final Expiration Date, then Lessee
shall be deemed to have elected the Purchase Option. If Lessee shall either (i)
elect (or be deemed to have elected) to exercise the Purchase Option or (ii)
elect the Sale Option and fail to cause the Lessor's Related Property and Bond
Interest in the Properties to be sold in accordance with the terms of Section
22.1 on the Expiration Date (a "Sale Option Failure"), then in either case
Lessee shall pay to Lessor on the date on which such purchase or sale is
scheduled to occur an amount equal to the Termination Value for Lessor's Related
Property and Bond Interest in the Properties (which the parties do not intend to
be a "bargain" purchase), and, in connection therewith, Lessee shall comply with
the terms and provisions of Section 22.1(c) to the same extent as if Lessor had
exercised its option to retain its leasehold interest in one (1) or more
Properties pursuant to Section 22.1(a) and, upon receipt of such amounts and
satisfaction of such obligations, Lessor shall transfer to Lessee all of
Lessor's Related Property and Bond Interest in the Properties in accordance with
Section 20.2; provided, however, if a Sale Option Failure shall occur, then in
lieu of paying Termination Value for Lessor's Related Property and Bond Interest
in the Properties and receiving a transfer of Lessor's Related Property and Bond
Interest, Lessee may, on the date on which such sale was scheduled to occur, pay
to Lessor an amount equal to the Maximum Residual Guaranty Amount, together with
any accrued but unpaid Basic Rent and Supplemental Rent and all other amounts
then due and owing by the Lessee or subsequently arising pursuant to any
indemnity provision under any Operative Agreement, in which case Lessee's
subleasehold interest in the Properties and other rights arising hereunder shall
immediately terminate and Lessee shall not be entitled to receive an assignment
of Lessor's Head Leasehold Interest in the Properties or the Related Bonds.
20.2 Lessee Purchase Option.
Provided, no Default or Event of Default shall have occurred
and be continuing and provided, that the Election Notice has been appropriately
given specifying the Purchase Option, Lessee shall purchase Lessor's Related
Property and Bond Interest in all of the Properties on the Expiration Date or
Payment Date at a price equal to the Termination Value (which the parties do not
intend to be a "bargain" purchase price).
Subject to Section 19.2, in connection with any termination of
this Lease with respect to any Property pursuant to the terms of Section 16.2,
or in connection with Lessee's exercise of its Purchase Option, upon the date on
which this Lease is to terminate with respect to a Property or all of the
Properties, and upon tender by Lessee of the amounts set forth in Section
16.2(b) or this Section 20.2, as applicable, Lessor shall execute, acknowledge
(where required) and deliver to Lessee, at Lessee's cost and expense, each of
the following: (a) an assignment of rights under the Head Lease relating to the
Property or Properties in form and substance reasonably satisfactory to the
Lessee (so long as no Default or Event of Default shall have occurred) and the
Agent assigning the Lessor's Head Lease Leasehold Interest relating to the
Property or Properties to Lessee free and clear of the Lien of this Lease, the
Lien of the Credit Documents and any Lessor Liens, excluding, however, any Lien
arising under the Bond Documents; (b) to the extent required by law or local
custom, a Bill of Sale conveying the Lessor's interest, if any, in each Property
(to the extent it is personal property) to Lessee free and clear of the Lien of
this Lease, the Lien of the Credit Documents and any Lessor Liens, excluding,
however, any Lien arising under the Bond Documents; (c) to the extent required
by Law or local custom any real estate tax affidavit or other document required
by law to be executed and filed in order to reflect the assignment of the Head
Lease Leasehold Interest relating to the Property or Properties; (d) to the
extent required by Law or local custom, FIRPTA affidavits; and (e) an assignment
of the Related Bonds with proper endorsement thereof, in form and substance
satisfactory to the Lessee (so long as no Default or Event of Default shall have
occurred) and the Agent conveying Lessor's interest therein to Lessee free and
clear of the lien of this Lease, the lien of the Credit Documents and the Lessor
Liens, excluding, however the Lien arising under the Bond Documents. The
Lessor's leasehold interest in the applicable Property or Properties shall be
conveyed to Lessee "AS-IS, WHERE-IS" and in then present physical condition. Any
assignment of Lessor's Related Property and Bond Interest in the Property shall
contain an express assumption of the obligations of the Lessor thereunder and of
any and all other obligations of Lessor under any Bond Documents.
If any Property is the subject of remediation efforts
respecting Hazardous Substances at the Expiration Date which could materially
and adversely impact the Fair Market Sales Value of such Property (or the
Lessor's Head Lease Leasehold Interest therein), then Lessee shall be obligated
to repurchase Lessor's Head Lease Leasehold Interest in each such Property and
the Related Bonds pursuant to Section 20.2.
On the Expiration Date and/or any Payment Date on which Lessee
has elected to exercise its Purchase Option, Lessee shall pay (or cause to be
paid) to Lessor, the Agent and all other parties, as appropriate, the sum of all
costs and expenses incurred by any such party in connection with the election by
Lessee to exercise its Purchase Option and all Rent and all other amounts then
due and payable or accrued under this Lease and/or any other Operative
Agreement.
20.3 Third Party Sale Option.
(a) Provided, that (i) no Default or Event of Default shall
have occurred and be continuing and (ii) the Election Notice has been
appropriately given specifying the Sale Option, Lessee shall undertake
to cause a sale of the Lessor's Related Property and Bond Interest in
all of the Properties on the Expiration Date (all as specified in the
Election Notice) in accordance with the provisions of Section 22.1
hereof.
(b) In the event Lessee exercises the Sale Option then, as
soon as practicable and in all events not less than sixty (60) days
prior to the Expiration Date, Lessee at its expense shall cause to be
delivered to Lessor a Phase I environmental site assessment for each of
the Properties recently prepared (no more than thirty (30) days old
prior to the date of delivery) by an independent recognized
professional acceptable to the Agent and in form, scope and content
satisfactory to the Agent. In the event that the Agent shall not have
received such environmental site assessment by the date sixty (60) days
prior to the Expiration Date or in the event that such environmental
assessment shall reveal the existence of any material violation of
Environmental Laws, other material Environmental Violation or potential
material Environmental Violation (with materiality determined in each
case in Lessor's discretion), then Lessee on the Expiration Date shall
pay to Lessor an amount equal to the Termination Value for Lessor's
Related Property and Bond Interest in the Properties and shall further
pay any and all other amounts due and owing hereunder. Upon receipt of
such payment and all other amounts due under the Operative Agreements,
Lessor shall transfer to Lessee all of Lessor's Related Property and
Bond Interest with respect to the Properties in accordance with Section
19.1.
ARTICLE XXI
21.1 [Intentionally Omitted].
ARTICLE XXII
22.1 Sale Procedure.
(a) During the Marketing Period, Lessee, on behalf of Lessor,
shall obtain bids for the cash purchase of Lessor's Related Property
and Bond Interest with respect to the Properties in connection with a
sale to one (1) or more third party purchasers to be consummated on the
Expiration Date (the "Sale Date") for the highest price available,
shall notify Lessor promptly of the name and address of each
prospective purchaser and the cash price which each prospective
purchaser shall have offered to pay for Lessor's Related Property and
Bond Interest with respect to each such Property and shall provide
Lessor with such additional information about the bids and the bid
solicitation procedure as Lessor may reasonably request from time to
time. All such prospective purchasers must be Persons other than Lessee
or any Affiliate of Lessee. On the Sale Date, Lessee shall pay (or
cause to be paid) to Lessor and all other parties, as appropriate, the
sum of all costs and expenses incurred by Lessor and/or the Agent (as
the case may be) in connection with such sale of Lessor's Related
Property and Bond Interest with respect to the Properties, all Rent and
all other amounts then due and payable or accrued under this Lease
and/or any other Operative Agreement.
Lessor may reject any and all bids and may assume sole
responsibility for obtaining bids by giving Lessee written notice to
that effect; provided, however, that notwithstanding the foregoing,
Lessor may not reject the bids submitted by Lessee if such bids, in the
aggregate, are greater than or equal to the sum of the Limited Recourse
Amount for Lessor's Related Property and Bond Interest with respect to
the Properties, and represent bona fide offers from one (1) or more
third party purchasers. If the highest cash price which a prospective
purchaser or the prospective purchasers shall have offered to pay for
Lessor's Related Property and Bond Interest with respect to the
Properties on the Sale Date is less than the sum of the Limited
Recourse Amount for Lessor's Related Property and Bond Interest with
respect to the Properties or if such bids do not represent bona fide
offers from one (1) or more third parties or if there are no bids,
Lessor may elect to retain Lessor's Related Property and Bond Interest
with respect to the Properties by giving Lessee prior written notice of
Lessor's election to retain such Related Property and Bond Interest
with respect to the Properties and promptly upon receipt of such
notice, Lessee shall surrender, or cause to be surrendered, each of the
Properties in accordance with the terms and conditions of Section 10.1.
Unless Lessor shall have elected to retain the Related
Property and Bond Interest with respect to the Properties pursuant to
the provisions of the preceding paragraph, Lessee shall arrange for
Lessor to sell its Related Property and Bond Interest with respect to
the Properties free and clear of the Lien of this Lease and any Lessor
Liens attributable to Lessor (but excluding however any Liens arising
under the Bond Documents), without recourse or warranty (of title or
otherwise), for cash on the Sale Date to the purchaser or purchasers
offering the highest cash sales price, as identified by Lessee or
Lessor, as the case may be; provided, however, solely as to Lessor or
the Trust Company, in its individual capacity, any Lessor Lien shall
not constitute a Lessor Lien so long as Lessor or the Trust Company, in
its individual capacity, is diligently contesting, such Lessor Lien by
appropriate proceedings. To effect such transfer and assignment, Lessor
shall execute, acknowledge (where required) and deliver to the
appropriate purchaser the documents, instruments and items described in
the second paragraph of Section 20.2 in connection with a termination
of one or more Properties or the Lessee's exercise of its Purchase
Option: Any assignment of Lessor's rights under the Head Lease shall
contain an express assumption of the obligations of the Lessor
thereunder and of any and all other obligations under any Bond
Documents. Lessee shall surrender the Properties so sold or subject to
such documents to each purchaser in the condition specified in Section
10.1. Lessee shall not take or fail to take any action which would have
the effect of unreasonably discouraging bona fide third party bids for
any Property (or interest therein). If Lessor's Head Lease Leasehold
Interest in any Property is not either (i) assigned on the Sale Date in
accordance with the terms of this Section 22.1, or (ii) retained by
Lessor pursuant to an affirmative election made by Lessor pursuant to
the second sentence of the second paragraph of this Section 22.1(a),
then (x) Lessee shall be obligated to pay Lessor on the Sale Date an
amount equal to the Maximum Residual Guaranty Amount, together with all
accrued but unpaid Basic Rent and Supplemental Rent and any and all
other amounts then due and owing by the Lessee or subsequently arising
pursuant to any indemnity or similar provision under any Operative
Agreement, and Lessee's subleasehold interest in the Property and other
rights arising hereunder shall immediately terminate and Lessee shall
not be entitled to receive an assignment of Lessor's Head Lease
Leasehold Interest in the Properties or the Related Bonds.
(b) If Lessor's Related Property and Bond Interest in the
Properties is assigned on a Sale Date to one (1) or more third party
purchasers in accordance with the terms of Section 22.1(a) and the
aggregate purchase price paid for such Related Property and Bond
Interest with respect to the Properties is less than the sum of the
aggregate Property Cost for the Properties (hereinafter such difference
shall be referred to as the "Deficiency Balance"), then Lessee hereby
unconditionally promises to pay to Lessor on the Sale Date the lesser
of (i) the Deficiency Balance, or (ii) the Maximum Residual Guarantee
Amount for all of the Related Property and Bond Interest in the
Properties. On a Sale Date if (w) no Event of Default has occurred and
is continuing, (x) Lessor receives the Termination Value for the
Lessor's Related Property and Bond Interest in the Properties from one
(1) or more third party purchasers, (y) Lessor receives all other
amounts specified in the last sentence of the first paragraph of
Section 22.1(a) and (z) the aggregate purchase price paid for all such
Related Property and Bond Interest on such date exceeds the sum of the
aggregate Property Cost for such Properties (or Lessor's leasehold
interest therein), then Lessee may retain such excess. If Lessor's
Related Property and Bond Interest is retained by Lessor pursuant to an
affirmative election made by Lessor pursuant to the provisions of
Section 22.1(a), then Lessee hereby unconditionally promises to pay to
Lessor on the Sale Date an amount equal to the Maximum Residual
Guarantee Amount for Lessor's Related Property and Bond Interest. Any
payment of the foregoing amounts described in this Section 22.1(b)
shall be made together with a payment of all other amounts referenced
in the last sentence of the first paragraph of Section 22.1(a).
(c) In the event that the Lessor's Related Property and Bond
Interest in the Properties is sold or assigned to one (1) or more third
party purchasers on the Sale Date or retained by Lessor in connection
with an affirmative election made by Lessor pursuant to the provisions
of Section 22.1(a), then in either case on the applicable Sale Date
Lessee shall provide Lessor or such third party purchaser with (i) all
permits, certificates of occupancy, governmental licenses and
authorizations necessary to use, operate, repair, access and maintain
each such Property for its intended purposes, (ii) such manuals,
permits, easements, licenses, intellectual property, know-how,
rights-of-way and other rights and privileges in the nature of an
easement as are reasonably necessary or desirable in connection with
the use, operation, repair, access to or maintenance of each such
Property for its intended purpose or otherwise as Lessor or such third
party purchaser(s) shall reasonably request (and a royalty-free license
or similar agreement to effectuate the foregoing on terms reasonably
agreeable to Lessor or such third party purchaser(s), as applicable)
and (iii) a services agreement covering such services and supplies to
be provided by Lessee as Lessor or such third party purchaser(s) may
request in order to use and operate each such Property for its intended
purposes at such rates (not in excess of arm's length fair market
rates) as shall be acceptable to Lessee and Lessor or such third party
purchaser(s). All assignments, licenses, easements, agreements and
other deliveries required by clauses (i), (ii) and (iii) of this
paragraph (c) shall be in form reasonably satisfactory to Lessor or
such third party purchaser(s), as applicable, and shall be fully
assignable (including without limitation both primary assignments and
assignments given in the nature of security) without payment of any
fee, cost or other charge. Lessee shall also execute any documentation
requested by Lessor or such third party purchaser(s), as applicable,
evidencing the continuation or assignment of each Ground Lease.
22.2 Application of Proceeds of Sale.
Lessor shall apply the proceeds of sale of its Related
Property and Bond Interest with respect to any Property in the following order
of priority:
(a) FIRST, to pay or to reimburse Lessor (and/or the Agent, as
the case may be) for the payment of all reasonable costs and expenses
incurred by Lessor (and/or the Agent, as the case may be) in connection
with the sale (to the extent Lessee has not satisfied its obligation to
pay such costs and expenses);
(b) SECOND, so long as the Credit Agreement is in effect and
any Holder Advances or any amount is owing to the Holders under any
Operative Agreement, to the Agent to be applied pursuant to
intercreditor provisions between the Lenders and the Holders contained
in the Operative Agreements; and
(c) THIRD, to Lessee.
22.3 Indemnity for Excessive Wear.
If the proceeds of the assignment described in Section 22.1
with respect to Lessor's Related Property and Bond Interest with respect to the
Properties, less all expenses incurred by Lessor in connection with such sale
(or assignment), shall be less than the Limited Recourse Amount in the
Properties with respect to such Related Property and Bond Interest, and at the
time of such sale (or assignment) it shall have been reasonably determined
(pursuant to the Appraisal Procedure) that the Fair Market Sales Value of the
Related Property and Bond Interest in the Properties shall have been impaired by
greater than expected wear and tear during the term of the Lease, Lessee shall
pay to Lessor within ten (10) days after receipt of Lessor's written statement
(i) the amount of such excess wear and tear determined by the Appraisal
Procedure or (ii) the amount of the shortfall, whichever amount is less.
22.4 Appraisal Procedure.
For determining the Fair Market Sales Value of the Related
Property and Bond Interest of the Properties (or any other amount which may,
pursuant to any provision of any Operative Agreement, be determined by an
appraisal procedure), Lessor and Lessee shall use the following procedure (the
"Appraisal Procedure"). Lessor and Lessee shall endeavor to reach a mutual
agreement as to such amount for a period of ten (10) days from commencement of
the Appraisal Procedure under the applicable section of the Lease, and if they
cannot agree within ten (10) days, then two (2) qualified appraisers, one (1)
chosen by Lessee and one (1) chosen by Lessor, shall mutually agree thereupon,
but if either party shall fail to choose an appraiser within twenty (20) days
after notice from the other party of the selection of its appraiser, then the
appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If
the two (2) appraisers cannot agree within twenty (20) days after both shall
have been appointed, then a third appraiser shall be selected by the two (2)
appraisers or, failing agreement as to such third appraiser within thirty (30)
days after both shall have been appointed, by the American Arbitration
Association. The decisions of the three (3) appraisers shall be given within
twenty (20) days of the appointment of the third appraiser and the decision of
the appraiser most different from the average of the other two (2) shall be
discarded and such average shall be binding on Lessor and Lessee; provided, that
if the highest appraisal and the lowest appraisal are equidistant from the third
appraisal, the third appraisal shall be binding on Lessor and Lessee. The fees
and expenses of the appraiser appointed by Lessee shall be paid by Lessee; the
fees and expenses of the appraiser appointed by Lessor shall be paid by Lessor
(such fees and expenses not being indemnified pursuant to Section 13 of the
Participation Agreement); and the fees and expenses of the third appraiser shall
be divided equally between Lessee and Lessor (such fees and expenses not being
indemnified pursuant to Section 13 of the Participation Agreement).
22.5 Certain Obligations Continue.
During the Marketing Period, the obligation of Lessee to pay
Rent with respect to the Properties (including without limitation the
installment of Basic Rent due on the Expiration Date) shall continue
undiminished until payment in full to Lessor of the sale proceeds, if any, the
Maximum Residual Guarantee Amount, the amount due under Section 22.3, if any,
and all other amounts due to Lessor or any other Person with respect to all
Properties or any Operative Agreement. Lessor shall have the right, but shall be
under no duty, to solicit bids, to inquire into the efforts of Lessee to obtain
bids or otherwise to take action in connection with any such sale, other than as
expressly provided in this Article XXII.
ARTICLE XXIII
23.1 Holding Over.
If Lessee shall for any reason remain in possession of a
Property after the expiration or earlier termination of this Lease as to such
Property (unless such Property is conveyed to Lessee), such possession shall be
as a tenancy at sufferance during which time Lessee shall continue to pay
Supplemental Rent that would be payable by Lessee hereunder were the Lease then
in full force and effect with respect to such Property and Lessee shall continue
to pay Basic Rent at one hundred fifty percent (150%) of the Basic Rent that
would otherwise be due and payable at such time. Such Basic Rent shall be
payable from time to time upon demand by Lessor and such additional fifty
percent (50%) amount shall be applied by Lessor to the payment of the Loans
pursuant to the Credit Agreement and the Holder Advances pursuant to the Trust
Agreement pro rata between the Loans and the Holder Advances. During any period
of tenancy at sufferance, Lessee shall, subject to the second preceding
sentence, be obligated to perform and observe all of the terms, covenants and
conditions of this Lease, but shall have no rights hereunder other than the
right, to the extent given by law to tenants at sufferance, to continue their
occupancy and use of such Property. Nothing contained in this Article XXIII
shall constitute the consent, express or implied, of Lessor to the holding over
of Lessee after the expiration or earlier termination of this Lease as to any
Property (unless such Property (or Lessor's leasehold interest therein) is
conveyed to Lessee) and nothing contained herein shall be read or construed as
preventing Lessor from maintaining a suit for possession of such Property or
exercising any other remedy available to Lessor at law or in equity.
ARTICLE XXIV
24.1 Risk of Loss.
During the Term, unless Lessee shall not be in actual
possession of any Property in question solely by reason of Lessor's exercise of
its remedies of dispossession under Article XVII, the risk of loss or decrease
in the enjoyment and beneficial use of such Property as a result of the damage
or destruction thereof by fire, the elements, casualties, thefts, riots, wars or
otherwise is assumed by Lessee, and Lessor shall in no event be answerable or
accountable therefor.
ARTICLE XXV
25.1 Assignment.
(a) Lessee may not assign this Lease or any of its rights or
obligations hereunder or with respect to any Property in whole or in
part to any Person without the prior written consent of the Agent, the
Lenders, the Holders and Lessor.
(b) No assignment by Lessee (referenced in this Section 25.1
or otherwise) or other relinquishment of possession to any Property
shall in any way discharge or diminish any of the obligations of Lessee
to Lessor hereunder and Lessee shall remain directly and primarily
liable under this Lease as to any assignment regarding this Lease.
25.2 Subleases.
(a) Promptly, but in any event within five (5) Business Days,
following the execution and delivery of any sublease permitted by this
Article XXV, Lessee shall notify Lessor and the Agent of the execution
of such sublease. As of the date of each Lease Supplement, Lessee shall
lease the respective Properties described in such Lease Supplement from
Lessor, and any existing tenant respecting such Property shall
automatically be deemed to be a subtenant of Lessee and not a tenant of
Lessor.
(b) Without the prior written consent of the Agent, any
Lender, any Holder or Lessor, but subject to the other provisions of
this Section 25.2, Lessee may sublet any Property or portion thereof to
any Person. All subleasing shall be done on market terms and shall in
no way diminish the fair market value or useful life of any applicable
Property.
(c) No sublease (referenced in this Section 25.2 or otherwise)
or other relinquishment of possession to any Property shall in any way
discharge or diminish any of Lessee's obligations to Lessor hereunder
and Lessee shall remain directly and primarily liable under this Lease
as to such Property, or portion thereof, so sublet. During the Basic
Term, the term of any such sublease (including renewals) shall not
extend beyond the Basic Term. Each sublease shall be expressly subject
and subordinate to this Lease.
ARTICLE XXVI
26.1 No Waiver.
No failure by Lessor or Lessee to insist upon the strict
performance of any term hereof or to exercise any right, power or remedy upon a
default hereunder, and no acceptance of full or partial payment of Rent during
the continuance of any such default, shall constitute a waiver of any such
default or of any such term. To the fullest extent permitted by law, no waiver
of any default shall affect or alter this Lease, and this Lease shall continue
in full force and effect with respect to any other then existing or subsequent
default.
ARTICLE XXVII
27.1 Acceptance of Surrender.
No surrender to Lessor of this Lease or of all or any portion
of any Property or of any part of any thereof or of any interest therein shall
be valid or effective unless agreed to and accepted in writing by Lessor and the
Agent and no act by Lessor or the Agent or any representative or agent of Lessor
or the Agent, other than a written acceptance, shall constitute an acceptance of
any such surrender.
27.2 No Merger of Title.
There shall be no merger of this Lease or of the leasehold
estate created hereby by reason of the fact that the same Person may acquire,
own or hold, directly or indirectly, in whole or in part, (a) this Lease or the
leasehold estate created hereby or any interest in this Lease or such leasehold
estate, (b) any right, title or interest in any Property, (c) any Notes, or (d)
a beneficial interest in Lessor.
ARTICLE XXVIII
28.1 Notices.
All notices required or permitted to be given under this Lease
shall be in writing and delivered as provided in the Participation Agreement.
ARTICLE XXIX
29.1 Miscellaneous.
Anything contained in this Lease to the contrary
notwithstanding, all claims against and liabilities of Lessee or Lessor arising
from events commencing prior to the expiration or earlier termination of this
Lease shall survive such expiration or earlier termination. If any provision of
this Lease shall be held to be unenforceable in any jurisdiction, such
unenforceability shall not affect the enforceability of any other provision of
this Lease and such jurisdiction or of such provision or of any other provision
hereof in any other jurisdiction.
29.2 Amendments and Modifications.
Neither this Lease nor any Lease Supplement may be amended,
waived, discharged or terminated except in accordance with the provisions of
Section 14.5 of the Participation Agreement.
29.3 Successors and Assigns.
All the terms and provisions of this Lease shall inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
29.4 Headings and Table of Contents.
The headings and table of contents in this Lease are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
29.5 Counterparts.
This Lease may be executed in any number of counterparts, each
of which shall be an original, but all of which shall together constitute one
(1) and the same instrument.
29.6 GOVERNING LAW.
THIS LEASE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF GEORGIA, EXCEPT TO THE EXTENT THE LAWS OF THE
STATE WHERE A PARTICULAR PROPERTY IS LOCATED ARE REQUIRED TO APPLY.
29.7 Calculation of Rent.
All calculation of Rent payable hereunder shall be computed
based on the actual number of days elapsed over a year of three hundred sixty
(360) days or, to the extent such Rent is based on the Prime Lending Rate, three
hundred sixty-five (365) (or three hundred sixty-six (366), as applicable) days.
29.8 Memoranda of Lease and Lease Supplements.
This Lease shall not be recorded; provided, Lessor and Lessee
shall promptly record (a) a memorandum of this Lease and the applicable Lease
Supplement (in substantially the form of Exhibit B attached hereto) regarding
each Property promptly after the acquisition thereof in the local filing office
with respect thereto, in all cases at Lessee's cost and expense, and as required
under applicable law to sufficiently evidence this Lease and any such Lease
Supplement in the applicable real estate filing records.
29.9 Allocations between the Lenders and the Holders.
Notwithstanding any other term or provision of this Lease to
the contrary, the allocations of the proceeds of the Properties and any and all
other Rent and other amounts received hereunder shall be subject to the
inter-creditor provisions between the Lenders and the Holders contained in the
Operative Agreements (or as otherwise agreed among the Lenders and the Holders
from time to time).
29.10 Limitations on Recourse.
Notwithstanding anything contained in this Lease to the
contrary, Lessee agrees to look solely to Lessor's estate and interest in the
Properties (and in no circumstance to the Agent, the Lenders, the Holders or
otherwise to Lessor) for the collection of any judgment requiring the payment of
money by Lessor in the event of liability by Lessor, and no other property or
assets of Lessor or any shareholder, owner or partner (direct or indirect) in or
of Lessor, or any director, officer, employee, beneficiary, Affiliate of any of
the foregoing shall be subject to levy, execution or other enforcement procedure
for the satisfaction of the remedies of Lessee under or with respect to this
Lease, the relationship of Lessor and Lessee hereunder or Lessee's use of the
Properties or any other liability of Lessor to Lessee. Nothing in this Section
shall be interpreted so as to limit the terms of Sections 6.1 or 6.2 or the
provisions of Section 14.10 of the Participation Agreement.
29.11 WAIVERS OF JURY TRIAL.
EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY, TO
THE FULLEST EXTENT ALLOWED BY APPLICABLE LAW, WAIVE TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LEASE AND FOR ANY
COUNTERCLAIM THEREIN.
29.12 Exercise of Lessor Rights.
Lessee hereby acknowledges and agrees that the rights and
powers of Lessor under this Lease have been assigned to the Agent pursuant to
the terms of the Security Agreement and the other Operative Agreements.
29.13 Submission to Jurisdiction; Venue; Arbitration.
(a) Any legal action or proceeding with respect to this Lease
may be brought in the courts of the State of Georgia in Fulton County
or of the United States for the Northern District of Georgia, and, by
execution and delivery of this Lease, each of the parties to this Lease
hereby irrevocably accepts for itself and in respect of its property,
generally and unconditionally, the nonexclusive jurisdiction of such
courts. Each of the parties to this Lease further irrevocably consents
to the service of process out of any of the aforementioned courts in
any such action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to it at the address set
out for notices pursuant to Section 28.1, such service to become
effective three (3) days after such mailing. Nothing herein shall
affect the right of any party to serve process in any other manner
permitted by Law or to commence legal proceedings or to otherwise
proceed against any party in any other jurisdiction.
(b) Each of the parties to this Lease hereby irrevocably
waives any objection which it may now or hereafter have to the laying
of venue of any of the aforesaid actions or proceedings arising out of
or in connection with this Lease brought in the courts referred to in
subsection (a) above and hereby further irrevocably waives and agrees
not to plead or claim in any such court that any such action or
proceeding brought in any such court has been brought in an
inconvenient forum.
(c) Notwithstanding the provisions of Section 29.13(a) to the
contrary, upon demand of any party hereto, whether made before or after
institution of any judicial proceeding, any Dispute between or among
parties to this Lease shall be resolved by binding arbitration as
provided herein. Institution of a judicial proceeding by a party does
not waive the right of that party to demand arbitration hereunder.
Disputes may include, without limitation, tort claims, counterclaims,
disputes as to whether a matter is subject to arbitration, claims
brought as class actions, claims arising from this Lease executed in
the future, or claims arising out of or connected with the transaction
reflected by this Lease.
Arbitration shall be conducted under and governed by the
Arbitration Rules of the AAA and Title 9 of the United States Code. All
arbitration hearings shall be conducted in Atlanta, Fulton County,
Georgia. The expedited procedures set forth in Rule 51 et seq. of the
Arbitration Rules shall be applicable to claims of less than
$1,000,000. All applicable statutes of limitation shall apply to any
Dispute. A judgment upon the award may be entered in any court having
jurisdiction. The panel from which all arbitrators are selected shall
be comprised of licensed attorneys. The single arbitrator selected for
expedited procedure shall be a retired judge from the highest court of
general jurisdiction, state or federal, of the state where the hearing
will be conducted or if such person is not available to serve, the
single arbitrator may be a licensed attorney. Notwithstanding the
foregoing, this arbitration provision does not apply to disputes under
or related to swap agreements.
Notwithstanding the preceding binding arbitration provisions,
the parties to this Lease agree to preserve, without diminution,
certain remedies that the Agent on behalf of the Lenders and the
Holders may employ or exercise freely, independently or in connection
with an arbitration proceeding or after an arbitration action is
brought. The Agent on behalf of the Lenders and the Holders shall have
the right to proceed in any court of proper jurisdiction or by
self-help to exercise or prosecute the following remedies, as
applicable (i) all rights to foreclose against any real or personal
property or other security by exercising a power of sale granted under
any Operative Agreement or under applicable Law or by judicial
foreclosure and sale, including a proceeding to confirm the sale; (ii)
all rights of self-help including peaceful occupation of real property
and collection of rents, set-off, and peaceful possession of personal
property; (iii) obtaining provisional or ancillary remedies including
injunctive relief, sequestration, garnishment, attachment, appointment
of receiver and filing an involuntary bankruptcy proceeding; and (iv)
when applicable, a judgment by confession of judgment. Preservation of
these remedies does not limit the power of an arbitrator to grant
similar remedies that may be requested by a party in a Dispute.
The parties hereto agree that they shall not have a remedy of
special, punitive or exemplary damages against the other in any Dispute
and hereby waive any right or claim to special, punitive or exemplary
damages they have now or which may arise in the future in connection
with any Dispute whether the Dispute is resolved by arbitration or
judicially.
By execution and delivery of this Lease, each of the parties
hereto accepts, for itself and in connection with its properties,
generally and unconditionally, the non-exclusive jurisdiction relating
to any arbitration proceedings conducted under the Arbitration Rules in
Atlanta, Fulton County, Georgia and irrevocably agrees to be bound by
any final judgment rendered thereby in connection with this Lease from
which no appeal has been taken or is available.
29.14 USURY SAVINGS PROVISION.
IT IS THE INTENT OF THE PARTIES HERETO TO CONFORM TO AND
CONTRACT IN STRICT COMPLIANCE WITH APPLICABLE USURY LAW FROM TIME TO TIME IN
EFFECT. TO THE EXTENT ANY RENT OR PAYMENTS HEREUNDER ARE HEREINAFTER
CHARACTERIZED BY ANY COURT OF COMPETENT JURISDICTION AS THE REPAYMENT OF
PRINCIPAL AND INTEREST THEREON, THIS SECTION 29.14 SHALL APPLY. ANY SUCH RENT OR
PAYMENTS SO CHARACTERIZED AS INTEREST MAY BE REFERRED TO HEREIN AS "INTEREST."
ALL AGREEMENTS AMONG THE PARTIES HERETO ARE HEREBY LIMITED BY THE PROVISIONS OF
THIS PARAGRAPH WHICH SHALL OVERRIDE AND CONTROL ALL SUCH AGREEMENTS, WHETHER NOW
EXISTING OR HEREAFTER ARISING AND WHETHER WRITTEN OR ORAL. IN NO WAY, NOR IN ANY
EVENT OR CONTINGENCY (INCLUDING WITHOUT LIMITATION PREPAYMENT OR ACCELERATION OF
THE MATURITY OF ANY OBLIGATION), SHALL ANY INTEREST TAKEN, RESERVED, CONTRACTED
FOR, CHARGED, OR RECEIVED UNDER THIS LEASE OR OTHERWISE, EXCEED THE MAXIMUM
NONUSURIOUS AMOUNT PERMISSIBLE UNDER APPLICABLE LAW. IF, FROM ANY POSSIBLE
CONSTRUCTION OF ANY OF THE OPERATIVE AGREEMENTS OR ANY OTHER DOCUMENT OR
AGREEMENT, INTEREST WOULD OTHERWISE BE PAYABLE IN EXCESS OF THE MAXIMUM
NONUSURIOUS AMOUNT, ANY SUCH CONSTRUCTION SHALL BE SUBJECT TO THE PROVISIONS OF
THIS PARAGRAPH AND SUCH AMOUNTS UNDER SUCH DOCUMENTS OR AGREEMENTS SHALL BE
AUTOMATICALLY REDUCED TO THE MAXIMUM NONUSURIOUS AMOUNT PERMITTED UNDER
APPLICABLE LAW, WITHOUT THE NECESSITY OF EXECUTION OF ANY AMENDMENT OR NEW
DOCUMENT OR AGREEMENT. IF LESSOR SHALL EVER RECEIVE ANYTHING OF VALUE WHICH IS
CHARACTERIZED AS INTEREST WITH RESPECT TO THE OBLIGATIONS OWED HEREUNDER OR
UNDER APPLICABLE LAW AND WHICH WOULD, APART FROM THIS PROVISION, BE IN EXCESS OF
THE MAXIMUM LAWFUL AMOUNT, AN AMOUNT EQUAL TO THE AMOUNT WHICH WOULD HAVE BEEN
EXCESSIVE INTEREST SHALL, WITHOUT PENALTY, BE APPLIED TO THE REDUCTION OF THE
COMPONENT OF PAYMENTS DEEMED TO BE PRINCIPAL AND NOT TO THE PAYMENT OF INTEREST,
OR REFUNDED TO LESSEE OR ANY OTHER PAYOR THEREOF, IF AND TO THE EXTENT SUCH
AMOUNT WHICH WOULD HAVE BEEN EXCESSIVE EXCEEDS THE COMPONENT OF PAYMENTS DEEMED
TO BE PRINCIPAL. THE RIGHT TO DEMAND PAYMENT OF ANY AMOUNTS EVIDENCED BY ANY OF
THE OPERATIVE AGREEMENTS DOES NOT INCLUDE THE RIGHT TO RECEIVE ANY INTEREST
WHICH HAS NOT OTHERWISE ACCRUED ON THE DATE OF SUCH DEMAND, AND LESSOR DOES NOT
INTEND TO CHARGE OR RECEIVE ANY UNEARNED INTEREST IN THE EVENT OF SUCH DEMAND.
ALL INTEREST PAID OR AGREED TO BE PAID TO LESSOR SHALL, TO THE EXTENT PERMITTED
BY APPLICABLE LAW, BE AMORTIZED, PRORATED, ALLOCATED, AND SPREAD THROUGHOUT THE
FULL STATED TERM (INCLUDING WITHOUT LIMITATION ANY RENEWAL OR EXTENSION) OF THIS
LEASE SO THAT THE AMOUNT OF INTEREST ON ACCOUNT OF SUCH PAYMENTS DOES NOT EXCEED
THE MAXIMUM NONUSURIOUS AMOUNT PERMITTED BY APPLICABLE LAW.
30.1 ACKNOWLEDGMENT OF HEAD LEASE; BOND DOCUMENTS.
Lessee acknowledges and agrees that Lessor has entered into the Head
Lease and related Bond Documents at the request and direction of the Lessee in
order to make the property the subject of the Head Lease available to the Lessee
pursuant to this Lease. Further, the Lessee acknowledges and agrees that it will
incur a substantial benefit as a result of the Lessor entering into the Head
Lease and the related Bond Documents, including without limitation a partial
abatement of ad valorem taxes accruing in connection with the property the
subject of the Head Lease and this Lease. Further, the Lessee acknowledges and
agrees that it has reviewed the terms and conditions of the Head Lease and the
related Bond Documents. Accordingly, the Lessee specifically acknowledges and
agrees that it shall pay and perform each and every obligation of the Lessor
arising under or in connection with the Head Lease and the related Bond
Documents, excluding, however, the obligations of the Lessor to pay rent under
Section 5.3(a) of the Head Lease in an amount sufficient to pay principal and
interest on the Bonds; provided, that to the extent that Lessee has fully paid
or performed an obligation under the Lease, it shall not have a duplicative
obligation to pay or perform the same obligation under the Head Lease to the
extent that such payment or performance under the Lease does fulfill the
obligation under the Head Lease (or should reasonably be expected to fulfill
such obligation, but for the gross negligence or willful misconduct of another
party). The obligations arising hereunder shall survive the expiration or
termination of the Lease.
[Signature pages follow]
IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed
and delivered as of the date first above written.
TOTAL SYSTEM SERVICES, INC.
By: James B. Lipham
Name: James B. Lipham
Title: EVP & CFO
FIRST SECURITY BANK,
NATIONAL ASSOCIATION, not
individually, but solely as
the Owner Trustee under the
TSYS Trust 1997-1, as
Lessor
By: Val T. Orton
Name: Val T. Orton
Title: Vice President
Receipt of this original counterpart of the foregoing Lease is hereby
acknowledged as the date hereof NATIONSBANK OF TEXAS, N.A., as the Agent
By:__________________________________________________
Name:________________________________________________
Title:_______________________________________________
Lease Agreement
TSYS Trust 1997-1
EXHIBIT A TO
THE LEASE
LEASE SUPPLEMENT NO. ___
THIS LEASE SUPPLEMENT NO. ___ (this "Lease Supplement") dated as of
[________________] between FIRST SECURITY BANK, NATIONAL ASSOCIATION, not
individually, but solely as the Owner Trustee under the TSYS Trust 1997-1, as
lessor (the "Lessor"), and TOTAL SYSTEM SERVICES, INC., as lessee (the
"Lessee").
WHEREAS, Lessor is the lessee or will be the lessee of the Property
described on Schedule 1 hereto (the "Leased Property") and wishes to sublease
the same to Lessee;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. Definitions; Rules of Usage. For purposes of this Lease
Supplement, capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned to them in Appendix A to the Participation Agreement,
dated as of November 24, 1997, among Lessee, Lessor, not individually, except as
expressly stated therein, but solely as the Owner Trustee under the TSYS Trust
1997-1, Synovus Financial Corp., as the Guarantor, the Holders from time to time
a party thereto, the Lenders from time to time a party thereto and NationsBank
of Texas, N.A., as the Agent for the Lenders and respecting the Security
Documents, as the Agent for the Lenders and Holders, to the extent of their
interests, as such may be amended, modified, extended, supplemented, restated
and/or replaced from time to time.
SECTION 2. The Properties. Attached hereto as Schedule 1 is the
description of the Leased Property, with an Equipment Schedule attached hereto
as Schedule 1-A, an Improvement Schedule attached hereto as Schedule 1-B and a
legal description of the Land attached hereto as Schedule 1-C. Effective upon
the execution and delivery of this Lease Supplement by Lessor and Lessee, the
Leased Property shall be subject to the terms and provisions of the Lease.
Without further action, any and all additional Equipment funded under the
Operative Agreements and any and all additional Improvements made to the Land
shall be deemed to be titled to the Lessor and subject to the terms and
conditions of the Lease and this Lease Supplement.
SECTION 3. Use of Property. At all times during the Term with respect
to each Property, Lessee will comply with all obligations under and (to the
extent no Event of Default exists and provided, that such exercise will not
impair the value of such Property) shall be permitted to exercise all rights and
remedies under, all operation and easement agreements and related or similar
agreements applicable to such Property.
SECTION 4. Ratification; Incorporation by Reference. Except as
specifically modified hereby, the terms and provisions of the Lease and the
Operative Agreements are hereby ratified and confirmed and remain in full force
and effect. The Lease is hereby incorporated herein by reference as though
restated herein in its entirety.
SECTION 5. Original Lease Supplement. The single executed original of
this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED
COUNTERPART" on the signature page thereof and containing the receipt of the
Agent therefor on or following the signature page thereof shall be the original
executed counterpart of this Lease Supplement (the "Original Executed
Counterpart"). To the extent that this Lease Supplement constitutes chattel
paper, as such term is defined in the Uniform Commercial Code as in effect in
any applicable jurisdiction, no security interest in this Lease Supplement may
be created through the transfer or possession of any counterpart other than the
Original Executed Counterpart.
SECTION 6. GOVERNING LAW. THIS LEASE SUPPLEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF GEORGIA, EXCEPT TO THE
EXTENT THE LAWS OF THE STATE WHERE A PARTICULAR PROPERTY IS LOCATED ARE REQUIRED
TO APPLY.
SECTION 7. Mortgage; Power of Sale. Without limiting any other remedies
set forth in the Lease, in the event that a court of competent jurisdiction
rules that the Lease constitutes a mortgage, deed of trust or other secured
financing as is the intent of the parties, then Lessor and Lessee agree that
Lessee hereby grants a Lien against the Leased Property WITH POWER OF SALE, and
that, upon the occurrence of any Lease Event of Default, Lessor shall have the
power and authority, to the extent provided by law, after prior notice and lapse
of such time as may be required by law, to foreclose its interest (or cause such
interest to be foreclosed) in all or any part of the Leased Property.
SECTION 8. Counterpart Execution. This Lease Supplement may be executed
in any number of counterparts and by each of the parties hereto in separate
counterparts, all such counterparts together constituting but one (1) and the
same instrument.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
IN WITNESS WHEREOF, each of the parties hereto has caused this Lease
Supplement to be duly executed by an officer thereunto duly authorized as of the
date and year first above written.
FIRST SECURITY BANK, NATIONAL
ASSOCIATION, not individually,
but solely as the Owner
Trustee under the TSYS Trust
1997-1, as Lessor
By:____________________________________
Name:__________________________________
Title:_________________________________
TOTAL SYSTEM SERVICES, INC.,
as Lessee
By:____________________________________
Name:__________________________________
Title:_________________________________
Receipt of this original counterpart of the foregoing Lease Supplement is hereby
acknowledged as the date hereof.
NATIONSBANK OF TEXAS, N.A., as
the Agent
By:____________________________________
Name:__________________________________
Title:_________________________________
[CONFORM TO STATE LAW REQUIREMENTS]
STATE OF _______________ )
) ss:
COUNTY OF ______________ )
The foregoing Lease Supplement was acknowledged before me, the
undersigned Notary Public, in the County of _________________ this _____ day of
______________, by ________________, as __________________ of FIRST SECURITY
BANK, NATIONAL ASSOCIATION, a national banking association, not individually,
but solely as the Owner Trustee under the TSYS Trust 1997-1, on behalf of the
Owner Trustee.
[Notarial Seal] ________________________________________
Notary Public
My commission expires:____________
STATE OF _______________ )
) ss:
COUNTY OF ______________ )
The foregoing Lease Supplement was acknowledged before me, the
undersigned Notary Public, in the County of _________________ this _____ day of
______________, by ________________, as __________________ of TOTAL SYSTEM
SERVICES, INC., a ________________ corporation, on behalf of the corporation.
[Notarial Seal]
________________________________________
Notary Public
My commission expires:____________
STATE OF _______________ )
) ss:
COUNTY OF ______________ )
The foregoing Lease Supplement was acknowledged before me, the
undersigned Notary Public, in the County of ________________ this ____ day of
___________, by _____________, as __________________ of NATIONSBANK OF TEXAS,
N.A., a national banking association, as the Agent.
[Notarial Seal]
________________________________________
Notary Public
My commission expires:____________
SCHEDULE 1
TO LEASE SUPPLEMENT NO. ____
Description of the Leased Property
Office complex consisting of approximately 1,000,000 square feet of improvements
located in Muscogee County, Georgia.
SCHEDULE 1-A
TO LEASE SUPPLEMENT NO. ____
Equipment
NONE
SCHEDULE 1-B
TO LEASE SUPPLEMENT NO. ____
Improvements
NONE
SCHEDULE 1-C
TO LEASE SUPPLEMENT NO. ____
Land
All that lot, tract or parcel of land, situate, lying and being in Columbus,
Muscogee County, Georgia, known and designated as all of City Lots 199, 200,
201, 202, 203, 204, 205, 206 and adjacent property in Columbus, Georgia, and
designated as "Tract 4A 2.7 +/- ac." and "Tract 4B 2.8 +/- ac." upon a map or
plat entitled "Survey for the Housing Authority of Columbus, Georgia, Total
System Services, Inc. Riverfront Campus, Columbus, Georgia," prepared by Moon,
Meeks, Mason & Vinson, Inc., Civil Engineers, Land Surveyors, Columbus, Georgia,
dated August 21, 1997, a copy of which is recorded in Plat Book 137, Page 83-A,
B and C in the Office of the Superior Court of Muscogee County, Georgia, and
being more particularly described as follows:
Beginning at an iron pin located at the intersection of the northerly margin of
15th Street and the westerly margin of First Avenue and running thence North 00
degrees 45 minutes 11 seconds East along said westerly margin of First Avenue
for a distance of 597.23 feet to an iron pin located at the intersection of the
westerly margin of First Avenue and the southerly margin of 16th Street, running
thence North 89 degrees 43 minutes 51 seconds West along said southerly margin
of 16th Street for a distance of 340.32 feet to an iron pin, continuing thence
North 89 degrees 43 minutes 51 seconds West for a distance of 53.65 feet to a
point which is the normal water mark at the bottom of the East bank of the
Chattahoochee River, running thence in a southerly direction along the edge of
the said water mark at the bottom of the East bank of the Chattahoochee River
for a distance of 528 feet, more or less, to an iron pin, running thence North
88 degrees 54 minutes 00 seconds East for a distance of 130.46 feet to an iron
pin, running thence South 00 degrees 47 minutes 30 seconds West for a distance
of 73.04 feet to an iron pin, running thence South 89 degrees 02 minutes 00
seconds East for a distance of 12.81 feet to an iron pin, running thence South
00 degrees 54 minutes 00 seconds West for a distance of 20 feet to an iron pin
in the northerly margin of 15th Street, running thence South 89 degrees 14
minutes 08 seconds East along said northerly margin of 15th Street for a
distance of 325.61 feet to the iron pin which marks the point of beginning of
the property hereby conveyed.
The within described property is conveyed subject to that certain easement
reserved by the City of Columbus, Georgia for maintenance of a 48 inch sewer
line as described in that certain Warranty Deed dated December 3, 1962, between
the City of Columbus, Georgia and Muscogee Manufacturing Company, a copy of
which is recorded in Deed Book 867, Folio 213, in the Office of the Clerk of the
Superior Court of Muscogee County, Georgia and that certain Warranty Deed dated
December 3, 1962, between the City of Columbus, Georgia and William T. Heard,
Jr., a copy of which is recorded in Deed Book 867, Folio 216, in the Office of
the Clerk of the Superior Court of Muscogee County, Georgia.
EXHIBIT B-1 TO THE LEASE
Recordation requested by:
Moore & Van Allen, PLLC
After recordation return to:
Moore & Van Allen, PLLC (RVB)
NationsBank Corporate Center
100 North Tryon Street, Floor 47
Charlotte, NC 28202-4003
Space above this line
for Recorder's use
- --------------------------------------------------------------------------------
MEMORANDUM OF LEASE AGREEMENT
THIS MEMORANDUM OF LEASE AGREEMENT ("Memorandum"), dated as of
_____________, 199___, is by and between FIRST SECURITY BANK, NATIONAL
ASSOCIATION, a national banking association, not individually, but solely as the
Owner Trustee under the TSYS Trust 1997-1, with an office at 79 South Main
Street, Salt Lake City, Utah 84111 (hereinafter referred to as "Lessor") and
TOTAL SYSTEM SERVICES, INC., a Georgia corporation, with an office at 1200 Sixth
Avenue, Columbus, Georgia 31901 (hereinafter referred to as "Lessee").
WITNESSETH:
That for value received, Lessor and Lessee do hereby covenant, promise
and agree as follows:
1. Demised Premises and Date of Lease. Lessor has subleased to Lessee,
and Lessee has subleased from Lessor, for the Term (as hereinafter defined),
certain real property and other property located in
_______________________________, which is described in the attached Schedule 1
(the "Property"), pursuant to the terms of a Lease Agreement between Lessor and
Lessee dated as of November 24, 1997 (as such may be amended, modified,
extended, supplemented, restated and/or replaced from time to time, "Lease") and
a Lease Supplement No. _____ between Lessor and Lessee dated as of
_____________, 19__ (the "Lease Supplement").
2. Term, Renewal, Extension and Purchase Option. The term of the Lease
("Term") commenced as of __________, 19__ and shall end as of ___________, 19__,
unless the Term is extended or earlier terminated in accordance with the
provisions of the Lease. The Lease contains provisions for renewal and
extension. The tenant has a purchase option under the Lease.
3. Tax Payer Numbers.
Lessor's tax payer number: __________________.
Lessee's tax payer number: __________________.
4. Mortgage; Power of Sale. Without limiting any other remedies set
forth in the Lease, in the event that a court of competent jurisdiction rules
that the Lease constitutes a mortgage, deed of trust or other secured financing
as is the intent of the parties, then Lessor and Lessee agree that Lessee has
granted, pursuant to the terms of the Lease, a Lien against the Property WITH
POWER OF SALE, and that, upon the occurrence and during the continuance of any
Lease Event of Default, Lessor shall have the power and authority, to the extent
provided by law, after prior notice and lapse of such time as may be required by
law, to foreclose its interest (or cause such interest to be foreclosed) in all
or any part of the Property.
5. Effect of Memorandum. The purpose of this instrument is to give
notice of the Lease and their respective terms, covenants and conditions to the
same extent as if the Lease were fully set forth herein. This Memorandum shall
not modify in any manner the terms, conditions or intent of the Lease or the
Lease Supplement and the parties agree that this Memorandum is not intended nor
shall it be used to interpret the Lease or determine the intent of the parties
under the Lease.
[The remainder of this page has been intentionally left blank.]
IN WITNESS WHEREOF, the parties hereto have duly executed this
instrument as of the day and year first written.
LESSOR:
FIRST SECURITY BANK,
NATIONAL ASSOCIATION, not
individually, but solely as
the Owner Trustee under the
TSYS Trust 1997-1
By:_________________________________
Name:_______________________________
Title:______________________________
LESSEE:_____________________________
TOTAL SYSTEM SERVICES, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
B-2
EXHIBIT B-2 TO THE LEASE
Recordation requested by:
Moore & Van Allen, PLLC
After recordation return to:
Moore & Van Allen, PLLC (RVB)
NationsBank Corporate Center
100 North Tryon Street, Floor 47
Charlotte, NC 28202-4003
Space above this line
for Recorder's use
- --------------------------------------------------------------------------------
MEMORANDUM OF LEASE AGREEMENT
AND
LEASE SUPPLEMENT NO. _____________
THIS MEMORANDUM OF LEASE AGREEMENT AND LEASE SUPPLEMENT NO.
____________ ("Memorandum"), dated as of _____________, 199___, is by and
between FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking
association, not individually, but solely as the Owner Trustee under the TSYS
Trust 1997-1, with an office at 79 South Main Street, Salt Lake City, Utah 84111
(hereinafter referred to as "Lessor") and TOTAL SYSTEM SERVICES, INC., a Georgia
corporation, with an office at 1200 Sixth Avenue, Columbus, Georgia 31901
(hereinafter referred to as "Lessee").
WITNESSETH:
That for value received, Lessor and Lessee do hereby covenant, promise
and agree as follows:
1. Demised Premises and Date of Lease. Lessor has subleased to Lessee,
and Lessee has subleased from Lessor, for the Term (as hereinafter defined),
certain real property and other property located in
_______________________________, which is described in the attached Schedule 1
(the "Property"), pursuant to the terms of a Lease Agreement between Lessor and
Lessee dated as of November 24, 1997 (as such may be amended, modified,
extended, supplemented, restated and/or replaced from time to time, "Lease") and
a Lease Supplement No. _____ between Lessor and Lessee dated as of
_____________, 19__ (the "Lease Supplement").
2. Term, Renewal, Extension and Purchase Option. The term of the Lease
for the Property ("Term") commenced as of __________, 19__ and shall end as of
___________, 19__, unless the Term is extended or earlier terminated in
accordance with the provisions of the Lease. The Lease contains provisions for
renewal and extension. The tenant has a purchase option under the Lease.
3. Tax Payer Numbers.
Lessor's tax payer number: __________________.
Lessee's tax payer number: __________________.
4. Mortgage; Power of Sale. Without limiting any other remedies set
forth in the Lease, in the event that a court of competent jurisdiction rules
that the Lease constitutes a mortgage, deed of trust or other secured financing
as is the intent of the parties, then Lessor and Lessee agree that Lessee has
granted, pursuant to the terms of the Lease and the Lease Supplement, a Lien
against the Property WITH POWER OF SALE, and that, upon the occurrence and
during the continuance of any Lease Event of Default, Lessor shall have the
power and authority, to the extent provided by law, after prior notice and lapse
of such time as may be required by law, to foreclose its interest (or cause such
interest to be foreclosed) in all or any part of the Property.
5. Effect of Memorandum. The purpose of this instrument is to give
notice of the Lease and the Lease Supplement and their respective terms,
covenants and conditions to the same extent as if the Lease and the Lease
Supplement were fully set forth herein. This Memorandum shall not modify in any
manner the terms, conditions or intent of the Lease or the Lease Supplement and
the parties agree that this Memorandum is not intended nor shall it be used to
interpret the Lease or the Lease Supplement or determine the intent of the
parties under the Lease or the Lease Supplement.
[The remainder of this page has been intentionally left blank.]
IN WITNESS WHEREOF, the parties hereto have duly executed this
instrument as of the day and year first written.
LESSOR:
FIRST SECURITY BANK,
NATIONAL ASSOCIATION, not
individually, but solely as
the Owner Trustee under the
TSYS Trust 1997-1
By:____________________________________
Name:__________________________________
Title:_________________________________
LESSEE:________________________________
TOTAL SYSTEM SERVICES, INC.
By:____________________________________
Name:__________________________________
Title:_________________________________
SCHEDULE 1
(Description of Property)
[CONFORM TO STATE LAW REQUIREMENTS]
STATE OF _______________ )
) ss:
COUNTY OF ______________ )
The foregoing Memorandum of Lease Agreement and Lease Supplement No.
_____ was acknowledged before me, the undersigned Notary Public, in the County
of _________________ this _____ day of ___________19__, by
_______________________________________, as ________________________ of FIRST
SECURITY BANK, NATIONAL ASSOCIATION, a national banking association, not
individually, but solely as the Owner Trustee under the TSYS Trust 1997-1, on
behalf of the Owner Trustee.
[Notarial Seal]
________________________________________
Notary Public
My commission expires:____________
STATE OF _______________ )
) ss:
COUNTY OF ______________ )
The foregoing Memorandum of Lease Agreement and Lease Supplement No.
_____ was acknowledged before me, the undersigned Notary Public, in the County
of _________________ this _____ day of ____________19__, by
_________________________________, as __________________ of TOTAL SYSTEM
SERVICES, INC., a [_________________] corporation, on behalf of the corporation.
[Notarial Seal]
________________________________________
Notary Public
My commission expires:____________
TOTAL SYSTEM SERVICES, INC.
Statement re Computation of Per Share Earnings
The following computations set forth the calculations of basic and
diluted earnings per share for the twelve months ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net income $ 47,478,472 39,437,181 27,730,102
================= ================= =================
Weighted average number of common shares
outstanding 129,304,249 129,287,493 129,263,226
Increase due to assumed issuance of shares
related to stock options outstanding 188,122 163,605 130,325
Increase due to contingently issuable shares
associated with acquisition -- -- 21,978
----------------- ----------------- -----------------
Weighted average common and common
equivalent shares outstanding 129,492,371 129,451,098 129,415,529
================= ================= =================
Basic earnings per share $ .37 .31 .21
================= ================= =================
Diluted earnings per share $ .37 .30 .21
================= ================= =================
</TABLE>
TOTAL SYSTEM SERVICES, INC.(R) 1997 ANNUAL REPORT
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 22.8%
and 22.0%, respectively. The balance sheet data also reflect the continued
strong financial position of TSYS, as evidenced by the current ratio of 2.2:1 at
December 31, 1997, and increased shareholders' equity. The following financial
data should be read in conjunction with the Consolidated Financial Statements
and related Notes thereto and Financial Review, included elsewhere in this
Annual Report.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
(in thousands except per share data) 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Bankcard data processing services .......$ 324,718 277,870 218,953 166,194 136,650
Other services .......................... 36,781 33,778 30,755 21,377 15,424
- -----------------------------------------------------------------------------------------------------------
Total revenues .................. 361,499 311,648 249,708 187,571 152,074
- -----------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense .... 147,438 124,259 94,946 73,051 54,517
Net occupancy and equipment expense ..... 94,685 82,118 64,549 51,283 43,421
Other operating expenses ................ 59,447 53,368 47,291 28,139 21,521
- -----------------------------------------------------------------------------------------------------------
Total operating expenses ........ 301,570 259,745 206,786 152,473 119,459
- -----------------------------------------------------------------------------------------------------------
Equity in income (loss) of joint ventures 9,347 7,094 69 (13) --
- -----------------------------------------------------------------------------------------------------------
Operating income ................ 69,276 58,997 42,991 35,085 32,615
- -----------------------------------------------------------------------------------------------------------
Nonoperating income:
Gain (loss) on disposal of equipment, net (36) 31 (123) 65 335
Interest income, net of expense ......... 2,315 1,416 839 264 (80)
- -----------------------------------------------------------------------------------------------------------
Total nonoperating income ....... 2,279 1,447 716 329 255
- -----------------------------------------------------------------------------------------------------------
Income before income taxes ...... 71,555 60,444 43,707 35,414 32,870
Income taxes .................................... 24,077 21,007 15,977 12,924 12,647
- -----------------------------------------------------------------------------------------------------------
Net income ......................$ 47,478 39,437 27,730 22,490 20,223
===========================================================================================================
Basic earnings per share ........$ .37 .31 .21 .17 .16
===========================================================================================================
Diluted earnings per share ......$ .37 .30 .21 .17 .16
===========================================================================================================
Cash dividends declared per share ...............$ .045 .045 .045 .040 .035
===========================================================================================================
Weighted average common shares outstanding ...... 129,304 129,287 129,263 129,259 128,811
===========================================================================================================
Weighted average common and common
equivalent shares outstanding ........... 129,492 129,451 129,416 129,445 128,952
===========================================================================================================
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
- ----------------------------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets ............$296,858 245,759 199,000 165,042 133,339
Working capital ......... 70,899 52,274 37,687 33,421 30,594
Total long-term debt..... 475 676 931 1,162 1,707
Shareholders' equity..... 221,255 178,878 144,472 123,004 102,278
</TABLE>
21
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 from providing bankcard data processing and related
services to banks and other institutions under long-term processing contracts.
TSYS' services are marketed as THE TOTAL SYSTEM to financial institutions and
other organizations throughout the United States, 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, as well as an increase in the scope of services offered, revenues relating
to bankcard data processing services have continued to grow. Processing
contracts with large customers, representing a significant portion of the
Company's total revenues, generally provide for discounts on certain services
based on increases in the level of cardholder accounts processed. As a result,
bankcard data processing revenues and the related margins 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 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 of 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 business, its card portfolio or a segment of its accounts to a
party which processes cardholder accounts internally or uses another processor.
Continuing consolidation in the financial services industry could favorably or
unfavorably impact TSYS' financial condition and results of operations.
The average number of cardholder accounts on file increased 21.1% to 87.2
million in 1997, compared to 72.0 million in 1996, which represented a 35.7%
increase over 53.1 million in 1995. At December 31, 1997, TSYS' cardholder
accounts on file were approximately 92.8 million, up from 79.4 million and 63.3
million at December 31, 1996 and 1995, respectively.
During 1997, the majority of the increase in cardholder accounts on file
was primarily a result of portfolio growth of existing customers. The addition
of new clients also contributed approximately 4.7 million accounts to the growth
in cardholder accounts on file at December 31, 1997.
Total System Services de Mexico, S.A. de C.V. (TSYS de Mexico) began
generating revenues in June 1995 and continues to provide credit card related
processing services to a number of Mexican banks. TSYS de Mexico performs card
and statement production services, while subcontracting bankcard processing to
TSYS.
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 (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.
Revenues and expenses associated with TSYS' merchant processing operations
through April 1996 are included in TSYS' revenues and expenses. Effective May 1,
1996, TSYS' share of Vital's results of operations are included in equity in the
income of joint ventures. This change in classification of the Company's
revenues and expenses from its merchant processing operations to an equity
interest in the Vital joint venture affects the comparability of the Company's
statements of income.
22
TOTAL SYSTEM SERVICES, INC.(R) 1997 ANNUAL REPORT
Since 1994, TSYS has been providing processing services for commercial
cards which include purchasing cards, corporate cards and fleet cards for
employees. At December 31, 1997, TSYS was processing approximately 5.0 million
commercial card accounts, a 58.0% increase over the approximately 3.1 million
being processed at year-end 1996, representing a 61.1% increase over the 2.0
million at year-end 1995. Commercial card revenue is included in revenues from
bankcard processing.
A significant amount of the Company's revenues are derived from long-term
contracts with large customers, including certain major customers. Two
customers, AT&T Universal Card Services and NationsBank, together accounted for
approximately 25%, 29% and 34% of total revenues for the years ended December
31, 1997, 1996 and 1995, respectively. During 1997, TSYS announced an extension
of its long-term processing contract with NationsBank, to the year 2005.
Recently, AT&T announced its intention to sell its credit card business to
Citibank. TSYS and AT&T have a contract with a term until August 2000, and, at
AT&T's instruction, the Company is proceeding with converting the customer's
accounts to TS2 in 1998; approximately 1.2 million of these accounts were
converted in January 1998. The loss of either AT&T or NationsBank, or other
significant customers, could have a material adverse effect on the Company's
financial condition and results of operations.
During the first quarter of 1997, TSYS successfully completed the
conversion of Bank of America's cardholder accounts to TS2. In October 1997, the
Company completed the conversion of NationsBank's cardholder accounts to TS2
from our general cardholder processing system. As a result, TSYS has
approximately 19.2 million accounts being processed on TS2 at year-end 1997,
compared to 6.3 million at year-end 1996 and 1.1 million at year-end 1995.
Revenues from other services consist primarily of revenues generated by
TSYS' wholly owned subsidiaries, Columbus Depot Equipment Company (CDEC),
Mailtek, Inc. (Mailtek), TSYS Total Solutions, Inc. (TSI) (formerly Lincoln
Marketing, Inc.), and Columbus Productions, Inc. (CPI). CDEC provides TSYS
customers with an option to lease certain equipment necessary for on-line
communications and use of TSYS applications; Mailtek and TSI 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 1997 to
83.4%,compared to 83.3% and 82.8% for 1996 and 1995, 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; and certain costs associated with ongoing
enhancements to TS2, as well as certain costs associated with the conversion of
customers to TS2.
A significant portion of TSYS' operating expenses relates to salaries and
other personnel costs. During 1997, the average number of employees increased to
2,895, compared to 2,498 in 1996 and 2,087 in 1995. 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 capitalized for internally developed software and conversions
were $4.4 million, $4.9 million and $8.4 million in 1997, 1996 and 1995,
respectively. These decreases in capitalization have also contributed to
increases in employment expense, particularly in comparing 1996 to 1995. Since
completion of development of the core TS2 processing system, employment expenses
capitalized relate primarily to enhancements to TS2 and costs associated with
the conversion to TS2 of customers under long-term contracts.
[Omitted Bankcard Revenues graph is represented by the following table.]
Bankcard Revenues (Millions of Dollars)
97 $324.7
96 $277.9
95 $219.0
94 $166.2
93 $136.7
[Omitted Operating Income graph is represented by the folowing table.]
Operating Income (Millions of Dollars)
97 $ 69.3
96 $ 59.0
95 $ 43.0
94 $ 35.1
93 $ 32.6
23
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:
<TABLE>
<CAPTION>
Percentage Change
in Dollar Amounts
-----------------
Percentage of Total Revenues 1997 1996
Years Ended December 31, vs vs
----------------------------
1997 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Bankcard data processing services ....... 89.8% 89.2 87.7 16.9 26.9
Other services .......................... 10.2 10.8 12.3 8.9 9.8
- --------------------------------------------------------------------------------
Total revenues .................. 100.0 100.0 100.0 16.0 24.8
- --------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense .... 40.8 39.9 38.0 18.7 30.9
Net occupancy and equipment expense ..... 26.2 26.3 25.8 15.3 27.2
Other operating expenses ................ 16.4 17.1 19.0 11.4 12.9
- --------------------------------------------------------------------------------
Total operating expenses ........ 83.4 83.3 82.8 16.1 25.6
- --------------------------------------------------------------------------------
Equity in income of joint ventures ...... 2.6 2.2 0.0 31.8 nm
- --------------------------------------------------------------------------------
Operating income ................ 19.2 18.9 17.2 17.4 37.2
- --------------------------------------------------------------------------------
Nonoperating income:
Gain (loss) on disposal of equipment, net (0.0) 0.0 (0.0) nm nm
Interest income, net of expense ......... 0.6 0.5 0.3 63.5 68.6
- --------------------------------------------------------------------------------
Total nonoperating income ....... 0.6 0.5 0.3 57.5 101.9
- --------------------------------------------------------------------------------
Income before income taxes ...... 19.8 19.4 17.5 18.4 38.3
Income taxes .................................... 6.7 6.7 6.4 14.6 31.5
- --------------------------------------------------------------------------------
Net income ...................... 13.1% 12.7 11.1 20.4 42.2
================================================================================
</TABLE>
nm = not meaningful
Due to the importance of technology to its business, a large portion of
TSYS' employees are programmers - approximately 31.1% in 1997, compared to 33.1%
and 35.7% in 1996 and 1995, respectively. The Company has the option of
participating in the state of Georgia's incentive program called Intellectual
Capital Partnership Program (ICAPP). ICAPP is a commitment by the state of
Georgia of up to $23 million for classrooms, teachers, computer equipment and
high-tech training designed to meet Georgia businesses' needs for technical
analysts, computer systems personnel and mainframe programmers into the next
century. At December 31, 1997, approximately 195 graduates of these classes were
full-time employees of TSYS. There can be no assurance that TSYS will be able to
continue to recruit, hire and retain sufficient numbers of technical personnel
necessary to support its continued growth.
Net occupancy and equipment expense increased 15.3% in 1997 over 1996,
compared to 27.2% in 1996 over 1995. Equipment and software rentals, which
represent the largest component of net occupancy and equipment expense,
increased $6.7 million, or 15.5%, in 1997 compared to 1996, and $11.1 million,
or 34.1%, in 1996 compared to 1995. Substantial new, technologically advanced
equipment was leased in order to meet growth needs in 1997 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 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.
24
TOTAL SYSTEM SERVICES, INC.(R) 1997 ANNUAL REPORT
TSYS continues to monitor and assess its building and equipment needs as it
positions itself for future growth and expansion. In 1997, construction was
begun on a campus-type facility which will serve as the Company's corporate
headquarters; house administrative, client contact and programming team members;
and allow for significant growth. The Company has entered into an operating
lease agreement relating to the new corporate campus. Under the agreement, the
lessor has purchased the properties, is paying the construction and development
costs and has leased the facilities to the Company commencing upon its
completion, expected to be in 1999. The lease will provide for substantial
residual value guarantees and will include purchase options at the original cost
of the property. Real estate taxes, insurance, maintenance and operating
expenses applicable to the leased property will be obligations of the Company.
In addition, TSYS began expansion of 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 was
completed on the North Center property in 1997 to serve as TSI'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 11.4% in 1997 compared to 1996 and 12.9%
in 1996 compared to 1995. The growth in other operating expenses in 1997 is
primarily due to increased travel and other business development costs
associated with exploring new business opportunities. In 1997, management fees,
paid to an affiliate for human resources, maintenance, security, communications,
corporate education, travel and administration, increased 7.6% over 1996. In
1996, these management fees increased 171.7% because the fees were paid for only
the second half of 1995 but were paid for a full year in 1996. 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
between 1996 and 1995.
Operating Income
Operating income increased 17.4% to $69.3 million in 1997, compared to
$59.0 million in 1996, an increase of 37.2% over 1995 operating income of $43.0
million. Equity in income of TSYS' two joint ventures contributed significantly
to the increase as Vital became operational during 1996, and the Mexican joint
venture had its first full year of operations in 1996. Excluding equity in
income of joint ventures, operating income increased 15.5% to $59.9 million,
compared to $51.9 million in 1996, and increased 20.9% over the amount for 1995
of $42.9 million. The increases in operating income are due to increased
revenues combined with a focus on expense control. The operating income margin,
including equity in income of joint ventures, increased to 19.2% in 1997,
compared to 18.9% and 17.2% in 1996 and 1995, respectively.
Nonoperating Income
Interest income, net of expense, includes interest expense of $46,000,
$63,000 and $157,000 and interest income of $2.4 million, $1.5 million and
$996,000 for 1997, 1996 and 1995, respectively.
Interest expense decreased in 1997 and 1996 due to the decreasing level of
outstanding debt of subsidiaries. Interest income increased in 1997 and in 1996
due to increases in cash available for investment. 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; the certificate of deposit was redeemed at
maturity in the first quarter of 1997.
Income Taxes
Income tax expense was $24.1 million, $21.0 million and $16.0 million in
1997, 1996 and 1995, respectively, representing effective income tax rates of
33.6%, 34.8% and 36.6%. The decline in TSYS' effective income tax rate for 1997,
as compared to 1996 and 1995, is attributable to certain effective income tax
planning strategies, including the identification and recognition of research
and experimentation credits for ongoing development activities, foreign tax
credits associated with the Mexican joint venture, and a reduction in state
income taxes due to favorable new tax legislation.
25
Net Income
Net income increased 20.4% to $47.5 million (basic and diluted earnings per
share of $.37) in 1997 compared to 1996. In 1996, net income increased 42.2% to
$39.4 million (basic earnings per share of $.31 and diluted earnings per share
of $.30) compared to $27.7 million (basic and diluted earnings per share of
$.21) in 1995. The increase in net income is attributable to increased operating
revenues combined with an emphasis on expense control.
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 its operations and growth 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 and contract acquisition costs; and
the payment of cash dividends.
During 1997, TSY purchased and leased computer hardware and related
equipment, including software. Capital expenditures for property and equipment
were $18.0 million in 1997, compared to $19.4 million in 1996, and $17.0 million
in 1995. Expenditures for purchased computer software were $14.1 million in
1997, compared to $9.0 million in 1996 and $5.5 million in 1995. Additions to
internally developed computer software, principally enhancements to TS2, were
$997,000 in 1997, $178,000 in 1996 and $2.6 million in 1995.
Costs to develop the core TS2 bankcard processing and support software were
capitalized and are being amortized over a useful life of ten years.
Amortization of TS2 resulted in expense of $3.3 million in 1997, 1996 and 1995.
Costs associated with the development of additional features of TS2 continue to
be capitalized upon establishing technological feasibility, and amortization is
begun when they become available for general customer use.
The core system of TS2 was designed to be Year 2000 compliant, and the
Company is continuing its ongoing project to ensure that all of the Company's
processing systems, including our general cardholder processing system, are Year
2000 compliant. The modification phase of the project is expected to be
completed in 1998, with the testing phase to be performed in 1998 and 1999. In
1997, TSYS had $2.0 million of direct costs related to the Year 2000 project.
The Company expects to incur approximately $8.0 million of direct costs in 1998
and approximately $6.0 million in 1999. Based upon progress to date, TSYS does
not expect its Year 2000 project to significantly impact its financial condition
and results of operations. TSYS has made an assessment of non-compliant
suppliers and vendors and will schedule and coordinate testing of incoming and
outgoing interfaces with third-party vendors. The failure of the Company's
processing systems to be Year 2000 compliant could have a material adverse
effect on the Company's financial condition and results of operations.
Personnel costs associated with the conversion of customers under new
long-term contracts to TS2 are capitalized as contract acquisition costs and are
amortized over the life of the processing contracts. Capitalized conversion
costs, net, included in contract acquisition costs, at December 31, 1997 and
1996, amounted to $6.5 million and $8.4 million, respectively.
At December 31, 1997, TSYS' total investment in TSYS de Mexico was $7.4
million. At December 31, 1996, cumulative currency translation adjustments had
decreased the Company's equity investment in TSYS de Mexico by $2.0 million and
resulted in a cumulative currency translation adjustment, net of income taxes,
of $1.2 million. During the year ended December 31, 1997, due to Mexico's highly
inflationary economy, TSYS began expensing currency translation adjustments. In
1998, the Company will continue to reflect currency translation adjustments in
TSYS' results of operations.
In each quarter of 1997, the Board of Directors declared and paid a
dividend on TSYS' common stock of $.011 per share. Total dividends declared were
$5.8 million in 1997, 1996 and 1995.
During 1996, TSYS announced its decision to build a new campus-type
facility on approximately 46 acres of land in downtown Columbus, Georgia. 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 multibuilding, multiyear phased project; initial construc-
26
TOTAL SYSTEM SERVICES, INC.(R) 1997 ANNUAL REPORT
tion was begun in 1997. Preliminary cost estimates for the first phase are
$75-100 million. The Company has entered into an operating lease agreement
relating to the new corporate campus. Lease payments are expected to commence in
1999 and will not affect TSYS' results of operations or financial position in
1998. The expansion currently underway at the North Center, expected to cost
$20-25 million, will be financed through the internal generation of funds and
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 2.2:1. At December 31, 1997,
TSYS had working capital of $70.9 million, compared to $52.3 million in 1996 and
$37.7 million in 1995.
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 and/or debt securities such as industrial revenue bonds. However, there
can be no assurance that funds will be available on terms acceptable to TSYS.
Forward-Looking Statements
Certain statements contained in this Annual Report which are not statements
of historical fact constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by TSYS with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of TSYS which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenues, income or loss, earnings or loss per share, the payment or nonpayment
of dividends, capital structure and other financial items; (ii) statements of
plans and objectives of TSYS or its management or Board of Directors, including
those relating to products or services; (iii) statements of future economic
performance; and (iv) statements of assumptions underlying such statements.
Words such as "believes," "anticipates," "expects," "intends," "targeted," and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (i) the strength of the U.S. economy
in general and relevant foreign economies; (ii) the financial performance of
current and future contracts; (iii) inflation, interest rate and foreign
exchange rate fluctuations; (iv) timely and successful implementation of
processing systems to provide new products, improved functionality and increased
efficiencies; (v) changes in consumer spending, borrowing and saving habits;
(vi) technological changes; (vii) acquisitions; (viii) the ability to increase
market share and control expenses; (ix) changes in laws, regulations, credit
card association rules or other industry standards affecting TSYS' business
which require significant product redevelopment efforts; (x) the effect of
changes in accounting policies and practices as may be adopted by the Financial
Accounting Standards Board; (xi) changes in TSYS' organization, compensation and
benefit plans; (xii) the costs and effects of litigation and of unexpected or
adverse outcomes in such litigation; (xiii) failure to successfully implement
the Company's Year 2000 modification plans substantially as scheduled and
budgeted; and (xiv) the success of TSYS at managing the risks involved in the
foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and TSYS undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
27
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents (includes $40.6 million and $25.1 million
on deposit with a related party at 1997 and 1996, respectively) $ 43,335,922 27,496,057
Short-term investments (includes $5.0 million invested with a related party at 1996) 998,228 5,000,000
Accounts receivable, net of allowance for doubtful accounts of
$736,000 and $704,000 at 1997 and 1996, respectively 69,450,919 59,044,530
Prepaid expenses and other current assets 18,620,638 11,839,231
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 132,405,707 103,379,818
Property and equipment, net (Note 3) 68,968,574 62,899,046
Computer software, net (Note 4) 43,133,137 39,720,484
Other assets (Notes 5 and 10) 52,350,519 39,759,735
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 296,857,937 245,759,083
=================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 6,400,365 4,688,469
Accrued salaries and related liabilities 6,680,979 6,422,199
Accrued employee benefits 13,870,969 14,590,362
Current portion of long-term debt and obligations under capital leases
Other current liabilities (includes $1.2 million payable to related parties at 1997 132,416 201,274
and 1996) (Note 10) 34,421,668 25,203,041
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 61,506,397 51,105,345
Long-term debt and obligations under capital leases,
excluding current portion 342,096 474,513
Deferred income taxes (Note 7) 13,754,688 15,301,478
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 75,603,181 66,881,336
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity (Notes 2 and 6):
Common stock - $.10 par value. Authorized 300,000,000 shares;
129,483,522 issued at 1997 and 1996, respectively; 129,330,225 and 129,289,680
outstanding at 1997 and 1996, respectively 12,948,352 12,948,352
Additional paid-in capital 5,975,436 5,353,972
Treasury stock, at cost (377,701) (473,544)
Cumulative currency translation adjustments (1,178,182) (1,178,182)
Retained earnings 203,886,851 162,227,149
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 221,254,756 178,877,747
- ---------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Total liabilities and shareholders' equity $ 296,857,937 245,759,083
=================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
TOTAL SYSTEM SERVICES, INC.(R) 1997 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Bankcard data processing services (includes $29.2
million, $24.9 million and $10.2 million from related
parties for the years ended December 31, 1997,
1996 and 1995, respectively) $ 324,717,864 277,869,778 218,953,101
Other services 36,781,535 33,778,571 30,754,596
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues (Notes 2 and 11) 361,499,399 311,648,349 249,707,697
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses:
Salaries and other personnel expense 147,438,458 124,258,754 94,946,370
Net occupancy and equipment expense 94,685,343 82,117,603 64,548,541
Other operating expenses (includes $10.4 million, $9.7 million and
$3.7 million to related parties for the years ended December 31,
1997, 1996 and 1995, respectively) 59,446,283 53,368,464 47,291,267
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expenses (Note 2) 301,570,084 259,744,821 206,786,178
- ---------------------------------------------------------------------------------------------------------------------------------
Equity in income of joint ventures (Note 5) 9,347,183 7,093,600 68,666
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income 69,276,498 58,997,128 42,990,185
- ---------------------------------------------------------------------------------------------------------------------------------
Nonoperating income:
Gain (loss) on disposal of equipment, net (35,632) 31,576 (122,790)
Interest income, net of expense (includes $2.1 million, $1.4 million
and $759,000 from a related party for the years ended
December 31, 1997, 1996 and 1995, respectively) 2,315,043 1,415,700 839,681
- ---------------------------------------------------------------------------------------------------------------------------------
Total nonoperating income (Note 2) 2,279,411 1,447,276 716,891
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 71,555,909 60,444,404 43,707,076
Income taxes (Note 7) 24,077,437 21,007,223 15,976,974
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 47,478,472 39,437,181 27,730,102
=================================================================================================================================
Basic earnings per share $ .37 .31 .21
=================================================================================================================================
Diluted earnings per share $ .37 .30 .21
=================================================================================================================================
Weighted average common shares outstanding 129,304,249 129,287,493 129,263,226
Increase due to assumed issuance of shares
related to stock options outstanding 188,122 163,605 130,325
Increase due to contingently issuable shares
associated with acquisition - - 21,978
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 129,492,371 129,451,098 129,415,529
=================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
29
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1997 1996 and 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative
Additional Currency
Common Stock Paid-in Treasury Translation Retained
------------------
Shares Amount Capital Stock Adjustments Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1994 129,457,388 $12,945,738 3,839,146 (475,789) - 106,694,743 $123,003,838
Common stock issued under
restricted stock awards 4,156 416 (416) - - - -
Amortization of restricted
stock awards (Note 6) - - 607,025 - - - 607,025
Increase in cumulative currency
translation adjustments - - - - (1,052,081) - (1,052,081)
Cash dividends declared
($.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 from
treasury shares for
exercise of
stock options - - 315 2,245 - - 2,560
Amortization of restricted
stock awards (Note 6) - - 582,267 - - - 582,267
Increase in cumulative currency
translation adjustments - - - - (126,101) - (126,101)
Cash dividends declared
($.045 per share) - - - - - (5,818,014) (5,818,014)
Tax benefits associated with
stock awards - - 15,333 - - - 15,333
Net income - - - - - 39,437,181 39,437,181
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 129,483,522 12,948,352 5,353,972 (473,544) (1,178,182) 162,227,149 178,877,747
Common stock issued from
treasury shares for
exercise of
stock options - - 102,434 95,843 - - 198,277
Amortization of restricted
stock awards (Note 6) - - 487,242 - - - 487,242
Cash dividends declared
($.045 per share) - - - - - (5,818,770) (5,818,770)
Tax benefits associated
with stock awards - - 31,788 - - - 31,788
Net income - - - - - 47,478,472 47,478,472
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 129,483,522 $12,948,352 5,975,436 (377,701) (1,178,182) 203,886,851 $221,254,756
===================================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
30
TOTAL SYSTEM SERVICES, INC.(R) 1997 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 47,478,472 39,437,181 27,730,102
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in income of joint ventures (9,347,183) (7,093,600) (68,666)
Depreciation and amortization 29,141,073 23,106,775 20,285,123
Provision for doubtful accounts 94,000 94,500 458,606
Deferred income tax expense (benefit) (1,546,790) 1,600,583 963,384
(Gain) loss on disposal of equipment, net 35,632 (31,576) 122,790
(Increase) decrease in:
Accounts receivable (10,500,389) (9,524,251) (13,970,497)
Prepaid expenses and other assets (1,860,648) (1,815,428) (94,883)
Increase (decrease) in:
Accounts payable 1,711,896 (1,122,865) 314,885
Accrued expenses and other current liabilities 9,911,535 13,345,580 12,137,363
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 65,117,598 57,996,899 47,878,207
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (18,033,160) (19,369,373) (16,977,970)
Additions to computer software (15,106,064) (9,195,856) (8,129,742)
Proceeds from disposal of equipment 74,797 657,699 864,699
Investment in joint ventures - (2,482,939) (3,455,865)
Dividends received from joint ventures 3,252,561 - -
Increase in contract acquisition costs (17,557,631) (7,889,846) (9,954,881)
Purchase of short-term investments (998,228) (5,000,000) -
Redemption of short-term investments 5,000,000 - -
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (43,367,725) (43,280,315) (37,653,759)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt - - 1,965,775
Principal payments on long-term debt and capital lease obligations (201,275) (254,954) (2,208,457)
Dividends paid on common stock (5,818,326) (5,817,756) (5,816,817)
Proceeds from exercise of stock options 109,593 2,560 -
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,910,008) (6,070,150) (6,059,499)
- ------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 15,839,865 8,646,434 4,164,949
Cash and cash equivalents at beginning of year 27,496,057 18,849,623 14,684,674
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 43,335,922 27,496,057 18,849,623
========================================================================================================================
Cash paid for interest (net of capitalized amounts) $ 46,691 62,129 157,130
========================================================================================================================
Cash paid for income taxes $ 22,908,026 22,890,244 16,244,194
========================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
31
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. TSYS' services are marketed as THE
TOTAL SYSTEM to financial institutions and other organizations throughout the
United States, Mexico, Puerto Rico and Canada.
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, Mailtek, Inc., TSYS Total Solutions, Inc. and Columbus Productions,
Inc. Significant intercompany accounts and transactions have been eliminated in
consolidation.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reported periods to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
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 (Vital), a merchant processing
operation headquartered in Tempe, Arizona.
Property and Equipment: Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation expense is computed
using the straight-line method over the estimated useful lives of the assets.
Buildings and improvements are depreciated over 2-40 years, computer equipment
over 2-5 years, and furniture and other equipment over 3-15 years.
Computer Software: The Company capitalizes software development costs incurred
from the time technological feasibility of the software product or enhancement
is established until the software is ready for use in providing processing
services to customers. Research and development costs and computer software
maintenance costs are expensed as incurred. Software development costs related
to the core 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 life not to exceed 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 impairment, the
32
TOTAL SYSTEM SERVICES, INC.(R) 1997 ANNUAL REPORT
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.
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 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 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 asset and
liability method. Under the asset and liability method, deferred income tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred income
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Cash Flow Reporting: Investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Earnings per Share: The Company has presented earnings per share in accordance
with the provisions of Statement of Financial Accounting Standards No. 128 (SFAS
128) "Earnings per Share." SFAS 128 requires companies that have publicly held
common stock or common stock equivalents to present both basic and diluted
earnings per share (EPS) on the face of the income statement. Basic EPS is
calculated as income available to common stockholders divided by the weighted
average number of common shares outstanding during the period. Diluted EPS is
calculated to reflect the potential dilution that would occur if
33
stock options or other contracts to issue common stock were exercised and
resulted in additional common stock that would share in the earnings of the
Company. The Company has restated its earnings per share for all periods
presented to reflect the adoption of SFAS 128.
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 accrued 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 values.
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. Through
December 31, 1996, net exchange gains or losses resulting from the translation
of assets and liabilities, net of tax, were accumulated in a separate section of
shareholders' equity titled Cumulative Currency Translation Adjustments.
Effective January 1, 1997, the Mexican economy was designated as highly
inflationary, and thus all currency translation adjustments for the year ended
December 31, 1997, have been expensed.
Reclassifications: Certain reclassifications have been made to the 1996 and 1995
financial statements to conform to the presentation adopted in 1997.
Recent Accounting Pronouncements: In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
130 (SFAS 130) "Reporting Comprehensive Income." SFAS 130 requires companies to
display, with the same prominence as other financial statements, the components
of comprehensive income. SFAS 130 requires that an enterprise classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. TSYS' financial statements will
include the disclosure of comprehensive income in accordance with the provisions
of SFAS 130 beginning in the first quarter of 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected financial
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997. The Company does
not expect the impact of SFAS 131 on its financial position and results of
operations to be material.
NOTE 2 Relationship with Affiliated Companies
At December 31, 1997, CB&T owned 104,401,292 shares (approximately 80.7%) of
TSYS common stock.
34
TOTAL SYSTEM SERVICES, INC.(R) 1997 ANNUAL REPORT
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 $2,609,762, $1,809,847 and $1,805,280
during the years ended December 31, 1997, 1996 and 1995, respectively.
Miscellaneous data processing services performed by TSYS for certain Synovus
nonbanking affiliates generated revenues of $148,036, $128,411 and $113,568
during the years ended December 31, 1997, 1996 and 1995, 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 $18,365,224, $18,201,357 and $8,281,777 for the years ended
December 31, 1997, 1996 and 1995, respectively. Bankcard data processing
revenues related to Vital, the Company's joint venture with Visa, were
$8,115,010 and $4,755,406 for the years ended December 31, 1997 and 1996.
Revenues from other services provided by TSYS to Synovus and its affiliates were
$1,110,899, $920,703 and $718,281 during the years ended December 31, 1997, 1996
and 1995, 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 1997 or 1996.
In 1997, 1996 and 1995, TSYS received interest income of $2,075,315,
$1,392,543 and $837,356, respectively. In 1997, TSYS paid CB&T interest expense
on a short-term construction loan of $123,420 which was capitalized. Also, in
1995, TSYS paid CB&T interest expense of $78,318.
During 1997, 1996 and 1995, Synovus Data Corp. paid TSYS $224,154, $303,554
and $701,159, 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 1997 and in 1996 and
$214,650 in 1995. Lease payments made to CB&T amounted to $53,790 in 1997 and in
1996 and $54,313 in 1995. Lease payments received from CB&T amounted to $11,628
in each of 1997 and 1996 and $20,203 in 1995.
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 $1,216,089, $1,079,706 and $1,039,693 for the years
ended December 31, 1997, 1996 and 1995, respectively. Synovus paid TSYS
management fees of $361,093 in 1995 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
$9,232,001, $8,583,648 and $3,158,695 for these services in 1997, 1996 and 1995,
respectively. TSYS received $26,169, $107,449 and $198,578 in rent from SSC in
1997, 1996 and 1995, respectively. TSYS made lease payments to SSC for $31,274
and $34,472 in 1997 and 1996, respectively.
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 $40.6 million and
$25.1 million at December 31, 1997 and 1996, respectively.
TSYS also had a $5.0 million certificate of deposit with CB&T, which is
included in short-term investments in 1996. In the first quarter of 1997, the
certificate of deposit was redeemed at maturity for face value.
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
35
common stock in 1997, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Shares
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Restricted stock awards -- 35,349 25,683
Stock options 363,917 227,896 191,055
</TABLE>
The restricted stock awards were valued at the price paid for the Synovus
shares which was $764,422 and $389,526 in 1996 and 1995, 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 become
exercisable over two to three years and expire eight to ten 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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 2,784,807 2,482,820
Buildings 49,344,128 43,387,052
Computer equipment 42,284,153 42,024,097
Furniture and other equipment 37,861,608 33,424,802
Construction in progress 1,807,994 21,481
- --------------------------------------------------------------------------------
134,082,690 121,340,252
Less accumulated depreciation
and amortization 65,114,116 58,441,206
- --------------------------------------------------------------------------------
Property and equipment, net $ 68,968,574 62,899,046
================================================================================
</TABLE>
Depreciation and amortization of property and equipment was $11,935,776,
$10,478,116 and $9,768,665 for the years ended December 31, 1997, 1996 and 1995,
respectively.
NOTE 4 Computer Software
Computer software at December 31 is summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
TS2 $33,048,872 33,048,872
Other internally developed
software including TS2
enhancements 4,832,892 5,523,804
Purchased computer software 39,466,299 25,864,700
- --------------------------------------------------------------------------------
77,348,063 64,437,376
Less accumulated amortization 34,214,926 24,716,892
- --------------------------------------------------------------------------------
Computer software, net $43,133,137 39,720,484
================================================================================
</TABLE>
Capitalized software development costs for the years ended December 31,
1997, 1996 and 1995, were $996,600, $177,732 and $2,617,445, respectively.
Amortization expense related to purchased computer software costs was
$7,212,571, $4,146,670 and $3,350,507 for the years ended December 31, 1997,
1996 and 1995, respectively. Amortization of developed software was $4,455,148,
$4,483,193 and $4,007,037 for the years ended December 31, 1997, 1996 and 1995,
respectively.
NOTE 5 Investment in Joint Ventures
In 1994, the Company acquired a 49% equity interest in TSYS de Mexico, a joint
venture which processes cardholder and merchant accounts for 20 banks in Mexico.
Effective May 1, 1996, the Company acquired a 50% equity interest in Vital, a
joint venture with Visa U.S.A., which combines the front-end
authorization and back-end accounting and settlement processing of
merchants. The combined unaudited condensed financial
36
TOTAL SYSTEM SERVICES, INC.(R) 1997 ANNUAL REPORT
information for the joint ventures as of December 31, 1997 and 1996, and for the
years then ended is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance Sheet Data:
Current assets $ 50,274,402 29,292,567
Total assets 66,922,076 41,312,690
Liabilities (all current) 23,939,197 10,187,539
Statement of Income Data:
Revenues 139,125,139 95,625,643
Operating income 19,113,203 15,201,419
Income before income taxes 21,386,651 16,162,670
Net income* 18,790,608 14,292,665
Equity in income of joint
ventures 9,347,183 7,093,600
</TABLE>
*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.
NOTE 6 Shareholders' Equity
Treasury Stock: During 1987, the Board of Directors of TSYS approved the
purchase of up to 1,600,000 shares of its common stock. At December 31, 1997,
153,297 shares were held as treasury shares at a cost of $377,701. At December
31, 1996, 193,842 shares at a cost of $473,544 were held as treasury shares.
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 was recorded as a reduction of additional paid-in
capital in the Company's consolidated balance sheets and is being amortized as
compensation expense over the vesting period of the awards. Compensation expense
relating to these awards was $357,800, $456,619 and $529,982 for the years ended
December 31, 1997, 1996 and 1995, respectively, and unamortized compensation at
December 31, 1997, was $44,325. Common stock issued under restricted stock
awards is considered outstanding for purposes of the computation of earnings per
share. The amounts and terms of common stock issued under restricted awards are
summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Market Value at Vesting
Date of Issuance of Shares Date of Issuance Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
February 24, 1992 524,000 1,801,250 72 months
November 6, 1995 4,156 46,495 36 months
</TABLE>
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; 1.6 million shares of common
stock were reserved for distribution under the LTI Plan. Options granted under
the LTI Plan may be incentive stock options or non-qualified stock options as
determined by the Committee at the time of grant. Incentive stock options are
granted at a price not less than 100% of the fair market value of the stock on
the grant date, and non-qualified options are granted at a price to be
determined by the Committee. Option vesting terms are established by the
Committee at the time of grant, and presently range from one to five years. The
expiration date of options granted under the LTI Plan is determined at the time
of grant and may not exceed ten years from the date of the grant. At December
31, 1997, there were options outstanding under the LTI Plan to purchase
1,126,350 shares of the Company's common stock, of which 146,350 shares were
exercisable. There were no shares available for grant at December 31, 1997.
Additionally, options (not issued under the LTI Plan) to purchase 25,000 shares
of the Company's common stock were outstanding at December 31, 1997.
37
A summary of the status of the Company's options granted as of December 31,
1997, 1996 and 1995 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options:
Outstanding at
beginning of year 189,000 $ 3.00 191,200 $ 3.00 196,600 $ 3.00
Granted 1,005,000 19.95 - - - -
Exercised 42,650 3.00 1,100 3.00 - -
Forfeited/canceled - - 1,100 3.00 5,400 3.00
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at
end of year 1,151,350 $ 17.79 189,000 $ 3.00 191,200 $ 3.00
====================================================================================================================================
Options exercis-
able at year-end 146,350 $ 3.00 - - - -
====================================================================================================================================
Weighted average
fair value of options
granted during
the year $ 7.97 - -
====================================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding at Contractual Exercise Exercisable at Exercise
December 31, 1997 Life Price December 31, 1997 Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
146,350 4.50 $ 3.00 146,350 $ 3.00
25,000 11.03 27.75 - -
980,000 9.84 19.75 - -
- ------------------------------------------------------------------------------------------------
1,151,350 9.19 $17.79 146,350 $ 3.00
================================================================================================
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the
unaudited pro forma amounts indicated at right.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used: dividend yield of 0.0%; expected volatility of 41.6%;
risk-free interest rate of 5.87%; and expected lives of 3.95 years for all
options.
Year Ended December 31, 1997
- ------------------------------------------------------------------
Net income applicable
to common stockholders
As reported $ 47,478,472
Pro forma 47,150,569
Basic earnings per share:
As reported .37
Pro forma .36
Diluted earnings per share:
As reported .37
Pro forma .36
NOTE 7 Income Taxes
The provision for income taxes includes income taxes currently payable and
those deferred because of temporary differences between the financial statement
and tax bases of assets and liabilities.
The components of income tax expense included in the Consolidated
Statements of Income were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense:
Federal $ 24,267,412 17,710,103 13,522,207
State 1,356,815 1,696,537 1,491,383
- --------------------------------------------------------------------------------------------
Total current income tax expense 25,624,227 19,406,640 15,013,590
- --------------------------------------------------------------------------------------------
Deferred income tax expense (benefit):
Federal (1,460,857) 1,470,806 885,272
State (85,933) 129,777 78,112
- --------------------------------------------------------------------------------------------
Total deferred income tax expense (benefit): (1,546,790) 1,600,583 963,384
- --------------------------------------------------------------------------------------------
Total income tax expense $ 24,077,437 21,007,223 15,976,974
============================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" income tax expense $ 25,044,568 21,155,541 15,297,477
Increase (decrease) in income tax expense
resulting from:
State income tax expense, net of
federal income tax benefit 826,073 1,187,104 1,020,172
Foreign tax credits (1,335,483) (1,170,111) -
Other, net (457,721) (165,311) (340,675)
- --------------------------------------------------------------------------------------------
Total income tax expense $ 24,077,437 21,007,223 15,976,974
============================================================================================
</TABLE>
The tax effects of the significant components of deferred income tax assets
and liabilities are presented in the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Primarily reserves not deductible until paid $ 3,900,198 4,556,046
- --------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Computer software development costs (13,694,728) (16,617,264)
Excess tax over financial statement
depreciation (1,778,442) (1,685,253)
Other, net (2,181,716) (1,555,007)
- --------------------------------------------------------------------------------------------
Gross deferred income tax liability (17,654,886) (19,857,524)
- --------------------------------------------------------------------------------------------
Net deferred income tax liability $(13,754,688) (15,301,478)
=============================================================================================
</TABLE>
NOTE 8 Employee Benefit Plans
The Company provides benefits to its employees by allowing employees to
participate in certain defined contribution plans. These employee benefit plans
are described as follows:
Profit Sharing Plan: The Company's employees are eligible to participate in the
Synovus Financial Corp./Total System Services, Inc. (Synovus/TSYS) Profit
Sharing Plan. The Company's contributions to the plan are contingent upon
achievement of certain financial goals. The terms of the plan limit the
Company's contribution to 9% 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:
- --------------------------------------------------------------------------------
1997 $ 6,828,175
1996 5,270,884
1995 4,429,998
Money Purchase Plan: The Company's employees are eligible to participate in the
Synovus/TSYS Money Purchase Pension Plan, a defined contribution pension plan.
The terms of the plan provide for the Company to make annual contributions to
the plan equal to 7% of participant compensation, as defined. The Company's
contributions to the plan charged to expense are as follows:
- --------------------------------------------------------------------------------
1997 $ 5,294,540
1996 3,925,699
1995 3,417,057
401(k) Plan: The Company's employees are eligible to participate in the
Synovus/TSYS 401(k) Plan. The terms of the plan allow employees to contribute up
to 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:
- --------------------------------------------------------------------------------
1997 $ 21,861
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:
- --------------------------------------------------------------------------------
1997 $ 1,588,618
1996 1,226,340
1995 962,829
Postretirement Medical Benefits Plan: TSYS provides certain medical benefits to
qualified retirees through a postretirement medical benefits plan. The benefit
expense and accrued benefit cost associated with the plan are not significant to
the Company's consolidated financial statements.
NOTE 9 Commitments and Contingencies
Lease Commitments: TSYS is obligated under noncancelable operating leases for
computer equipment and facilities. Management expects that, as these leases
expire, they will be renewed or replaced by similar leases. In 1997, the Company
entered into an operating lease agreement for the Company's new corporate
campus. Under the agreement the lessor is paying for the construction and
development costs and has leased the facilities to the Company commencing upon
its completion for a term of three years. The lease provides for substantial
40
residual value guarantees and includes purchase options at original cost of the
property. The amount of the residual value guarantees relative to the assets
under this lease is projected to be $87.0 million. Once the leased assets are
placed into service, the Company will estimate its liability under the residual
value guarantees and will record additional rent expense if necessary on a
straight-line basis over the lease term.
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, 1997, are as follows:
- --------------------------------------------------------------------------------
1998 $ 43,363,238
1999 43,659,154
2000 31,121,168
2001 15,861,516
2002 3,429,590
- --------------------------------------------------------------------------------
$ 137,434,666
================================================================================
Total rental expense under all operating leases in 1997, 1996 and 1995 was
$52,765,480, $45,990,637 and $34,862,784, 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 adverse effect on
the financial condition or results of operations of the Company if disposed of
unfavorably.
NOTE 10 Supplementary Balance Sheet Information
Significant components of other noncurrent assets are summarized as follows:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Contract acquisition costs, net $ 27,274,037 18,645,910
Investment in joint ventures, net 21,338,446 15,347,876
Significant components of other current liabilities are summarized as follows:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Customer postage deposits $ 13,579,370 8,691,602
Transaction processing provisions 4,051,285 3,301,011
NOTE 11 Major Customers
For the years ended December 31, 1997, 1996 and 1995, two major customers
accounted for approximately 25%, 29%, and 34% of total revenues, respectively.
41
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
January 23, 1998
42
QUARTERLY FINANCIAL DATA, STOCK PRICE, DIVIDEND INFORMATION
TSYS' common stock trades on the New York Stock Exchange (NYSE) under the
symbol "TSS." Price and volume information appears under the abbreviation
"TotlSysSvc" in NYSE daily stock quotation listings. As of February 12, 1998,
there were 8,307 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 8, 1997, and was paid
January 2, 1998, to shareholders of record on December 19, 1997. Total dividends
declared in 1997 and in 1996 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, 1997 and 1996.
[Omitted Revenues graph is represented by the following table.]
Revenues
(Millions of Dollars)
1997 1996
QTR4 $96.5 $85.9
QTR3 $92.1 $80.2
QTR2 $89.7 $74.5
QTR1 $83.1 $71.1
[Omitted Net Income graph is represented by the following table.]
Net Income
(Millions of Dollars)
1997 1996
QTR4 $15.8 $14.2
QTR3 $13.2 $11.3
QTR2 $ 9.9 $ 7.9
QTR1 $ 8.5 $ 6.0
<TABLE>
<CAPTION>
First Second Third Fourth
(in thousands except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 Revenues ............................ $83,137 89,736 92,135 96,491
Operating income .................... 12,594 15,071 18,913 22,698
Net income .......................... 8,517 9,941 13,225 15,795
Basic earnings per share ............ .07 .08 .10 .12
Diluted earnings per share .......... .07 .08 .10 .12
Cash dividends declared per share.... .011 .012 .011 .011
Stock prices:
High ............................... 34 5/8 34 5/8 24 15/16 29 7/16
Low ................................ 25 3/4 22 1/2 21 7/8 18 5/16
- ------------------------------------------------------------------------------------------------
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
Basic earnings per share ............ .05 .06 .09 .11
Diluted earnings per share .......... .05 .06 .09 .11
Cash dividends declared per share.... .011 .012 .011 .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
- ------------------------------------------------------------------------------------------------
</TABLE>
43
TSYS(R)
TOTAL SYSTEM SERVICES, INC.(R)
Richard W. Ussery March 12, 1998
Chairman of the Board
Dear Shareholder:
The Annual Meeting of the Shareholders of Total System Services, Inc. will
be held on April 16, 1998, at The Columbus Museum, 1251 Wynnton Road, in
Columbus, Georgia beginning at 10:00 o'clock A.M., E.T., for the purposes set
forth in the accompanying Notice of Annual Meeting of Shareholders and Proxy
Statement.
We hope that you will be able to be with us and let us give you a review of
1997. Whether you own a few or many shares of stock and whether or not you plan
to attend in person, it is important that your shares be voted on matters that
come before the meeting. To make sure your shares are represented, we urge you
to complete and mail the enclosed Proxy Card promptly.
Thank you for helping us make 1997 a good year. We look forward to your
continued support in 1998 and another good year.
Sincerely yours,
/s/Richard W. Ussery
RICHARD W. USSERY
Total System Services, Inc. Post Office Box 2506 Columbus, Georgia 31902-2506
TSYS(R)
TOTAL SYSTEM SERVICES, INC.(R)
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 16, 1998
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Shareholders of Total
System Services, Inc.(R) ("TSYS(R)") will be held at The Columbus Museum, 1251
Wynnton Road, in Columbus, Georgia on April 16, 1998, at 10:00 o'clock A.M.,
E.T., for:
(1) The election of three nominees as Class III directors of TSYS to serve
until the 2001 Annual Meeting of Shareholders; and
(2) The transaction of such other business as may properly come before the
Annual Meeting.
Information relating to the above matters is set forth in the accompanying
Proxy Statement.
Only shareholders of record at the close of business on February 12, 1998
will be entitled to notice of and to vote at the Annual Meeting.
/s/G. Sanders Griffith, III
G. SANDERS GRIFFITH, III
Secretary
Columbus, Georgia
March 12, 1998
WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE ANNUAL MEETING IN PERSON, PLEASE
VOTE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED RETURN ENVELOPE WHICH DOES NOT REQUIRE ANY POSTAGE IF MAILED IN THE
UNITED STATES.
TSYS(R)
TOTAL SYSTEM SERVICES, INC.(R)
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 16, 1998
I. INTRODUCTION
A. Purposes of Solicitation - Terms of Proxies.
The Annual Meeting of the Shareholders ("Annual Meeting") of Total System
Services, Inc. ("TSYS") will be held on April 16, 1998 for the purposes set
forth in the accompanying Notice of Annual Meeting of Shareholders and in this
Proxy Statement. The enclosed Proxy Card ("Proxy") is solicited BY AND ON BEHALF
OF TSYS' BOARD OF DIRECTORS in connection with such Annual Meeting or any
adjournment thereof. The costs of the solicitation of Proxies by TSYS' Board of
Directors will be paid by TSYS. Forms of Proxies and Proxy Statements will also
be distributed through brokers, banks, nominees, custodians and other like
parties to the beneficial owners of shares of the $.10 par value common stock of
TSYS ("TSYS Common Stock"), and TSYS will reimburse such parties for their
reasonable out-of-pocket expenses therefor. TSYS' mailing address is Post Office
Box 2506, Columbus, Georgia 31902-2506.
The shares represented by the Proxy in the accompanying form, which when
properly executed, returned to TSYS' Board of Directors and not revoked, will be
voted in accordance with the instructions specified in such Proxy. If a choice
is not specified in the Proxy, the shares represented by such Proxy will be
voted "FOR" the election of the three nominees for Class III directors named
herein.
Each Proxy granted may be revoked in writing at any time before the
authority granted thereby is exercised. Attendance at the Annual Meeting will
constitute a revocation of the Proxy for such Meeting if the maker thereof
elects to vote in person.
This Proxy Statement and the enclosed Proxy are being first mailed to
shareholders on or about March 12, 1998.
B. TSYS Securities Entitled to Vote and Record Date.
TSYS' outstanding voting securities are TSYS Common Stock, each share of
which entitles the holder thereof to one vote on any matter coming before a
meeting of TSYS' shareholders. Only shareholders of record at the close of
business on February 12, 1998 are entitled to vote at the Annual Meeting or any
adjournment thereof. As of that date, there were 129,331,775 shares of TSYS
Common Stock outstanding and entitled to vote. TSYS owned 151,747 shares of TSYS
Common Stock on February 12, 1998 as treasury shares, which are not considered
to be outstanding and are not entitled to be voted at the Annual Meeting.
C. Shareholder Proposals.
From time to time, TSYS' shareholders may present proposals which may be
proper subjects for inclusion in TSYS' Proxy Statement for consideration at
TSYS' Annual Meeting. To be considered for inclusion, shareholder proposals must
be submitted on a timely basis. Proposals for TSYS' 1999 Annual Meeting, which
has been tentatively scheduled for April 12, 1999, must be received by TSYS no
later than November 12, 1998, and any such proposals, as well as any questions
related thereto, should be directed to Secretary, Total System Services, Inc.,
901 Front Avenue, Suite 301, Columbus, Georgia 31901.
D. Director Nominees or Other Business for Presentation at the Annual Meeting
Shareholders who wish to present director nominations or other business at
the Annual Meeting are required to notify the Secretary of their intent at least
60 days but not more than 120 days before the meeting and the notice must
provide information as required in the bylaws. A copy of these bylaw
requirements will be provided upon request in writing to Secretary, Total System
Services, Inc., 901 Front Avenue, Suite 301, Columbus, Georgia 31901. This
requirement does not affect the deadline for submitting shareholder proposals
for inclusion in the Proxy Statement nor does it preclude discussion by any
shareholder of any business properly brought before the Annual Meeting.
E. Columbus Bank and Trust Company.
Columbus Bank and Trust Company(R)("CB&T") owned individually 104,401,292
shares, or 80.7%, of the outstanding shares of TSYS Common Stock on February 12,
1998. CB&T(R) is a wholly owned banking subsidiary of Synovus Financial Corp.(R)
("Synovus"), a multi-financial services company having 175,265,721 shares of
$1.00 par value voting common stock ("Synovus Common Stock") outstanding on
February 12, 1998.
II. ELECTION OF DIRECTORS
A. Information Concerning Number and Classification of Directors and Nominees.
(1) Number and Classification of Directors.
In accordance with the vote of shareholders taken at TSYS' 1988 Annual
Meeting, the number of members of TSYS' Board of Directors was fixed at 18.
TSYS' Board of Directors is currently comprised of 13 members. TSYS has five
directorships which remain vacant. These vacant directorships could be filled in
the future at the discretion of TSYS' Board of Directors. This discretionary
power gives TSYS' Board of Directors the flexibility of appointing new directors
in the periods between TSYS' Annual Meetings should suitable candidates come to
its attention. Any person appointed by TSYS' Board of Directors to a vacant
directorship would not be appointed to serve a classified, three-year term but
would only serve as a director until the next succeeding Annual Meeting. At such
Annual Meeting, such appointee would stand before TSYS' shareholders for
election to a classified term of office as a director. Proxies cannot be voted
at the 1998 Annual Meeting for a greater number of persons than the number of
nominees named.
Pursuant to TSYS' Articles of Incorporation and bylaws, the members who
comprise TSYS' Board of Directors are divided into three classes of directors:
Class I, Class II and Class III directors, with each of such Classes of
directors to be as nearly equal in number as possible. Each Class of directors
serves a staggered 3-year term. At TSYS' 1996 Annual Meeting, Class I directors
were elected to serve 3-year terms to expire at TSYS' 1999 Annual Meeting, and
at TSYS' 1997 Annual Meeting, Class II directors were elected to serve 3-year
terms to expire at TSYS' 2000 Annual Meeting. The terms of office of the Class
III directors expire at TSYS' 1998 Annual Meeting.
(2) Nominees for Class III Directors and Vote Required.
TSYS' Board of Directors has selected three nominees which it proposes for
election to TSYS' Board as Class III directors. The three nominees for Class III
directors of TSYS will be elected to serve 3-year terms that will expire at
TSYS' 2001 Annual Meeting. The three nominees for Class III directors of TSYS
are: Mason H. Lampton, William B. Turner and James D. Yancey.
Under TSYS' bylaws and Georgia law, a majority of the issued and
outstanding shares of TSYS Common Stock entitled to vote must be represented at
the 1998 Annual Meeting in order to constitute a quorum and all shares
represented at the Meeting, including shares abstaining and withholding
authority, are counted for purposes of determining whether a quorum exists. The
nominees for election as directors at the Annual Meeting who receive the
greatest number of votes (a plurality), a quorum being present, shall become
directors at the conclusion of the tabulation of votes. Thus, once a quorum has
been established, abstentions and broker non-votes have no effect upon the
election of directors. The shares represented by Proxies executed for TSYS' 1998
Annual Meeting in such manner as not to withhold authority to vote for the
election of any nominee for election as a Class III director on TSYS' Board of
Directors shall be voted "FOR" the election of the three nominees for Class III
directors on TSYS' Board named herein.
If any nominee for Class III director of TSYS becomes unavailable for any
reason before TSYS' 1998 Annual Meeting, the shares represented by executed
Proxies may be voted for such substitute nominee as may be determined by the
holders of such Proxies. It is not anticipated that any nominee will be
unavailable for election.
TSYS' BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF THE THREE
NOMINEES FOR ELECTION AS CLASS III DIRECTORS ON TSYS' BOARD SET FORTH HEREIN.
B. Information Concerning Directors and Nominees for Class III Directors.
(1) General Information.
The following sets forth the name, age, principal occupation and employment
(which, except as noted, has been for the past five years) of each of the
nominees for election as Class III directors of TSYS and the remaining directors
presently serving on TSYS' Board of Directors, his director classification, his
length of service as a director of TSYS, any family relationships with other
directors or executive officers of TSYS, and any Board of Directors of which he
is a member with respect to any company with a class of securities registered
with the Securities and Exchange Commission ("SEC") pursuant to Section 12 of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), including
Synovus, or any company which is subject to the requirements of Section 15(d) of
that Act, or any company registered with the SEC as an investment company under
the Investment Company Act of 1940 ("Public Company").
<TABLE>
<CAPTION>
TSYS Year
Director First Principal Occupation
Classifi- Elected and Other Directorships
Name Age cation Director of Public Companies
- ------------------------ ----- --------- --------- -------------------------------------------
<S> <C> <C> <C> <C>
Griffin B. Bell 79 I 1987 Senior Partner, King & Spalding (Law Firm)
James H. Blanchard<F1> 56 II 1982 Chairman of the Board and Chief
Executive Officer, Synovus Financial
Corp.; Chairman of the Executive
Committee, Total System Services, Inc.;
Director, BellSouth Corporation
Richard Y. Bradley<F2> 59 II 1991 Partner, Bradley & Hatcher (Law Firm);
Director, Synovus Financial Corp.
Gardiner W. Garrard, Jr. 57 II 1982 President, The Jordan Company (Real
Estate Development); Director, Synovus
Financial Corp.
John P. Illges, III 63 II 1982 Senior Vice President and Financial
Consultant, The Robinson-Humphrey
Company, Inc. (Stockbroker); Director,
Synovus Financial Corp.
Mason H. Lampton 50 III 1986 Chairman of the Board and President,
The Hardaway Company (Construction Company);
Director, Synovus Financial Corp.
W. Walter Miller, Jr.<F3> 49 II 1993 Senior Vice President, Total System
Services, Inc.
Samuel A. Nunn<F4> 59 I 1997 Senior Partner, King & Spalding (Law
Firm); Director, The Coca-Cola Company,
General Electric Company, National Service
Industries, Inc., Scientific-Atlanta, Inc.
and Texaco Inc.
H. Lynn Page 57 I 1982 Vice Chairman of the Board (Retired) and
Director, Synovus Financial Corp.,
Columbus Bank and Trust Company and
Total System Services, Inc.
Philip W. Tomlinson<F5> 51 I 1982 President, Total System Services, Inc.
William B. Turner<F3> 75 III 1982 Chairman of the Executive Committee,
Columbus Bank and Trust Company and
Synovus Financial Corp.; Advisory
Director, W.C. Bradley Co. (Metal
Manufacturer and Real Estate)
Richard W. Ussery<F6> 50 I 1982 Chairman of the Board and Chief
Executive Officer, Total System Services,
Inc.
James D. Yancey 56 III 1982 Vice Chairman of the Board, Synovus
Financial Corp. and Columbus Bank and
Trust Company; Director, Shoney's, Inc.
<FN>
<F1> James H. Blanchard was elected Chairman of the Executive Committee of TSYS
in February 1992. From 1982 until 1992, Mr. Blanchard served as Chairman
of the Board of TSYS.
<F2> Richard Y. Bradley formed Bradley & Hatcher in September 1995. From 1991
until 1995, Mr. Bradley served as President of Bickerstaff Clay Products
Company, Inc.
<F3> Mr. Miller's spouse is the niece of William B. Turner.
<F4> Mr. Nunn joined the law firm of King & Spalding in January 1997. From 1972
until 1997, Mr. Nunn represented the State of Georgia in the United States
Senate.
<F5> Philip W. Tomlinson was elected President of TSYS in February 1992. From
1982 until 1992, Mr. Tomlinson served as Executive Vice President of TSYS.
<F6> Richard W. Ussery was elected Chairman of the Board of TSYS in February
1992. From 1982 until 1992, Mr. Ussery served as President of TSYS.
</FN>
</TABLE>
(2) TSYS Common Stock Ownership of Directors and Management.
The following table sets forth, as of December 31, 1997, the number of
shares of TSYS Common Stock beneficially owned by each of TSYS' directors and
TSYS' five most highly compensated executive officers. Information relating to
beneficial ownership of TSYS Common Stock is based upon information furnished by
each person or entity using "beneficial ownership" concepts set forth in the
rules of the SEC under Section 13(d) of the Exchange Act.
<TABLE>
<CAPTION>
Shares of TSYS Shares of TSYS Shares of TSYS Percentage of
Common Stock Common Stock Common Stock Total Outstanding
Beneficially Beneficially Beneficially Shares Shares of
Owned with Owned with Owned with of TSYS TSYS Common
Sole Voting Shared Voting Sole Voting but Common Stock Stock
and Investment and Investment no Investment Beneficially Beneficially
Power as of Power as of Power as of Owned as of Owned as of
Name 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
-------------------------- ------------------- -------------------- ------------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Griffin B. Bell 59,362 8,007 --- 67,369 .05%
James H. Blanchard 520,800 240,320 --- 761,120 .59
Richard Y. Bradley 14,007 --- --- 14,007 .01
Gardiner W. Garrard, Jr. 6,262 --- --- 6,262 .005
John P. Illges, III 68,053 54,500 --- 122,553 .09
Mason H. Lampton 17,613 78,643<F1> --- 96,256 .07
James B. Lipham 65,498<F2> 800 --- 66,298 .05
W. Walter Miller, Jr. 61,496<F3> 8,306 --- 69,802 .05
Samuel A. Nunn 9,396<F4> --- --- 9,396 .007
H. Lynn Page 375,071 101,614<F5> --- 476,685 .37
William A. Pruett 144,423 --- --- 144,423 .11
Philip W. Tomlinson 418,598 39,864 67,200 525,662 .41
William B. Turner 103,493 384,000 --- 487,493 .38
Richard W. Ussery 293,751 49,850 75,200 418,801 .32
M. Troy Woods 51,229<F6> 250 --- 51,479 .04
James D. Yancey 529,596 16,000 --- 545,596 .42
<FN>
- --------
<F1> Includes 19,200 shares of TSYS Common Stock held in a trust for which Mr.
Lampton is not the trustee. Mr. Lampton disclaims beneficial ownership of
such shares.
<F2> Includes 4,800 shares of TSYS Common Stock with respect to which Mr. Lipham
has options to acquire.
<F3> Includes 4,800 shares of TSYS Common Stock with respect to which Mr. Miller
has options to acquire.
<F4> Includes 8,333 shares of TSYS Common Stock with respect to which Mr. Nunn
has options to acquire.
<F5> Includes 37,850 shares of TSYS Common Stock held by a charitable foundation
of which Mr. Page is a trustee.
<F6> Includes 6,000 shares of TSYS Common Stock with respect to which Mr. Woods
has options to acquire.
</FN>
</TABLE>
The following table sets forth information, as of December 31, 1997, with
respect to the beneficial ownership of TSYS Common Stock by all directors and
executive officers of TSYS as a group.
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding Shares of
TSYS Common Stock TSYS Common Stock
Name of Beneficially Owned Beneficially Owned
Beneficial Owner as of 12/31/97 as of 12/31/97
- ----------------------- ----------------------- -----------------------------
<S> <C> <C>
All directors
and executive
officers of TSYS 3,876,148 3.00%
as a group
(includes
17 persons)
</TABLE>
For a detailed discussion of the beneficial ownership of Synovus Common
Stock by TSYS' named executive officers and directors and by all directors and
executive officers of TSYS as a group, see Section IV(C) hereof captioned
"Synovus Common Stock Ownership of Directors and Management."
C. Board Committees and Attendance.
The business and affairs of TSYS are under the direction of TSYS' Board of
Directors. During 1997, TSYS' Board of Directors held five regular meetings and
one special meeting. During 1997, each of TSYS' incumbent directors attended at
least 75% of the meetings of TSYS' Board of Directors and the committees thereof
on which he sat.
TSYS' Board of Directors has three principal standing committees -- an
Executive Committee, an Audit Committee and a Compensation Committee. There is
no Nominating Committee of TSYS' Board of Directors.
Executive Committee. The members of TSYS' Executive Committee are: James H.
Blanchard, Chairman, Richard W. Ussery, Philip W. Tomlinson, William B. Turner,
James D. Yancey, Gardiner W. Garrard, Jr. and Richard Y. Bradley. During the
intervals between meetings of TSYS' Board of Directors, TSYS' Executive
Committee possesses and may exercise any and all of the powers of TSYS' Board of
Directors in the management and direction of the business and affairs of TSYS
with respect to which specific direction has not been previously given by TSYS'
Board of Directors. During 1997, TSYS' Executive Committee held one meeting.
Audit Committee. The members of TSYS' Audit Committee are: Gardiner W.
Garrard, Jr., Chairman, Mason H. Lampton and John P. Illges, III. The primary
functions to be engaged in by TSYS' Audit Committee include: (i) annually
recommending to TSYS' Board the independent certified public accountants
("Independent Auditors") to be engaged by TSYS for the next fiscal year; (ii)
reviewing the plan and results of the annual audit by TSYS' Independent
Auditors; (iii) reviewing and approving the range of management advisory
services provided by TSYS' Independent Auditors; (iv) reviewing TSYS' internal
audit function and the adequacy of the internal accounting control systems of
TSYS; (v) reviewing the results of regulatory examinations of TSYS; (vi)
periodically reviewing the financial statements of TSYS; and (vii) considering
such other matters with regard to the internal and independent audit of TSYS as,
in its discretion, it deems to be necessary or desirable, periodically reporting
to TSYS' Board as to the exercise of its duties and responsibilities and, where
appropriate, recommending matters in connection with the audit function with
respect to which TSYS' Board should consider taking action. During 1997, TSYS'
Audit Committee held four meetings.
Compensation Committee. The members of the Compensation Committee of TSYS'
Board of Directors are: Mason H. Lampton, Chairman, and John P. Illges, III. The
primary functions to be engaged in by TSYS' Compensation Committee include: (i)
evaluating the remuneration of senior management and board members of TSYS and
its subsidiaries and the compensation and fringe benefit plans in which
officers, employees and directors of TSYS are eligible to participate; and (ii)
recommending to TSYS' Board whether or not it should modify, alter, amend,
terminate or approve such remuneration, compensation or fringe benefit plans.
During 1997, TSYS' Compensation Committee held four meetings.
D. Executive Officers.
The following table sets forth the name, age and position with TSYS of each
executive officer of TSYS.
<TABLE>
<CAPTION>
Name Age Position with TSYS
- ------------------------- --- ------------------------------------
<S> <C> <C>
James H. Blanchard 56 Chairman of the Executive Committee
Richard W. Ussery 50 Chairman of the Board
and Chief Executive Officer
Philip W. Tomlinson 51 President
William A. Pruett 44 Executive Vice President
James B. Lipham 49 Executive Vice President
and Chief Financial Officer
M. Troy Woods 46 Executive Vice President
G. Sanders Griffith, III 44 General Counsel and Secretary
</TABLE>
All of the executive officers of TSYS are members of TSYS' Board of
Directors, except William A. Pruett, James B. Lipham, M. Troy Woods and G.
Sanders Griffith, III. William A. Pruett was elected as Executive Vice President
of TSYS in February 1993. From 1976 until 1993, Mr. Pruett served in various
capacities with CB&T and/or TSYS, including Senior Vice President. James B.
Lipham was elected as Executive Vice President and Chief Financial Officer of
TSYS in July 1995. From 1984 until 1995, Mr. Lipham served in various financial
capacities with Synovus and/or TSYS, including Senior Vice President and
Treasurer. M. Troy Woods was elected as Executive Vice President of TSYS in
July 1995. From 1987 until 1995, Mr. Woods served in various capacities with
TSYS, including Senior Vice President. G. Sanders Griffith, III has served as
General Counsel of TSYS since 1988 and was elected as Secretary of TSYS in June
1995. Mr. Griffith currently serves as Senior Executive Vice President, General
Counsel and Secretary of Synovus and has held various positions with Synovus
since 1988.
All of the executive officers of TSYS serve at the pleasure of TSYS' Board
of Directors. There are no family relationships between any of TSYS' executive
officers, and there are no arrangements or understandings between any such
executive officer or any other person pursuant to which any such officer was
elected.
III. EXECUTIVE COMPENSATION
(1) Summary Compensation Table.
The following table summarizes the cash and noncash compensation for each
of the last three fiscal years for the chief executive officer of TSYS and for
the other four most highly compensated executive officers of TSYS.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
-------------------------------------------------------- ------------------------------
Other Restricted Securities All
Annual Stock Underlying Other
Name and Compen- Award(s) Options/ Compen-
Principal Position<F1> Year Salary<F2> Bonus<F3> sation<F4> <F5> SARs sation<F6>
- ----------------------- ------ -------------- ----------- ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard W. Ussery 1997 $414,225 $257,806 -0- $ -0- 360,327 $141,895
Chairman of the Board 1996 391,725 491,363 -0- 316,187 65,780 137,152
and Chief Executive 1995 331,400 204,750 -0- 222,015 58,481 102,439
Officer
Philip W. Tomlinson 1997 354,550 202,650 -0- -0- 337,143 115,674
President 1996 335,350 386,000 -0- 223,784 46,557 115,728
1995 283,900 160,500 -0- 157,133 41,391 87,508
William A. Pruett 1997 210,150 131,090 -0- -0- 161,012 73,417
Executive Vice 1996 200,900 246,080 -0- 84,880 17,661 67,486
President 1995 173,000 103,800 -0- 59,604 15,701 50,628
M. Troy Woods 1997 194,375 102,187 -0- -0- 160,082 60,975
Executive Vice 1996 179,375 184,375 -0- 75,792 15,770 53,175
President 1995 150,000 59,375 -0- -0- 8,100 35,356
James B. Lipham 1997 162,500 86,250 -0- -0- 156,653 51,716
Executive Vice President 1996 147,500 152,500 -0- 63,938 13,302 43,755
and Chief Financial 1995 122,500 48,125 -0- -0- 8,100 30,302
Officer
<FN>
- --------------------
<F1> Mr. Blanchard received no cash compensation from TSYS during 1997, other
than director fees.
<F2> Amount consists of base salary and director fees for Messrs. Ussery
and Tomlinson.
<F3> Bonus amount for 1997 includes a special recognition award of $5,000 for
Messrs. Pruett, Woods and Lipham.
<F4> Perquisites and other personal benefits are excluded because the aggregate
amount does not exceed the lesser of $50,000 or 10% of annual salary and
bonus for the named executives.
<F5> Amount consists of market value of award on date of grant. As of December
31, 1997, Messrs. Ussery, Tomlinson, Pruett, Woods and Lipham held 108,588,
90,831, 9,026, 4,205 and 3,548 restricted shares, respectively, with a
value of $2,954,657, $2,437,115, $295,602, $137,714 and $116,197,
respectively. On July 1, 1996, restricted stock was awarded in the amount
of 21,927, 15,519, 5,888, 5,256 and 4,434 shares of Synovus Common Stock to
Messrs. Ussery, Tomlinson, Pruett, Woods and Lipham, respectively, with the
following vesting schedule: 20% on July 1, 1997; 20% on July 1, 1998; 20%
on July 1, 1999; 20% on July 1, 2000; and 20% on July 1, 2001. On September
5, 1995, restricted stock was awarded in the amount of 19,494, 13,797 and
5,234 shares of Synovus Common Stock to Messrs. Ussery, Tomlinson and
Pruett, respectively, with the following vesting schedule: 20% on September
5, 1996; 20% on September 5, 1997; 20% on September 5, 1998; 20% on
September 5, 1999; and 20% on September 5, 2000. Dividends are paid on all
restricted shares.
<F6> The 1997 amount consists of contributions or other allocations to defined
contribution plans of $25,600 for each executive; allocations pursuant to
defined contribution excess benefit agreements of $115,678, $89,448,
$47,397, $35,000 and $25,800 for each of Messrs. Ussery, Tomlinson, Pruett,
Woods and Lipham, respectively; premiums paid for group term life insurance
coverage of $510, $510, $420, $375 and $316 for each of Messrs. Ussery,
Tomlinson, Pruett, Woods and Lipham, respectively; and the economic benefit
of life insurance coverage related to split-dollar life insurance policies
of $107 and $116 for Messrs. Ussery and Tomlinson, respectively.
</FN>
</TABLE>
(2) Stock Option Exercises and Grants.
The following tables provide certain information regarding stock options granted
and exercised in the last fiscal year and the number and value of unexercised
options at the end of the fiscal year.
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------------------------------------------------------------------
% of Total Potential
Options/ Realized Value at
SARs Exercise Assumed Annual Rates of
Options/ Granted to or Stock Price Appreciation
SARs Employees Base For Option Term <F1>
Granted in Fiscal Price Expiration --------------------------
Name (#) Year ($/Share) Date 5%($) 10%($)
- ------------------- ----------- ------------- -------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard W. Ussery 80,327<F2> 3.8% $27.56 06/30/07 $1,057,095 $2,531,923
280,000<F3> 28.6 19.75 11/02/07 2,640,316 6,324,052
Philip W. Tomlinson 57,143<F2> 2.7 27.56 06/30/07 751,996 1,801,159
280,000<F3> 28.6 19.75 11/02/07 2,640,316 6,324,052
William A. Pruett 21,012<F2> 1.0 27.56 06/30/07 276,516 662,302
140,000<F3> 14.3 19.75 11/02/07 1,320,158 3,162,026
M. Troy Woods 20,082<F2> 0.9 27.56 06/30/07 264,277 632,989
140,000<F3> 14.3 19.75 11/02/07 1,320,158 3,162,026
James B. Lipham 16,653<F2> 0.8 27.56 06/30/07 219,152 524,906
140,000<F3> 14.3 19.75 11/02/07 1,320,158 3,162,026
<FN>
- ---------------
<F1> The dollar gains under these columns result from calculations using the
identified growth rates and are not intended to forecast future price
appreciation of Synovus Common Stock or TSYS Common Stock.
<F2> Options to purchase Synovus Common Stock granted on July 1, 1997 at fair
market value to exectives as part of the Synovus 1994 Long-Term Incentive
Plan. Options become exercisable on July 1, 1999 and are transferable to
family members.
<F3> Options to purchase TSYS Common Stock granted on November 3, 1997 at fair
market value to executives as part of the TSYS 1992 Long-Term Incentive
Plan, with following vesting schedule: 10% on November 3, 1998; 10% on
November 3, 1999; 10% on November 3, 2000; 10% on November 3, 2001; and 60%
on November 3, 2002. The options are transferable to family members.
</FN>
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number of Securities Value of
Underlying Unexercised Unexercised In-the-Money
Shares Value Options/SARs at FY-End (#) Options/SARs at FY-End ($)<F1>
Acquired on Realized -------------------------- -----------------------------
Name Exercise (#) ($)<F1> Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------- ------------ ----------- -------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard W. Ussery -0- -0- 89,593 / 146,107<F2> $2,104,248/ $1,622,436
-0- -0- 0 / 280,000<F3> 0/ 1,400,000
Philip W. Tomlinson -0- -0- 63,404 / 103,700<F2> 1,489,142/ 1,149,819
-0- -0- 0 / 280,000<F3> 0/ 1,400,000
William A. Pruett -0- -0- 24,503 / 38,673<F2> 576,213/ 432,726
-0- -0- 0 / 140,000<F3> 0/ 700,000
M. Troy Woods -0- -0- 0 / 43,952<F2> 0/ 576,599
-0- -0- 6,000 / 140,000<F3> 130,500/ 700,00
James B. Lipham -0- -0- 0 / 38,055<F2> 0/ 513,573
-0- -0- 4,800 / 140,000<F3> 104,400/ 700,000
<FN>
- ----------
<F1> Market value of underlying securities at exercise or year-end, minus the
exercise or base price.
<F2> Options pertain to shares of Synovus Common Stock.
<F3> Options pertain to shares of TSYS Common Stock.
</FN>
</TABLE>
(3) Compensation of Directors.
Compensation. During 1997, TSYS' directors received a $12,000 retainer, a
fee of $800 for regular and special meetings of TSYS' Board of Directors they
personally attended and a fee of $500 for meetings of the committees of TSYS'
Board of Directors they personally attended. In addition, directors of TSYS are
entitled to receive an $800 fee for one regular meeting and a fee of $800 for
one special meeting of TSYS' Board of Directors, despite the fact they are
unable to personally attend such meetings.
Director Stock Purchase Plan. TSYS' Director Stock Purchase Plan ("DSPP")
is a non-tax-qualified, contributory stock purchase plan pursuant to which
qualifying TSYS directors can purchase, with the assistance of contributions
from TSYS, presently issued and outstanding shares of TSYS Common Stock. Under
the terms of the DSPP, qualifying directors can elect to contribute up to $1,000
per calendar quarter to make purchases of TSYS Common Stock, and TSYS
contributes an additional amount equal to 50% of the directors' cash
contributions. Participants in the DSPP are fully vested in, and may request the
issuance to them of, all shares of TSYS Common Stock purchased for their benefit
thereunder.
Stock Option Agreement. On January 10, 1997, the Board of Directors of TSYS
granted Samuel A. Nunn an option to purchase 25,000 shares of TSYS Common Stock
at a purchase price of $27.75 per share, which price represents the fair market
value of a share of TSYS Common Stock on the date of the grant.
(4) Change in Control Arrangements.
Messrs. Ussery, Tomlinson, Pruett, Lipham and Woods each hold shares of
restricted stock of, and options to purchase stock of, Synovus and/or TSYS which
were issued pursuant to the 1992 Total System Services, Inc. Long-Term Incentive
Plan and the Synovus Financial Corp. 1994 Long-Term Incentive Plan. Under the
terms of the 1992 Total System Services, Inc. Long-Term Incentive Plan and the
Synovus Financial Corp. 1994 Long-Term Incentive Plan, in the event of a change
in control of TSYS or Synovus, the vesting of any stock options, stock
appreciation and other similar rights, restricted stock and performance awards
will be accelerated so that all awards not previously exercisable and vested
will become fully exercisable and vested.
Effective January 1, 1996, TSYS entered into Change of Control Agreements
("Agreements") with Messrs. Ussery, Tomlinson, Pruett, Woods and Lipham and
certain other officers. The Change of Control Agreements provide severance pay
and continuation of certain benefits in the event of a Change of Control of
Synovus or TSYS. In order to receive benefits under the Agreements, the
executive's employment must be terminated involuntarily, without cause, whether
actual or "constructive" within one year following a Change of Control or the
executive may voluntarily or involuntarily terminate employment during the
thirteenth month following a Change of Control. With respect to Synovus, a
"Change of Control" generally is deemed to occur in any of the following
circumstances: (1) the acquisition by any person of 20% or more of the
"beneficial ownership" of Synovus' outstanding voting stock, with certain
exceptions for Turner family members; (2) the persons serving as directors of
Synovus as of January 1, 1996 and those replacements or additions subsequently
approved by a two-thirds (2/3) vote of the Board ceasing to comprise at least
two-thirds (2/3) of the Board; (3) a merger, consolidation, reorganization or
sale of Synovus' assets unless (a) the previous beneficial owners of Synovus own
more than two-thirds (2/3) of the new company, (b) no person owns more than 20%
of the new company, and (c) two-thirds (2/3) of the new company's Board were
members of the incumbent Board which approved the business combination; or (4) a
"triggering event" as defined in the Synovus Rights Agreement. With respect to
TSYS, a Change of Control is generally defined in the same manner as a Change of
Control of Synovus, except that (1) a spin-off of TSYS stock to Synovus
shareholders and (2) any transaction in which Synovus continues to own more than
50% of the outstanding voting stock of TSYS are specifically excluded from the
definition of Change of Control.
Under the Agreements with Messrs. Ussery and Tomlinson, severance pay would
equal three times current base salary and bonus, with bonus being defined as the
average of the previous three years measured as a percentage of base salary
multiplied by current base salary. Under the Agreements with Messrs. Pruett,
Lipham and Woods, severance pay would equal two times current base salary and
bonus, as previously defined. Medical, life, disability and other welfare
benefits will be provided at the expense of TSYS for three years for Messrs.
Ussery and Tomlinson (two years for Messrs. Pruett, Lipham and Woods) with the
level of coverage being determined by the amount elected by the executive during
the open enrollment period immediately preceding the Change of Control.
Executives would also receive a short-year bonus for the year of separation
based on the greater of a half year's maximum bonus or pro rata maximum bonus to
the date of termination and a cash amount in lieu of a long-term incentive award
for the year of separation. If the executive has already received a long-term
incentive award in the separation year, the amount would equal 1.5 times the
market grant and if the executive has not, the amount would equal 2.5 times
market grant.
Executives who are impacted by the Internal Revenue Service excise tax that
applies to certain change of control agreements would receive additional gross
up payments so that they are in the same position as if there were no excise
tax. The Agreements do not provide for retirement benefits or perquisites.
Notwithstanding anything to the contrary set forth in any of TSYS' previous
filings under the Securities Act of 1933, as amended, or the Exchange Act that
might incorporate future filings, including this Proxy Statement, in whole or in
part, the following Performance Graph and Compensation Committee Report on
Executive Compensation shall not be incorporated by reference into any such
filings.
(5) Stock Performance Graph.
The following graph compares the yearly percentage change in cumulative
shareholder return on TSYS Common Stock with the cumulative total return of the
Standard & Poor's 500 Index and the Standard & Poor's Computer Software &
Services Index for the last five fiscal years (assuming a $100 investment on
December 31, 1992 and reinvestment of all dividends).
[Omitted Stock Performance Graph is represented by the following table.]
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
TSYS, S&P 500 AND S&P COMPUTER SOFTWARE & SERVICES INDEX
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
TSYS $100 $184 $241 $432 $762 $703
S&P 500 $100 $110 $112 $153 $189 $252
S&P CS&S $100 $128 $151 $212 $330 $459
</TABLE>
(6) Compensation Committee Report on Executive Compensation.
The Compensation Committee (the "Committee") of the Board of Directors of
TSYS is responsible for evaluating the remuneration of senior management and
board members of TSYS and its subsidiaries and the compensation and fringe
benefit plans in which officers, employees and directors of TSYS and its
subsidiaries are eligible to participate. Because TSYS' mission is to exceed the
expectations of its customers through the delivery of superior service and
continuous quality improvement that rewards its employees and enhances the value
of its shareholders' investment, the Committee's executive compensation policies
and practices are designed to attract, retain and reward its executives for
their performance in accomplishing TSYS' mission.
Elements of Executive Compensation. The four elements of executive
compensation at TSYS are:
o Base Salary
o Annual Bonus
o Long-Term Incentives
o Other Benefits
The Committee believes that a substantial portion, though not a majority,
of an executive's compensation should be "at-risk" based upon TSYS' short-term
performance (through the annual bonus and the Synovus/TSYS Profit Sharing Plan
and the Synovus/TSYS 401(k) Savings Plan) and long-term performance (through
long-term incentives including stock options and restricted stock awards). The
remainder of each executive's compensation is primarily based upon the
competitive practices of companies similar in size to TSYS ("similar companies")
with certain adjustments as described below. The companies used for comparison
are not the same companies included in the peer group index appearing in the
Stock Performance Graph above. A description of each element of executive
compensation and the factors and criteria used by the Committee in determining
these elements is discussed below:
Base Salary. Base salary is an executive's annual rate of pay without
regard to any other elements of compensation. The Committee believes that the
base salary of TSYS executives should reflect the fact that TSYS has had
outstanding stock performance over the previous 10 years, resulting in
significant market value added for its shareholders. The Committee has had
considerable difficulty, however, in obtaining data that reflected the
appropriate market for the compensation of TSYS executives. Positions for which
market matches could be found were targeted at the median level. The Committee
added a premium, however, to the size-based market data designed to reflect pay
at companies with similar strong stock performance and market value added.
Positions for which such market data could not be obtained were slotted using
internal equity considerations. Based solely upon these comparisons, the
Committee increased Mr. Ussery's base salary in 1997. The Committee also
increased the base salaries of TSYS' other executive officers in 1997 based upon
these comparisons and internal equity considerations, as described above.
Annual Bonus. Annual bonuses are awarded to the executive officers of TSYS
pursuant to the terms of the Synovus Executive Bonus Plan and the Synovus
Incentive Bonus Plan (collectively, the "plans"). The Committee has the
discretion from year-to-year to select participants in the Synovus Executive
Bonus Plan, which was approved by the shareholders of TSYS in 1996. For 1997,
the Committee selected Mr. Ussery to participate in the Synovus Executive Bonus
Plan, while the Committee selected Messrs. Tomlinson, Pruett, Woods and Lipham
to participate in the Synovus Incentive Bonus Plan. Under the terms of the
plans, bonus amounts are paid as a percentage of base pay based on the
achievement of previously established performance goals. The performance
measures for such goals may be chosen by the Committee from among the following
for Synovus, any of its business segments and/or any of its business units: (i)
number of cardholder, merchant and/or other customer accounts processed and/or
converted by TSYS; (ii) successful negotiation or renewal of contracts with new
and/or existing customers by TSYS; (iii) productivity and expense control; (iv)
stock price; (v) return on capital compared to cost of capital; (vi) net income;
(vii) operating income; (viii) earnings per share and/or earnings per share
growth; (ix) return on equity; (x) return on assets; (xi) nonperforming assets
and/or loans as a percentage of total assets and/or loans; (xii) noninterest
expense as a percentage of total expense; (xiii) loan charge-offs as a
percentage of total loans; and (xiv) asset growth. The maximum percentage
payouts under the Incentive Bonus Plan are 65% for Mr. Ussery, 60% for Messrs.
Tomlinson and Pruett and 50% for Messrs. Woods and Lipham. For Mr. Ussery and
TSYS' other executive officers, the Committee established a payout matrix based
upon the attainment of net income targets during 1997. TSYS' financial
performance and individual performance, separate from the financial performance
goals established at the beginning of the year, can reduce bonus awards
determined by the attainment of the established goals, although this was not the
case for any of TSYS' executive officers. Because the maximum net income target
for 1997 under the plans was exceeded and the overall financial results of TSYS
were favorable, Mr. Ussery and TSYS' other executive officers were awarded the
maximum bonus amount for which each executive was eligible.
Long-Term Incentives. The two types of long-term incentives awarded to
executives to date are stock options and restricted stock awards. Because of the
relatively low number of previously traded shares of TSYS, the Committee has
decided to award stock options and restricted stock awards of Synovus stock to
TSYS executives, thereby linking their interests to the interests of TSYS and
Synovus shareholders. Restricted stock awards are designed to focus executives
on the long-term performance of TSYS and Synovus. Stock options provide
executives with the opportunity to buy and maintain an equity interest in TSYS
and Synovus and to share in the appreciation of the value of TSYS and Synovus
Common Stock. In 1994, the Committee established a payout matrix for future
long-term incentive grants that uses total shareholder return as measured by
Synovus' performance (stock price increases plus dividends) and how Synovus'
total shareholder return compares to the return of a peer group of companies.
For the long-term incentive awards made in 1997, total shareholder return and
peer comparisons were measured during the 1994-1996 performance period. Applying
the results of the 1994-1996 performance period to the payout matrix, during
1997 the Committee granted Messrs. Ussery, Tomlinson, Pruett, Woods and Lipham
Synovus stock options of 80,327, 57,143, 21,012, 20,082 and 16,653 shares,
respectively. In addition, the Committee also made a retention grant of TSYS
stock options to Messrs. Ussery, Tomlinson, Pruett, Woods and Lipham of 280,000,
280,000, 140,000, 140,000 and 140,000 shares, respectively. The Committee made
these retention grants because the Committee believed the retention of these key
executives was critical for TSYS' continued growth over the next several years.
Benefits. Benefits offered to executives serve a different purpose than the
other elements of total compensation. In general, these benefits provide either
retirement income or protection against catastrophic events such as illness,
disability and death. Executives generally receive the same benefits offered to
the general employee population, with the only exceptions designed to promote
tax efficiency or to replace other benefits lost due to regulatory limits. The
Synovus/TSYS Profit Sharing Plan and the Synovus/TSYS 401(k) Savings Plan,
including excess benefit arrangements designed to replace benefits lost due to
regulatory limits (collectively the "Plan"), is the largest component of TSYS'
benefits package for executives. The Plan is directly related to corporate
performance because the amount of employer contributions to the Plan (to a
maximum of 14% of an executive's compensation) is a function of TSYS'
profitability. For 1997, Mr. Ussery and TSYS' other executive officers received
a Plan contribution of 9% of their compensation based upon the profitability
formula under the Plan. The remaining benefits provided to executives are
primarily based upon the competitive practices of similar companies.
In 1993, the Internal Revenue Code of 1986, as amended (the "Code"), was
amended to limit the deductibility for federal income tax purposes of annual
compensation paid by a publicly held corporation to its chief executive officer
and four other highest paid executives for amounts greater than $1 million
unless certain conditions are met. Because the Committee seeks to maximize
shareholder value, the Committee has taken steps to ensure the deductibility of
compensation in excess of $1 million. For 1997, Mr. Ussery would have been
affected by this provision but for the steps taken by the Committee. The
Committee reserves the ability to make awards which do not qualify for full
deductibility under Section 162(m) of the Code, however, if the Committee
determines that the benefits of so doing outweigh full deductibility.
The Committee believes that the executive compensation policies serve the
best interests of the shareholders and of TSYS. A substantial portion of the
compensation of TSYS' executives is directly related to and commensurate with
TSYS' performance. The Committee believes that the performance of TSYS to date
validates the Committee's compensation philosophy.
Mason H. Lampton
John P. Illges, III
(7) Compensation Committee Interlocks and Insider Participation.
Gardiner W. Garrard, Jr., Mason H. Lampton and John P. Illges, III served
as members of TSYS' Compensation Committee during 1997. No member of the
Committee is a current or former officer or employee of TSYS or its
subsidiaries.
Gardiner W. Garrard, Jr. is President of The Jordan Company. TSYS leases
from The Jordan Company approximately 10,000 square feet of office space in
Columbus, Georgia for $5,900 per month, which lease expires on September 30,
1999. The lease was made on substantially the same terms as those prevailing at
the time for leases of comparable property between unrelated third parties.
Gardiner W. Garrard, Jr., a director of TSYS, CB&T and Synovus, is an officer,
director and shareholder of The Jordan Company. Richard M. Olnick, the
brother-in-law of Gardiner W. Garrard, Jr. and a director of CB&T, is an
officer, director and shareholder of The Jordan Company.
Mason H. Lampton is Chairman of the Board and President of The Hardaway
Company. James H. Blanchard, Chairman of the Executive Committee of TSYS, served
on the Board of Directors of The Hardaway Company during 1997.
(8) Transactions with Management.
During 1997, TSYS paid to Communicorp, Inc. an aggregate of $535,342. These
payments were made in the ordinary course of business on substantially the same
terms as those prevailing at the time for comparable transactions with unrelated
third parties, and were primarily for various printing and business
communication services provided by Communicorp, Inc. to TSYS. Communicorp, Inc.
is a wholly owned subsidiary of AFLAC Incorporated. Daniel P. Amos, a director
of CB&T and Synovus during 1997, is Chief Executive Officer and a director of
AFLAC Incorporated.
TSYS leases various properties in Columbus, Georgia from W.C. Bradley Co.
for office space and storage. The rent paid for the space in 1997, which is
approximately 71,915 square feet, is approximately $718,236. The lease
agreements were made on substantially the same terms as those prevailing at the
time for comparable leases for similar facilities with an unrelated third party
in Columbus, Georgia.
TSYS has entered into an agreement with CB&T with respect to the use of
aircraft owned or leased by B&C Company, a Georgia general partnership in which
CB&T and W.C. Bradley Co. were equal partners during 1997. CB&T and W.C. Bradley
Co. each agreed to remit to B&C Company fixed fees for each hour they flew the
aircraft owned and/or leased by B&C Company. TSYS paid CB&T $853,515 for its use
of the B&C Company aircraft during 1997, which $853,515 was remitted to B&C
Company by CB&T. The charges payable by TSYS to CB&T in connection with its use
of this aircraft approximate charges made available to unrelated third parties
in the State of Georgia for use of comparable aircraft for commercial purposes.
William B. Turner, a director of TSYS and Chairman of the Executive Committee of
CB&T and Synovus, is an advisory director and shareholder of W.C. Bradley Co.
James H. Blanchard, Chairman of the Executive Committee of TSYS, Chairman of the
Board of Synovus and a director of CB&T, is a director of W.C. Bradley Co. W.
Walter Miller, Jr., a director of W.C. Bradley Co., is Senior Vice President and
a director of TSYS. Elizabeth C. Ogie, the niece of William B. Turner and the
sister-in-law of W. Walter Miller, Jr., is a director of W.C Bradley Co. and a
director of CB&T and Synovus. Stephen T. Butler, the nephew of William B. Turner
and an officer and director of W.C. Bradley Co., is a director of CB&T. Samuel
M. Wellborn, III, Chairman of the Board of CB&T, is a director of W.C. Bradley
Co. W.B. Turner, Jr. and John T. Turner, the sons of William B. Turner, are
officers and directors of W.C. Bradley Co. and are also directors of CB&T.
King & Spalding, a law firm located in Atlanta, Georgia, performed legal
services on behalf of TSYS during 1997. Griffin B. Bell and Samuel A. Nunn,
directors of TSYS, are Senior Partners of King & Spalding.
Bradley & Hatcher, a law firm located in Columbus, Georgia, was paid
$77,144 by TSYS during 1997 for the performance of legal services on behalf of
TSYS. Richard Y. Bradley, a director of Synovus, CB&T and TSYS, is a partner of
Bradley and Hatcher.
For information about transactions with companies that are affiliates of
Gardiner W. Garrard, Jr., a director of TSYS, see Section III (7) hereof
captioned "Compensation Committee Interlocks and Insider Participation."
For a description of certain transactions between TSYS and its affiliated
companies, upon whose Boards of Directors certain of TSYS' directors also serve,
see Section IV(D) hereof captioned "Bankcard Data Processing Services Provided
to CB&T and Certain of Synovus' Subsidiaries; Other Agreements Between TSYS,
Synovus, CB&T and Certain of Synovus' Subsidiaries."
IV. RELATIONSHIPS BETWEEN TSYS, SYNOVUS, CB&T AND CERTAIN OF SYNOVUS'
SUBSIDIARIES
A. Beneficial Ownership of TSYS Common Stock by CB&T.
The following table sets forth, as of December 31, 1997, the number of
shares of TSYS Common Stock beneficially owned by CB&T, the only known
beneficial owner of more than 5% of the issued and outstanding shares of TSYS
Common Stock.
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding Shares of
TSYS Common Stock TSYS Common Stock
Name and Address Beneficially Owned Beneficially Owned
Beneficial Owner as of 12/31/97 as of 12/31/97
- ------------------------ ------------------------ -----------------------------
<S> <C> <C>
Columbus Bank
and Trust Company 104,401,292<F1><F2> 80.7%
1148 Broadway,
Columbus, Georgia 31901
<FN>
- ------------
<F1> CB&T individually owns these shares.
<F2> As of December 31, 1997, Synovus Trust Company, a wholly owned trust
company subsidiary of CB&T ("Synovus Trust"), held in various fiduciary
capacities a total of 1,012,449 shares (.78%) of TSYS Common Stock. Of this
total, Synovus Trust held 753,739 shares as to which it possessed sole
voting power, 743,962 shares as to which it possessed sole investment
power, 207,410 shares as to which it possessed shared voting power and
210,510 shares as to which it possessed shared investment power. In
addition, as of December 31, 1997, Synovus Trust held in various agency
capacities an additional 1,310,790 shares of TSYS Common Stock as to which
it possessed no voting or investment power. Synovus and its subsidiaries
disclaim beneficial ownership of all shares of TSYS Common Stock which are
held by Synovus Trust in various fiduciary and agency capacities.
</FN>
</TABLE>
CB&T, by virtue of its individual ownership of 104,401,292 shares, or
80.7%, of the outstanding shares of TSYS Common Stock on December 31, 1997 is
able to, and intends to, elect a majority of TSYS' Board of Directors. CB&T
presently controls TSYS.
B. Interlocking Directorates of TSYS, Synovus and CB&T.
Seven of the thirteen members of and nominees to serve on TSYS' Board of
Directors also serve as members of the Boards of Directors of Synovus and CB&T.
They are James H. Blanchard, Richard Y. Bradley, Gardiner W. Garrard, Jr., John
P. Illges, III, H. Lynn Page, William B. Turner and James D. Yancey. Mason H.
Lampton serves as an Advisory Director of CB&T and as a director of Synovus.
C. Synovus Common Stock Ownership of Directors and Management.
The following table sets forth, as of December 31, 1997, the number of
shares of Synovus Common Stock beneficially owned by TSYS' directors and TSYS'
five most highly compensated executive officers.
<TABLE>
<CAPTION>
Shares of Shares of Shares of
Synovus Synovus Synovus Percentage
Common Stock Common Stock Common Stock of
Beneficially Beneficially Beneficially Total Outstanding
Owned with Owned with Owned with Shares of Shares of
Sole Voting Shared Sole Voting Synovus Synovus
and Voting and but no Common Stock Common Stock
Investment Investment Investment Beneficially Beneficially
Power as of Power as of Power as of Owned as of Owned as of
Name 12/31/97 12/31/97 12/31/97 12/31/97 12/31/97
- -------------------- -------------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Griffin B. Bell 29,556 15,109 --- 44,665 .03%
James H. Blanchard 1,210,708<F1> --- 219,217 1,429,925 .82
Richard Y. Bradley 12,520 84,330 --- 96,850 .06
Gardiner W. Garrard, Jr. 135,461 920,382 --- 1,055,843 .60
John P. Illges, III 202,132 342,437<F2> --- 544,569 .31
Mason H. Lampton 51,286 193,473<F3> --- 244,759 .14
James B. Lipham 2,529 --- 3,548 6,077 .003
W. Walter Miller, Jr. 19,881 42,253 --- 62,134 .04
Samuel A. Nunn --- --- --- --- ---
H. Lynn Page 560,546 7,677 --- 568,223 .32
William A. Pruett 29,532<F4> --- 9,026 38,558 .02
Philip W. Tomlinson 76,637<F5> --- 23,631 100,268 .06
William B. Turner 53,735 20,255,054<F6> --- 20,308,789 11.59
Richard W. Ussery 123,187<F7> 2,616 33,384 159,187 .09
M. Troy Woods 1,051 --- 4,205 5,256 .003
James D. Yancey 762,078<F8> 41,118 39,630 842,826 .48
<FN>
- -------------------
<F1> Includes 176,993 shares of Synovus Common Stock with respect to which Mr.
Blanchard has options to acquire.
<F2> Includes 41,778 shares of Synovus Common Stock held by a charitable
foundation of which Mr. Illges is a trustee.
<F3> Includes 176,458 shares of Synovus Common Stock held in a trust for which
Mr. Lampton is not the trustee. Mr. Lampton disclaims beneficial ownership
of such shares.
<F4> Includes 24,503 shares of Synovus Common Stock with respect to which Mr.
Pruett has options to acquire.
<F5> Includes 63,404 shares of Synovus Common Stock with respect to which Mr.
Tomlinson has options to acquire.
<F6> Includes 1,712,137 shares held by a charitable foundation of which Mr.
Turner is a trustee.
<F7> Includes 89,593 shares of Synovus Common Stock with respect to which Mr.
Ussery has options to acquire.
<F8>Includes 106,311 shares of Synovus Common Stock with respect to which Mr.
Yancey has options to acquire.
</FN>
</TABLE>
The following table sets forth information, as of December 31, 1997, with
respect to the beneficial ownership of Synovus Common Stock by all directors and
executive officers of TSYS as a group.
<TABLE>
<CAPTION>
Percentage of
Shares of Outstanding Shares of
Synovus Common Stock Synovus Common Stock
Name of Beneficially Owned Beneficially Owned
Beneficial Owner as of 12/31/97 as of 12/31/97
- ------------------------ ----------------------- -----------------------------
<S> <C> <C>
All directors
and executive
officers of TSYS as a 25,680,947 14.61%
group (includes 17
persons)
</TABLE>
D. Bankcard Data Processing Services Provided to CB&T and Certain of Synovus'
Subsidiaries; Other Agreements Between TSYS, Synovus, CB&T and Certain of
Synovus' Subsidiaries.
During 1997, TSYS provided bankcard data processing services to CB&T and 29
of Synovus' other banking subsidiaries. The bankcard data processing agreement
between TSYS and CB&T can be terminated by CB&T upon 60 days prior written
notice to TSYS or terminated by TSYS upon 180 days prior written notice to CB&T.
During 1997, TSYS derived $2,609,762 in revenues from CB&T and 29 of Synovus'
other banking subsidiaries from the performance of bankcard data processing
services and $148,036 in revenues from Synovus and its subsidiaries for the
performance of other data processing services. TSYS' charges to CB&T and
Synovus' other subsidiaries for bankcard and other data processing services are
comparable to, and are determined on the same basis as, charges by TSYS to
similarly situated unrelated third parties.
Synovus Service Corp. ("SSC"), a wholly owned subsidiary of Synovus,
provides various services to Synovus' subsidiary companies, including TSYS. TSYS
and SSC are parties to Lease Agreements pursuant to which SSC leased from TSYS
office space for lease payments aggregating $26,169 during 1997 and TSYS leased
from SSC office space for lease payments aggregating $31,274 during 1997. The
terms of these transactions are comparable to those which could have been
obtained in transactions with unaffiliated third parties.
TSYS and Synovus and TSYS and SSC are parties to Management Agreements
(having one year, automatically renewable, unless terminated, terms), pursuant
to which Synovus and SSC provide certain management services to TSYS. During
1997, these services included human resource services, maintenance services,
security services, communications services, corporate education services, travel
services, investor relations services, corporate governance services, legal
services, regulatory and statutory compliance services, executive management
services performed on behalf of TSYS by certain of Synovus' officers and
financial services. As compensation for management services provided during
1997, TSYS paid Synovus and SSC management fees of $1,216,089 and $9,232,001,
respectively. Management fees are subject to future adjustments based upon
charges at the time by unrelated third parties for comparable services.
During 1997, Synovus Trust Company served as Trustee of various employee
benefit plans of TSYS. During 1997, TSYS paid Synovus Trust Company trustee's
fees under these plans of $187,115.
During 1997, Columbus Depot Equipment Company ("CDEC"), a wholly owned
subsidiary of TSYS, and CB&T and 6 of Synovus' other subsidiaries were parties
to Lease Agreements pursuant to which CB&T and 6 of Synovus' other subsidiaries
leased from CDEC computer related equipment for bankcard and bank data
processing services for lease payments aggregating $97,037. During 1997, CDEC
sold CB&T and certain of Synovus' other subsidiaries computer related equipment
for bankcard and bank data processing services for payments aggregating $18,224.
In addition, CDEC was paid $2,100 by CB&T and certain of Synovus' other
subsidiaries for monitoring such equipment. The terms, conditions, rental rates
and/or sales prices provided for in these Agreements are comparable to
corresponding terms, conditions and rates provided for in leases and sales of
similar equipment offered by unrelated third parties.
During 1997, Synovus Data Corp., a wholly owned subsidiary of Synovus, paid
TSYS $224,154 for data links, network services and other miscellaneous items
related to the data processing services which Synovus Data Corp. provides to its
customers, which amount was reimbursed to Synovus Data Corp. by its customers.
During 1997, Synovus Data Corp. paid TSYS $24,900, primarily for computer
processing services. During 1997, TSYS and Synovus Data Corp. were parties to a
Lease Agreement pursuant to which TSYS leased from Synovus Data Corp. portions
of its office building for lease payments aggregating $240,000. The charges for
processing and other services, and the terms of the Lease Agreement, are
comparable to those between unrelated third parties.
During 1997, TSYS and CB&T were parties to Lease Agreements pursuant to
which CB&T leased from TSYS portions of its maintenance and warehouse facilities
for lease payments aggregating $11,628. During 1997, TSYS and CB&T were also
parties to a Lease Agreement pursuant to which TSYS leased office space from
CB&T for lease payments of $4,483 per month. The terms, conditions and rental
rates provided for in these Lease Agreements are comparable to corresponding
terms, conditions and rates provided for in leases of similar facilities offered
by unrelated third parties in the Columbus, Georgia area.
During 1997, Synovus, CB&T and other Synovus subsidiaries paid to Columbus
Productions, Inc. and TSYS Total Solutions, Inc., wholly owned subsidiaries of
TSYS, an aggregate of $1,000,403 for printing and correspondence services. The
charges for these services are comparable to those between unrelated third
parties.
During 1997, TSYS and its subsidiaries were paid $2,075,315 of interest by
CB&T in connection with deposit accounts with, and commercial paper purchased
from, CB&T. During 1997, a subsidiary of TSYS paid CB&T $123,420 of interest in
connection with a loan from CB&T. These interest rates are comparable to those
provided for between unrelated third parties.
The Board of Directors of TSYS has resolved that transactions with
officers, directors, key employees and their affiliates shall be approved by a
majority of its independent and disinterested directors, if otherwise permitted
by applicable law, and will be on terms no less favorable than could be obtained
from unrelated third parties.
V. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires TSYS' officers and directors,
and persons who own more than ten percent of TSYS Common Stock, to file reports
of ownership and changes in ownership on Forms 3,4 and 5 with the SEC and the
New York Stock Exchange. Officers, directors and greater than ten percent
shareholders are required by SEC regulations to furnish TSYS with copies of all
Section 16(a) forms they file.
To TSYS' knowledge, based solely on its review of the copies of such forms
received by it, and written representations from certain reporting persons that
no Forms 5 were required for those persons, TSYS believes that during the fiscal
year ended December 31, 1997, all Section 16(a) filing requirements applicable
to its officers, directors, and greater than ten percent beneficial owners were
complied with, except that Mr. Turner reported one transaction late on an
amended Form 4.
VI. INDEPENDENT AUDITORS
On March 2, 1998, TSYS' Board of Directors appointed KPMG Peat Marwick LLP
as the independent auditors to audit the financial statements of TSYS and its
subsidiaries for the fiscal year ending December 31, 1998. The Board of
Directors knows of no direct or material indirect financial interest by KPMG
Peat Marwick LLP in TSYS or of any connection between KPMG Peat Marwick LLP and
TSYS in the capacity of promoter, underwriter, voting trustee, director,
officer, shareholder or employee.
Representatives of KPMG Peat Marwick LLP will be present at TSYS' 1998
Annual Meeting with the opportunity to make a statement if they desire to do so
and will be available to respond to appropriate questions.
VII. FINANCIAL INFORMATION WITH REFERENCE TO TSYS CONTAINED IN TSYS' 1997
ANNUAL REPORT
Detailed financial information for TSYS and its subsidiaries for its 1997
fiscal year is included in TSYS' 1997 Annual Report that is being mailed to
TSYS' shareholders together with this Proxy Statement.
VIII. OTHER MATTERS
At the time of preparation of this Proxy Statement, TSYS' Board of
Directors has not been informed of any matters to be presented by or on behalf
of TSYS' Board of Directors or its management for action at TSYS' 1998 Annual
Meeting which are not referred to herein. If any other matters come before the
Annual Meeting or any adjournment thereof, it is the intention of the persons
named in the accompanying Proxy to vote thereon in accordance with their best
judgment.
TSYS' shareholders are urged to vote, date and sign the enclosed Proxy Card
solicited on behalf of TSYS' Board of Directors and return it at once in the
envelope which is enclosed for that purpose. This should be done whether or not
the TSYS shareholder plans to attend TSYS' 1998 Annual Meeting.
By Order of the Board of Directors
/s/Richard W. Ussery
Richard W. Ussery
Chairman of the Board, Total System Services, Inc.
Columbus, Georgia
March 12, 1998
EXHIBIT 21.1
SUBSIDIARIES OF TOTAL SYSTEM SERVICES, INC.
<TABLE>
<CAPTION>
<S> <C>
Columbus Depot Equipment Company 100%
A Georgia corporation
TSYS Total Solutions, Inc. 100%
A Georgia corporation
Columbus Productions, Inc. 100%
A Georgia corporation
TSYS Canada, Inc. 100%
A Georgia corporation
</TABLE>
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
Total System Services, Inc.
We consent to the incorporation by reference in the Registration Statements (No.
2-92497, No. 33-17376, No. 333-25401 and No. 333-41775) on Form S-8 of Total
System Services, Inc. of our reports dated January 23, 1998, relating to the
consolidated balance sheets of Total System Services, Inc. and subsidiaries as
of December 31, 1997 and 1996, 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, 1997, and the related financial statement
schedule, which reports appear in or are incorporated by reference in the Total
System Services, Inc. Annual Report on Form 10-K for the year 1997.
/s/KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 23, 1998
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 23, 1998 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 23, 1998
- ------------------------------------------------
James H. Blanchard,
Director and Chairman of the
Executive Committee
/s/Richard W. Ussery Date: March 23, 1998
- ------------------------------------------------
Richard W. Ussery,
Chairman of the Board
and Principal Executive Officer
14
/s/Philip W. Tomlinson Date: March 23, 1998
- --------------------------------------------------
Philip W. Tomlinson,
President
and Director
/s/James B. Lipham Date: March 23, 1998
- -------------------------------------------------
James B. Lipham,
Executive Vice President, Treasurer, Principal
Accounting and Financial Officer
/s/Griffin B. Bell Date: March 23, 1998
- -------------------------------------------------
Griffin B. Bell,
Director
/s/Richard Y. Bradley Date: March 23, 1998
- -------------------------------------------------
Richard Y. Bradley,
Director
/s/Gardiner W. Garrard, Jr., Date: March 23, 1998
- --------------------------------------------------
Gardiner W. Garrard, Jr.,
Director
/s/John P. Illges, III Date: March 23, 1998
- --------------------------------------------------
John P. Illges, III,
Director
/s/Mason H. Lampton Date: March 23, 1998
- --------------------------------------------------
Mason H. Lampton,
Director
/s/Samuel A. Nunn Date: March 23, 1998
- ---------------------------------------------------
Samuel A. Nunn,
Director
/s/H. Lynn Page Date: March 23, 1998
- -------------------------------------------------
H. Lynn Page,
Director
/s/W. Walter Miller, Jr. Date: March 23, 1998
- -------------------------------------------------
W. Walter Miller, Jr.,
Director
/s/William B. Turner Date: March 23, 1998
- -------------------------------------------------
William B. Turner,
Director
/s/James D. Yancey Date: March 23, 1998
- --------------------------------------------------
James D. Yancey,
Director
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000721683
<NAME> TOTAL SYSTEM SERVICES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 43,335,922
<SECURITIES> 0
<RECEIVABLES> 70,186,878
<ALLOWANCES> 735,959
<INVENTORY> 0
<CURRENT-ASSETS> 132,405,707
<PP&E> 134,082,690
<DEPRECIATION> 65,114,116
<TOTAL-ASSETS> 296,857,937
<CURRENT-LIABILITIES> 61,506,397
<BONDS> 0
0
0
<COMMON> 12,948,352
<OTHER-SE> 208,938,499
<TOTAL-LIABILITY-AND-EQUITY> 296,857,937
<SALES> 361,499,349
<TOTAL-REVENUES> 361,499,349
<CGS> 0
<TOTAL-COSTS> 301,570,084
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 71,555,909
<INCOME-TAX> 24,077,347
<INCOME-CONTINUING> 47,478,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,478,472
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Total System Services, Inc., in accordance with Statement of Financial
Accounting Standards No. 128 (SFAS 128) "Earnings per Share", has restated its
earnings per share for all periods presented to reflect the adoption of SFAS
128.
</LEGEND>
<RESTATED>
<CIK> 0000721683
<NAME> TOTAL SYSTEM SERVICES, INC.
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 23,806,186 29,890,350 39,998,737
<SECURITIES> 0 0 0
<RECEIVABLES> 55,814,268 63,617,266 67,139,903
<ALLOWANCES> 703,689 709,832 737,582
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 92,667,903 107,116,851 125,393,551
<PP&E> 125,249,859 130,329,557 133,401,478
<DEPRECIATION> 61,347,575 64,417,227 66,576,319
<TOTAL-ASSETS> 250,454,939 265,595,394 284,263,464
<CURRENT-LIABILITIES> 49,158,729 56,363,966 63,770,060
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 12,948,352 12,948,352 12,948,352
<OTHER-SE> 173,241,431 181,890,975 193,823,878
<TOTAL-LIABILITY-AND-EQUITY> 250,454,939 265,595,394 284,263,464
<SALES> 83,136,474 172,873,281 265,008,258
<TOTAL-REVENUES> 83,136,474 172,873,281 265,008,258
<CGS> 0 0 0
<TOTAL-COSTS> 72,311,520 149,142,563 224,590,708
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 13,045,845 28,581,488 48,122,433
<INCOME-TAX> 4,529,138 10,123,336 16,438,886
<INCOME-CONTINUING> 8,516,707 18,458,152 31,683,547
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,516,707 18,458,152 31,683,547
<EPS-PRIMARY> .07 .14 .25
<EPS-DILUTED> .07 .14 .24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Total System Services, Inc., in accordance with Statement of Financial
Accounting Standards No. 128 (SFAS 128) "Earnings per Share", has restated its
earnings per share for all periods presented to reflect the adoption of SFAS
128.
</LEGEND>
<RESTATED>
<CIK> 0000721683
<NAME> TOTAL SYSTEM SERVICES, INC.
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 19,612,947 23,512,307 24,989,809 27,496,057
<SECURITIES> 0 0 0 0
<RECEIVABLES> 49,434,032 50,507,417 56,599,491 59,748,530
<ALLOWANCES> 708,662 718,574 707,938 704,000
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 77,813,337 84,795,927 93,468,786 103,379,818
<PP&E> 114,400,803 119,223,836 119,968,214 121,340,252
<DEPRECIATION> 56,279,824 58,388,965 58,503,014 58,441,206
<TOTAL-ASSETS> 204,040,528 217,934,357 236,072,971 245,759,083
<CURRENT-LIABILITIES> 37,798,636 45,853,695 53,635,057 51,105,345
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 12,948,352 12,948,352 12,948,352 12,948,352
<OTHER-SE> 135,920,125 142,763,169 152,663,406 165,929,395
<TOTAL-LIABILITY-AND-EQUITY> 204,040,528 217,934,357 236,072,971 245,759,083
<SALES> 71,101,979 145,591,366 225,770,020 311,648,349
<TOTAL-REVENUES> 71,101,979 145,591,366 225,770,020 311,648,349
<CGS> 0 0 0 0
<TOTAL-COSTS> 63,232,684 127,732,183 193,305,275 259,744,821
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> 9,003,656 18,669,832 38,478,035 60,444,404
<INCOME-TAX> 3,034,442 6,828,327 13,261,794 21,007,223
<INCOME-CONTINUING> 5,969,214 13,869,331 25,216,241 39,437,181
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 5,969,214 13,869,331 25,216,241 39,437,181
<EPS-PRIMARY> .05 .11 .20 .31
<EPS-DILUTED> .05 .11 .19 .30
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Total System Services, Inc., in accordance with Statement of Financial
Accounting Standards No. 128 (SFAS 128) "Earnings per Share", has restated its
earnings per share for all periods presented to reflect the adoption of SFAS
128.
</LEGEND>
<RESTATED>
<CIK> 0000721683
<NAME> TOTAL SYSTEM SERVICES, INC.
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995 DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1995 JAN-01-1995 JAN-01-1995
<PERIOD-END> MAR-31-1995 JUN-30-1995 SEP-30-1995 DEC-31-1995
<CASH> 10,793,034 8,228,984 22,306,181 18,849,623
<SECURITIES> 0 0 0 0
<RECEIVABLES> 38,449,245 43,644,902 45,505,346 49,614,779
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 56,724,199 61,055,590 77,200,273 77,826,902
<PP&E> 101,718,403 104,739,347 102,766,369 109,516,982
<DEPRECIATION> 53,714,357 54,848,731 54,976,814 54,944,079
<TOTAL-ASSETS> 166,084,268 173,521,913 190,335,325 198,999,801
<CURRENT-LIABILITIES> 24,915,071 24,425,511 36,422,843 40,139,930
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 12,945,738 12,945,738 12,945,738 12,946,154
<OTHER-SE> 112,788,388 117,377,885 123,706,343 131,525,867
<TOTAL-LIABILITY-AND-EQUITY> 166,084,268 173,521,913 190,335,325 198,999,801
<SALES> 53,380,409 112,513,534 178,621,850 249,707,697
<TOTAL-REVENUES> 53,380,409 112,513,534 178,621,850 249,707,697
<CGS> 0 0 0 0
<TOTAL-COSTS> 45,617,182 94,729,514 150,091,401 206,786,178
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 0 0 0
<INCOME-PRETAX> 7,727,868 17,490,673 28,788,132 43,707,076
<INCOME-TAX> 2,944,349 6,693,575 10,601,124 15,976,974
<INCOME-CONTINUING> 4,783,519 10,797,098 18,187,008 27,730,102
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 4,783,519 10,797,098 18,187,008 27,730,102
<EPS-PRIMARY> .04 .08 .14 .21
<EPS-DILUTED> .04 .08 .14 .21
</TABLE>
