UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from To
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Commission file number 1-10254
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T|SYS| LOGO [OBJECT OMITTED]
Total System Services, Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-1493818
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1600 First Avenue, Post Office Box 1755, Columbus, Georgia 31902
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(Address of principal executive offices) (Zip Code)
(706) 649-2310
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF: August 6, 2004
- ------------------------------- ------------------------------------
Common Stock, $.10 par value 196,848,529
T|SYS| LOGO [OBJECT OMITTED]
TOTAL SYSTEM SERVICES, INC.
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) - June 30, 2004 and December 31, 2003 3
Consolidated Statements of Income (unaudited) - Three and six months
ended June 30, 2004 and 2003 5
Consolidated Statements of Cash Flows (unaudited) -Six months ended
June 30, 2004 and 2003 7
Notes to Unaudited Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Item 4. Controls and Procedures 42
Part II. Other Information
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchase of Equity
Securities 43
Item 4. Submission of Matters to a Vote of Security Holders 44
Item 6. Exhibits and Reports on Form 8-K 45
Signatures 46
Exhibit Index 47
TOTAL SYSTEM SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Unaudited)
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June 30, December 31,
(in thousands, except per share information) 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (includes $98.2 million and $80.8 million on
deposit with a related party at 2004 and 2003, respectively) $ 141,930 122,874
Restricted cash (includes $7.2 million and $7.6 million on deposit with a
related party at 2004 and 2003, respectively) 7,276 7,679
Accounts receivable, net of allowance for doubtful accounts and billing
adjustments of $7.8 million and $9.8 million at 2004 and 2003, respectively 117,407 120,646
Deferred income tax assets - 401
Prepaid expenses and other current assets 26,316 22,764
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 292,929 274,364
Property and equipment, net of accumulated depreciation and amortization of
$148.9 million and $136.9 million at 2004 and 2003, respectively 259,866 232,076
Computer software, net of accumulated amortization of $228.0 million and $202.3
million at 2004 and 2003, respectively 238,974 258,090
Contract acquisition costs, net 118,750 125,472
Equity investments 63,228 66,708
Goodwill, net 29,626 29,626
Other assets 27,466 14,900
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,030,839 1,001,236
============================================
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 3 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Balance Sheets (continued)
(Unaudited)
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June 30, December 31,
(in thousands, except per share information) 2004 2003
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 27,426 17,549
Accrued salaries and employee benefits 18,757 32,562
Current portion of obligations under capital leases and software obligations 1,064 15,231
Billings in excess of costs and profit on uncompleted contracts 1,407 17,573
Deferred income tax liabilities 6,658 -
Other current liabilities (includes $6.5 million and $4.3 million payable to
related parties at 2004 and 2003, respectively) 85,614 64,056
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 140,926 146,971
Obligations under capital leases and software obligations, excluding current
portion 3,178 29,748
Deferred income tax liabilities 91,423 88,544
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Total liabilities 235,527 265,263
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Minority interest in consolidated subsidiary 3,574 3,439
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Shareholders' equity:
Common stock - $.10 par value. Authorized 600,000 shares; 197,587 and
197,504 issued at 2004 and 2003, respectively; 196,849 and 196,815
outstanding at 2004 and 2003, respectively 19,759 19,750
Additional paid-in capital 42,716 41,574
Accumulated other comprehensive income 10,876 8,314
Treasury stock (shares of 738 and 689 at 2004 and 2003, respectively) (13,573) (12,426)
Retained earnings 731,960 675,322
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 791,738 732,534
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,030,839 1,001,236
============================================
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 4 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Income
(Unaudited)
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Three months ended
June 30,
-------------------------------------------
(in thousands, except per share information) 2004 2003
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Revenues:
Electronic payment processing services (includes $5.2 million and $4.4 million
from related parties for 2004 and 2003, respectively) $ 191,863 177,306
Other services (includes $1.5 million and $1.8 million from related parties for
2004 and 2003, respectively) 41,827 25,755
-------------------------------------------
Revenues before reimbursable items 233,690 203,061
Reimbursable items (includes $2.4 million and $2.2 million from related parties
for 2004 and 2003, respectively) 55,932 54,638
-------------------------------------------
Total revenues 289,622 257,699
-------------------------------------------
Expenses:
Salaries and other personnel expense 82,224 83,600
Net occupancy and equipment expense 66,153 50,407
Other operating expenses (includes $2.3 million and $2.2 million to related
parties for 2004 and 2003, respectively) 37,701 24,312
Loss (gain) on disposal of equipment, net 340 (13)
-------------------------------------------
Expenses before reimbursable items 186,418 158,306
Reimbursable items 55,932 54,638
-------------------------------------------
Total expenses 242,350 212,944
-------------------------------------------
Operating income 47,272 44,755
-------------------------------------------
Nonoperating income (expense):
Interest income (includes $141 and $255 from related parties for 2004 and 2003,
respectively) 537 1,230
Interest expense (39) (17)
(Loss)gain on foreign currency translation, net (30) 1,788
-------------------------------------------
Total nonoperating income 468 3,001
-------------------------------------------
Income before income taxes, minority interest and equity in income
of joint ventures 47,740 47,756
Income taxes 18,471 18,108
Minority interest in consolidated subsidiary's net income (67) (142)
Equity in income of joint ventures 6,684 4,800
-------------------------------------------
Net income $ 35,886 34,306
===========================================
Basic earnings per share $ 0.18 0.17
===========================================
Diluted earnings per share $ 0.18 0.17
===========================================
Weighted average common shares outstanding 196,846 196,703
Increase due to assumed issuance of shares related to stock options outstanding 329 505
-------------------------------------------
Weighted average common and common equivalent shares outstanding 197,175 197,208
===========================================
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 5 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Income
(Unaudited)
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Six months ended
June 30,
-------------------------------------------
(in thousands, except per share information) 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Electronic payment processing services (includes $9.5 million and $8.9 million
from related parties for 2004 and 2003, respectively) $ 375,619 345,132
Other services (includes $2.9 million and $3.3 million from related parties for
2004 and 2003, respectively) 82,675 50,808
-------------------------------------------
Revenues before reimbursable items 458,294 395,940
Reimbursable items (includes $4.6 million and $4.7 million from related parties
for 2004 and 2003, respectively) 116,564 113,112
-------------------------------------------
Total revenues 574,858 509,052
-------------------------------------------
Expenses:
Salaries and other personnel expense 170,086 159,696
Net occupancy and equipment expense 124,164 102,027
Other operating expenses (includes $4.6 million and $4.5 million to related
parties for 2004 and 2003, respectively) 72,252 46,329
Loss (gain) on disposal of equipment, net 378 (35)
-------------------------------------------
Expenses before reimbursable items 366,880 308,017
Reimbursable items 116,564 113,112
-------------------------------------------
Total expenses 483,444 421,129
-------------------------------------------
Operating income 91,414 87,923
-------------------------------------------
Nonoperating income (expense):
Interest income (includes $317 and $485 from related parties for 2004 and 2003,
respectively) 1,042 1,881
Interest expense (782) (30)
(Loss) gain on foreign currency translation, net (101) 1,162
-------------------------------------------
Total nonoperating income 159 3,013
-------------------------------------------
Income before income taxes, minority interest and equity in income
of joint ventures 91,573 90,936
Income taxes 35,226 33,622
Minority interest in consolidated subsidiary's net income (160) (260)
Equity in income of joint ventures 12,260 8,988
-------------------------------------------
Net income $ 68,447 66,042
===========================================
Basic earnings per share $ 0.35 0.34
===========================================
Diluted earnings per share $ 0.35 0.33
===========================================
Weighted average common shares outstanding 196,845 196,875
Increase due to assumed issuance of shares related to stock options outstanding 350 368
-------------------------------------------
Weighted average common and common equivalent shares outstanding 197,195 197,243
===========================================
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 6 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
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Six months ended
June 30,
------------------------------------------
(in thousands) 2004 2003
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Cash flows from operating activities:
Net income $ 68,447 66,042
Adjustments to reconcile net income to net cash provided by operating
Minority interest in consolidated subsidiary's net income 160 260
Loss (gain) on foreign currency translation, net 101 (1,162)
Equity in income of joint ventures (12,260) (8,988)
Depreciation and amortization 52,781 45,597
Impairment of developed software 10,059 -
Recoveries of bad debt expenses and billing adjustments (1,373) (97)
Charges for transaction processing 4,865 2,164
Deferred income tax expense 9,938 8,178
Loss (gain) on disposal of equipment, net 378 (35)
(Increase) decrease in:
Accounts receivable 4,950 (11,335)
Prepaid expenses and other assets (17,645) (2,050)
Increase (decrease) in:
Accounts payable 10,759 4,596
Accrued salaries and employee benefits (13,811) (19,179)
Billings in excess of costs and profit on uncompleted contracts (16,166) 28,472
Other current liabilities 11,272 (1,799)
------------------------------------------
Net cash provided by operating activities 112,455 110,664
------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (39,334) (107,432)
Additions to licensed computer software from vendors (14,001) (20,000)
Additions to internally developed computer software (3,703) (9,033)
Proceeds from disposal of equipment 8 66
Cash acquired in acquisition - 4,442
Cash used in acquisition - (36,000)
Dividends received from joint ventures 15,876 5,278
Contract acquisition costs (3,283) (13,379)
------------------------------------------
Net cash used in investing activities (44,437) (176,058)
------------------------------------------
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 7 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
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Six months ended
June 30,
------------------------------------------
(in thousands) 2004 2003
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Cash flows from financing activities:
Purchases of common stock (1,188) (9,485)
Proceeds from long-term debt borrowings - 20,234
Principal payments on capital lease obligations and software obligations (42,039) (52)
Dividends paid on common stock (7,873) (6,897)
Proceeds from exercise of stock options 1,192 637
------------------------------------------
Net cash (used in) provided by financing activities (49,908) 4,437
------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 946 (39)
------------------------------------------
Net increase (decrease) in cash and cash equivalents $ 19,056 (60,996)
Cash and cash equivalents at beginning of year 122,874 109,171
------------------------------------------
Cash and cash equivalents at end of period $ 141,930 48,175
==========================================
Cash paid for interest $ 782 30
==========================================
Cash paid for income taxes (net of refunds) $ 17,667 25,906
==========================================
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 8 -
TOTAL SYSTEM SERVICES, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements represent the
accounts of Total System Services, Inc.(R) (TSYS (R) or the Company); its wholly
owned subsidiaries, Columbus Depot Equipment CompanySM (CDEC (SM)), Columbus
Productions, Inc.SM (CPI), TSYS Canada, Inc.SM (TSYS Canada), TSYS Total Debt
Management, Inc. (TDM), ProCard, Inc. (ProCard), TSYS Japan Co., Ltd. (Japan
Co.), Enhancement Services Corporation (ESC) and TSYS Technology Center, Inc.
(TTC); and its majority owned foreign subsidiary, GP Network Corporation (GP
Net).
These financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in conformity with accounting principles generally accepted in
the United States of America. All adjustments, consisting of normal recurring
accruals, which, in the opinion of management, are necessary for a fair
presentation of financial position and results of operations for the periods
covered by this report have been included. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
Company's summary of significant accounting policies, consolidated financial
statements and related notes appearing in the Company's 2003 annual report
previously filed on Form 10-K. Results of interim periods are not necessarily
indicative of results to be expected for the year.
Note 2 - Supplementary Balance Sheet Information
Cash and cash equivalent balances are summarized as follows:
(in thousands) June 30, 2004 December 31, 2003
------------------------------------------------------------------------------ --------------------------
Cash and cash equivalents in domestic accounts $ 98,184 80,812
Cash and cash equivalents in foreign accounts 43,746 42,062
-------------------------- --------------------------
Total $ 141,930 122,874
========================== ==========================
The Company maintains accounts denominated in U.S. dollars, Euros, British
Pounds Sterling (BPS), Canadian dollars and Japanese Yen.
Significant components of prepaid expenses and other current assets are
summarized as follows:
(in thousands) June 30, 2004 December 31, 2003
------------------------------------------------------------------------------ --------------------------
Prepaid expenses $ 13,440 11,667
Supplies 4,114 3,544
Other 8,762 7,553
-------------------------- --------------------------
Total $ 26,316 22,764
========================== ==========================
- 9 -
Notes to Consolidated Financial Statements (continued)
Significant components of contract acquisition costs, net of accumulated
amortization, are summarized as follows:
(in thousands) June 30, 2004 December 31, 2003
------------------------------------------------------------------------------ --------------------------
Payments for processing rights, net $ 78,704 84,448
Conversion costs, net 40,046 41,024
-------------------------- --------------------------
Total $ 118,750 125,472
========================== ==========================
Amortization related to payments for processing rights, which is recorded
as a reduction of revenues, was $3.4 million for both the three months ended
June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004 and
2003, amortization related to payments for processing rights was $6.8 million
and $6.3 million, respectively.
Amortization expense related to conversion costs, which is recorded in
other operating expenses, was $2.8 million and $1.5 million for the three months
ended June 30, 2004 and 2003, respectively. For the six months ended June 30,
2004 and 2003, amortization expense related to conversion costs was $5.5 million
and $2.8 million, respectively.
Significant components of other current liabilities are summarized as
follows:
(in thousands) June 30, 2004 December 31, 2003
------------------------------------------------------------------------------ ----------------------------
Accrued expenses $ 22,067 16,879
Customer postage deposits 10,671 11,519
Deferred revenues 12,316 11,639
Client liabilities 6,985 7,804
Transaction processing provisions 8,269 5,091
Dividends payable 7,874 3,936
Other 17,432 7,188
-------------------------- ----------------------------
Total $ 85,614 64,056
========================== ============================
Note 3 - Comprehensive Income
Comprehensive income for TSYS consists of net income and foreign currency
translation adjustments recorded as a component of shareholders' equity.
Comprehensive income for the three months ended June 30 is as follows:
(in thousands) 2004 2003
-------------------------------------------------------------------------------- --------------------------
Net income $ 35,886 $ 34,306
Other comprehensive income:
Foreign currency translation adjustments,
net of tax 632 2,785
-------------------------- --------------------------
Comprehensive income $ 36,518 $ 37,091
========================== ==========================
- 10 -
Notes to Consolidated Financial Statements (continued)
Comprehensive income for the six months ended June 30 is as follows:
(in thousands) 2004 2003
-------------------------------------------------------------------------------- --------------------------
Net income $ 68,447 $ 66,042
Other comprehensive income:
Foreign currency translation adjustments,
net of tax 2,562 1,623
-------------------------- --------------------------
Comprehensive income $ 71,009 $ 67,665
========================== ==========================
The income tax effects allocated to and the cumulative balance of
accumulated other comprehensive income are as follows:
Balance at December 31, Pretax Balance at
(in thousands) 2003 amount Tax effect June 30, 2004
- ---------------------------------------------------------------------------------------------------------------------------
Foreign currency translation
adjustments $8,314 3,962 (1,400) $10,876
=======================================================================================
Note 4 - Segment Reporting and Major Customers
The Company reports selected information about operating segments in
accordance with Statement of Financial Accounting Standards No. 131 (SFAS No.
131). The Company's segment information reflects the information that the chief
operating decision makers (CODMs) use to make resource allocation and strategic
decisions. The CODMs at TSYS consist of the chairman of the board, the chief
executive officer, the president and the three senior executive vice presidents.
In the fourth quarter of 2003, the Company revised its segment information
to reflect the information that the CODMs use to make resource allocations and
strategic decisions. The revision moved TSYS Canada from international-based
services into the domestic-based services. TSYS Canada provides processing
services only to TSYS.
Through online accounting and electronic payment processing systems, Total
System Services, Inc. provides electronic payment processing and other related
services to card-issuing institutions in the United States, Mexico, Canada,
Honduras, Europe and the Caribbean. The reportable units are segmented based
upon geographic locations. Domestic-based services include electronic payment
processing services and other services provided from the United States.
Domestic-based services segment includes the financial results of TSYS,
excluding its foreign branch offices, and including the following subsidiaries:
CDEC, CPI, TSYS Canada, TDM, ProCard, ESC and TTC. TSYS' share of the equity
earnings of its Vital joint venture is included in domestic-based services.
International-based services include electronic payment processing and other
services provided outside the United States. International-based services
include the financial results of GP Net, Japan Co. and TSYS' branch offices in
Europe and Japan. TSYS' share of the equity earnings of its TSYS de Mexico joint
venture is included in international-based services.
- 11 -
Notes to Consolidated Financial Statements (continued)
Operating Segments Domestic-based International-based
(in thousands) services services Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
At June 30, 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 1,018,751 161,591 $ 1,180,342
Intersegment eliminations (149,503) - (149,503)
------------------------- ------------------------- -----------------------
Total assets $ 869,248 161,591 $ 1,030,839
========================= ========================= =======================
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 994,822 139,028 $ 1,133,850
Intersegment eliminations (132,614) - (132,614)
------------------------- ------------------------- ----------------------
Total assets $ 862,208 139,028 $ 1,001,236
========================= ========================= =======================
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Segment total revenue $ 262,113 27,511 $ 289,624
Intersegment revenue (2) - (2)
------------------------- ------------------------- -----------------------
Total revenue $ 262,111 27,511 $ 289,622
========================= ========================= =======================
Depreciation and amortization $ 23,484 3,187 $ 26,671
========================= ========================= =======================
Segment operating income $ 40,498 6,774 $ 47,272
========================= ========================= =======================
Income taxes $ 15,934 2,537 $ 18,471
========================= ========================= =======================
Equity in income of joint ventures $ 6,366 318 $ 6,684
========================= ========================= =======================
Net income $ 31,401 4,485 $ 35,886
========================= ========================= =======================
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Segment total revenue $ 237,849 19,852 $ 257,701
Intersegment revenue (2) - (2)
-------------------------- ------------------------- -----------------------
Total revenue $ 237,847 19,852 $ 257,699
========================== ========================= =======================
Depreciation and amortization $ 20,958 2,537 $ 23,495
========================== ========================= =======================
Segment operating income $ 41,015 3,740 $ 44,755
========================== ========================= =======================
Income taxes $ 16,799 1,309 $ 18,108
========================== ========================= =======================
Equity in income of joint ventures $ 4,550 250 $ 4,800
========================== ========================= =======================
Net income $ 31,672 2,634 $ 34,306
========================== ========================= =======================
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Segment total revenue $ 522,734 52,129 $ 574,863
Intersegment revenue (5) - (5)
------------------------- ------------------------- -----------------------
Total revenue $ 522,729 52,129 $ 574,858
========================= ========================= =======================
Depreciation and amortization $ 46,763 6,018 $ 52,781
========================= ========================= =======================
Segment operating income $ 80,071 11,343 $ 91,414
========================= ========================= =======================
Income taxes $ 31,096 4,130 $ 35,226
========================= ========================= =======================
Equity in income of joint ventures $ 11,567 693 $ 12,260
========================= ========================= =======================
Net income $ 60,845 7,602 $ 68,447
========================= ========================= =======================
- 12 -
Notes to Consolidated Financial Statements (continued)
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Segments (continued) Domestic-based International-based
(in thousands) services services Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Segment total revenue $ 470,968 38,087 $ 509,055
Intersegment revenue (3) - (3)
--------------------------- ------------------------- --------------------------
Total revenue $ 470,965 38,087 $ 509,052
=========================== ========================= ==========================
Depreciation and amortization $ 40,577 5,020 $ 45,597
=========================== ========================= ==========================
Segment operating income $ 82,051 5,872 $ 87,923
=========================== ========================= ==========================
Income taxes $ 31,716 1,906 $ 33,622
=========================== ========================= ==========================
Equity in income of joint ventures $ 8,492 496 $ 8,988
=========================== ========================= ==========================
Net income $ 62,037 4,005 $ 66,042
=========================== ========================= ==========================
Revenues for domestic-based services include electronic payment processing
and other services provided from the United States to clients domiciled in the
United States or other countries. Revenues from international-based services
include electronic payment processing and other services provided outside the
United States to clients domiciled mainly outside the United States.
The following geographic area data represent revenues for the three and six
months ended June 30, 2004 and 2003, respectively, based on the domicile of
customers.
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------- ---------------------------------------------
(in millions) 2004 2003 2004 2003
- ----------------------------- ---- ------------------- --------------------- -- ---------------------- --------------
United States $ 237.2 209.0 474.3 417.6
Canada* 21.3 19.2 41.0 35.1
Europe 24.2 17.0 45.5 32.4
Mexico 2.9 9.1 5.8 17.1
Japan 3.4 2.9 6.9 5.7
Other 0.6 0.5 1.4 1.2
------------------- --------------------- ---------------------- --------------
Totals $ 289.6 257.7 574.9 509.1
=================== ===================== ====================== ==============
The following table reconciles geographic revenues to revenues by reporting
segment for the three months ended June 30, 2004 and 2003, respectively, based
on the domicile of customers.
Domestic-based services International-based services
---------------------------------------- -- ------------------------------------
( in millions) 2004 2003 2004 2003
- ----------------------------- ---- ----------------- ----------------- -- ----------------- ------------------
United States $ 237.2 209.0 - -
Canada* 21.3 19.2 - -
Europe 0.1 - 24.1 17.0
Mexico 2.9 9.1 - -
Japan - - 3.4 2.9
Other 0.6 0.5 - -
- ----------------------------- ---- ----------------- ----------------- -- ----------------- ------------------
Totals $ 262.1 237.8 27.5 19.9
================= ================= == ================= ==================
- 13 -
Notes to Consolidated Financial Statements (continued)
The following table reconciles geographic revenues to revenues by reporting
segment for the six months ended June 30, 2004 and 2003, respectively, based on
the domicile of customers.
Domestic-based services International-based services
---------------------------------------- -- ------------------------------------
( in millions) 2004 2003 2004 2003
- ----------------------------- ---- ----------------- ----------------- -- ----------------- ------------------
United States $ 474.3 417.6 - -
Canada* 41.0 35.1 - -
Europe 0.2 - 45.3 32.4
Mexico 5.8 17.1 - -
Japan - - 6.9 5.7
Other 1.4 1.2 - -
- ----------------------------- ---- ----------------- ----------------- -- ----------------- ------------------
Totals $ 522.7 471.0 52.2 38.1
================= ================= == ================= ==================
* These revenues include those generated from the Caribbean accounts owned by a
Canadian institution.
The Company maintains property and equipment in the United States, Europe,
Japan and Canada. The following geographic area data represent net property and
equipment balances by region:
At June 30, At December 31,
(in millions) 2004 2003
--------------------------------------------------------------- -----------------------------
United States $ 204.9 192.7
Europe 53.0 37.2
Japan 1.8 2.0
Canada 0.2 0.2
--------------------------------------------------------------- -----------------------------
Totals $ 259.9 232.1
========================== =============================
Major Customers
For the three months ended June 30, 2004, the Company had two major
customers which accounted for approximately 27.9%, or $80.7 million, of total
revenues. For the three months ended June 30, 2003, TSYS had two major customers
that accounted for 30.2%, or $77.7 million, of total revenues. Revenues from
major customers for the periods reported are attributable to the domestic-based
services segment.
Three Months Ended June 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
Revenue % of Total % of Total
(in millions) Dollars Revenues Dollars Revenues
--------------------------------------------------------------------------- -------------------------------------
Customer One $ 54.9 19.0 % $ 49.2 19.1 %
Customer Two 25.8 8.9 28.5 11.1
--------------------------------------------------------------------- -------------------------------
Totals $ 80.7 27.9 % $ 77.7 30.2 %
=============================== ===============================
- 14 -
Notes to Consolidated Financial Statements (continued)
For the six months ended June 30, 2004, the Company had two major customers
which accounted for approximately 28.0%, or $161.0 million, of total revenues.
For the six months ended June 30, 2003, TSYS had two major customers that
accounted for 30.1%, or $153.0 million, of total revenues. Revenues from major
customers for the periods reported are attributable to the domestic-based
services segment.
Six Months Ended June 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
Revenue % of Total % of Total
(in millions) Dollars Revenues Dollars Revenues
--------------------------------------------------------------------------- -------------------------------------
Customer One $ 107.2 18.6 % $ 96.0 18.9 %
Customer Two 53.8 9.4 57.0 11.2
--------------------------------------------------------------------- -------------------------------
Totals $ 161.0 28.0 % $ 153.0 30.1 %
=============================== ===============================
Note 5 - Stock-Based Compensation
The Company maintains stock-based compensation plans for purposes of
incenting and retaining employees. The Company accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25 (APB
No. 25), "Accounting for Stock Issued to Employees," and related
Interpretations. Under APB No. 25, TSYS does not recognize compensation expense
for a stock option grant if the exercise price is equal to or greater than the
fair market value of the common stock on the grant date.
The following table illustrates the effect on net income and earnings per
share for the three months ended June 30, 2004 and 2003, respectively, if the
Company had applied the fair value recognition provisions of SFAS No. 123 (SFAS
No. 123), "Accounting for Stock-Based Compensation," to stock-based employee
compensation granted in the form of TSYS and Synovus Financial Corp. (Synovus)
stock options.
(in thousands, except per share data) June 30, 2004 June 30, 2003
------------------------------------------------------------------------------- ------------------------------
Net income, as reported $ 35,886 $ 34,306
Stock-based employee compensation expense
determined under the fair value based
method for all awards, net of related
income tax effects 1,182 1,222
-------------------------- ------------------------------
Net income, as adjusted $ 34,704 $ 33,084
========================== ==============================
Earnings per share:
Basic - as reported $ 0.18 $ 0.17
========================== ==============================
Basic - as adjusted $ 0.18 $ 0.17
========================== ==============================
Diluted - as reported $ 0.18 $ 0.17
========================== ==============================
Diluted - as adjusted $ 0.18 $ 0.17
========================== ==============================
- 15 -
Notes to Consolidated Financial Statements (continued)
The following table illustrates the effect on net income and earnings per
share for the six months ended June 30, 2004 and 2003, respectively, if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation granted in the form of TSYS and Synovus stock
options.
(in thousands, except per share data) June 30, 2004 June 30, 2003
------------------------------------------------------------------------------- ------------------------------
Net income, as reported $ 68,447 $ 66,042
Stock-based employee compensation expense
determined under the fair value based
method for all awards, net of related
income tax effects 2,509 2,475
-------------------------- ------------------------------
Net income, as adjusted $ 65,938 $ 63,567
========================== ==============================
Earnings per share:
Basic - as reported $ 0.35 $ 0.34
========================== ==============================
Basic - as adjusted $ 0.33 $ 0.32
========================== ==============================
Diluted - as reported $ 0.35 $ 0.33
========================== ==============================
Diluted - as adjusted $ 0.33 $ 0.32
========================== ==============================
Note 6 - Long-Term Debt
On June 30, 2003, TSYS obtained a $45.0 million long-term line of credit
from a banking affiliate of Synovus. The line is an automatic draw down
facility. The interest rate for the line of credit is the London Interbank
Offered Rate (LIBOR) plus 150 basis points. In addition, there is a charge of 15
basis points on any funds unused. The line of credit is unsecured and includes
covenants requiring the Company to maintain certain minimum financial ratios. At
June 30, 2004 and December 31, 2003, TSYS did not have an outstanding balance on
the line of credit.
On March 31, 2004, the Company paid in full the obligations that were in
effect on December 31, 2003 related to licensed mainframe software.
Note 7 - Supplementary Cash Flow Information
Cash used for contract acquisition costs for the six months ended June 30,
2004 and 2003 are summarized as follows:
(in thousands) June 30, 2004 June 30, 2003
------------------------------------------------------------------------------ ----------------------------
Conversion costs $ 3,283 $ 10,379
Payments for processing rights - 3,000
------------------------------------------------------------------------------ ----------------------------
Total $ 3,283 $ 13,379
========================== ============================
- 16 -
Notes to Consolidated Financial Statements (continued)
Note 8 - Acquisition
On April 28, 2003, TSYS completed the acquisition of Enhancement Services
Corporation (ESC) for $36.0 million in cash. The Company has allocated
approximately $26.0 million to goodwill, approximately $8.2 million to
intangibles and the remaining amount to the net assets acquired. ESC provides
targeted loyalty consulting and travel, as well as gift card and merchandise
reward programs to more than 40 national and regional financial institutions in
the United States. The Company believes the acquisition of ESC enhances TSYS'
processing services by adding distinct value differentiation for TSYS and its
clients. ESC operates as a separate subsidiary of TSYS.
Presented below are the pro forma consolidated results of operations for
the three and six months ended June 30, 2003 as though the acquisition of ESC
had occurred on January 1, 2003.
(in thousands, except per share Three Months Ended Six Months Ended
data) June 30, June 30,
------------------------------------- --- -------------------------- ---------------------------
2003 2003
------------------------------------- --- -------------------------- ---------------------------
Revenues $ 261,884 517,431
Net income 34,224 66,556
Basic earnings per share 0.17 0.34
Diluted earnings per share 0.17 0.34
Note 9 - Subsequent Event: Clarity Payment Solutions, Inc. Acquisition
On August 3, 2004, TSYS announced the acquisition of Clarity Payment
Solutions, Inc. (Clarity) for $53.0 million. The Company has started the process
of completing the purchase price allocation to the respective assets acquired
and liabilities assumed. It is expected that such purchase price allocation will
be completed in the third quarter of 2004. Clarity is a leading provider of
prepaid card solutions that utilize the Visa, MasterCard, EFT and ATM networks
for Fortune 500 companies as well as domestic and international financial
institutions. TSYS has merged its existing prepaid division with Clarity and has
branded the combined entity as TSYS Prepaid, Inc.
- 17 -
TOTAL SYSTEM SERVICES, INC.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Overview
Total System Services, Inc.'s (TSYS' or The Company's) revenues are derived from
providing electronic payment processing and related services to financial and
nonfinancial institutions, generally under long-term processing contracts. TSYS'
services are provided primarily through the Company's cardholder systems, TS2
and TS1, to financial institutions and other organizations throughout the United
States, Mexico, Canada, Honduras, the Caribbean and Europe. The Company
currently offers merchant services to financial institutions and other
organizations in Japan through its majority owned subsidiary, GP Network
Corporation (GP Net). TSYS also provides back-end processing services for its
joint venture, Vital Processing Services L.L.C. (Vital), to support merchant
processing in the United States.
Due to the somewhat seasonal nature of the credit card industry, TSYS'
revenues and results of operations have generally increased in the fourth
quarter of each year because of increased transaction and authorization volumes
during the traditional holiday shopping season. Furthermore, growth or declines
in card portfolios of existing clients, the conversion of cardholder accounts of
new clients to the Company's processing platforms, and the loss of cardholder
accounts impact the results of operations from period to period. Another factor
which may affect TSYS' revenues and results of operations from time to time, is
the sale by a client of its business, its card portfolio or a segment of its
accounts to a party which processes cardholder accounts internally or uses
another third-party processor. Consolidation in either the financial services or
retail industries, a change in the economic environment in the retail sector, or
a change in the mix of payments between cash and cards could favorably or
unfavorably impact TSYS' financial position, results of operations and cash
flows in the future.
A significant amount of the Company's revenues is derived from long-term
contracts with large clients, including certain major customers. Processing
contracts with large clients, representing a significant portion of the
Company's total revenues, generally provide for discounts on certain services
based on the size and activity of clients' portfolios. Therefore, electronic
payment processing revenues and the related margins are influenced by the client
mix relative to the size of client card portfolios, as well as the number and
activity of individual cardholder accounts processed for each client.
Consolidation among financial institutions has resulted in an increasingly
concentrated client base, which results in a changing client mix toward larger
clients and increasing pressure on the Company's net profit margins.
Based upon available market share data that includes cards processed
in-house, the Company believes it has a 20% market share of the domestic
consumer card processing arena; an 83% share of the Visa and MasterCard domestic
commercial card processing market; a 15% share of the domestic retail card
processing market; and a 4% market share of the U.S. off-line debit processing
market. The Company believes it has significant growth opportunities as in-house
processors and issuers processed by competitors realize the potential for
reduced costs and better portfolio performance offered through TSYS' processing
solutions.
- 18 -
Financial Overview (continued)
The Company provides services to its clients including processing consumer,
retail, commercial, debit and stored value cards, as well as student loan
account processing. Consumer cards include Visa and MasterCard credit cards as
well as American Express cards. Retail cards include private label and gift
cards. Commercial cards include purchasing cards, corporate cards and fleet
cards for employees. Government services/EBT accounts on file consist mainly of
student loan processing accounts. Debit/Stored value accounts include debit
cards and stored value cards. The tables on page 23 summarize TSYS' accounts on
file (AOF) information as of June 30, 2004 and 2003.
Significant highlights occurring during 2004 include:
o The Company announced it is in exclusive negotiations with J.P. Morgan
Chase & Co. to provide processing services for the 87 million
cardmembers of Chase Card Services.
o Payments remaining under the Company's software obligations at
December 31, 2003 were extinguished early in March 2004.
o Accounts on file processed on TSYS' systems increased 9.4% to 287.0
million at June 30, 2004, compared to 262.5 million at June 30, 2003.
o TSYS' board of directors approved a doubling of the quarterly dividend
to $0.04 per share from $0.02 per share.
Consolidation among financial institutions, particularly in the area of
credit card operations continued to be the major industry development occurring
in 2003 and the first half of 2004. In 2003, Circuit City sold its Visa and
MasterCard portfolio to FleetBoston Financial (FleetBoston); Sears' credit card
business was sold to Citigroup, Inc.; and, Bank of America announced it was
acquiring FleetBoston. In 2004, Circuit City sold its private label card
business to Bank One; and, J.P. Morgan Chase & Co. (Chase) and Bank One merged.
TSYS is currently in negotiations with both Bank of America and Chase,
respectively, in regards to TSYS providing processing services to Bank of
America's acquired portfolios and the combined portfolios of Bank One and Chase.
TSYS' management continually monitors the status of the Sears portfolio. The
impact of the mergers of Chase and Bank One, as well as Bank of America and
FleetBoston, on the financial position, results of operations and cash flows of
TSYS cannot be determined at this time.
Financial Review
This Financial Review provides a discussion of critical accounting policies,
related party transactions, and off-balance sheet arrangements. This Financial
Review also discusses the results of operations, financial condition, liquidity
and capital resources of TSYS and outlines the factors that have affected its
recent earnings, as well as those factors that may affect its future earnings.
Critical Accounting Policies and Estimates
The Company's financial position, results of operations and cash flows are
impacted by the accounting policies the Company has adopted. In order to get a
full understanding of the Company's financial statements, one must have a clear
understanding of the accounting policies employed.
Factors that could affect the Company's future operating results and cause
actual results to vary materially from expectations include, but are not limited
to, lower than anticipated growth from existing customers, an inability to
attract new customers and grow internationally, loss of one of the Company's
major customers or other significant clients, an inability to grow through
acquisitions or successfully
- 19 -
Critical Accounting Policies and Estimates (continued)
integrate acquisitions, an inability to control expenses, technology changes,
financial services consolidation, change in regulatory mandates, a decline in
the use of cards as a payment mechanism, a decline in the financial stability of
the Company's clients and uncertain economic conditions. Negative developments
in these or other risk factors could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
The Company has prepared the accompanying consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America. In preparing financial statements, it is necessary for management to
make assumptions and estimates affecting the amounts reported in the
consolidated financial statements and related notes. These estimates and
assumptions are developed based upon all information available. Actual results
could differ from estimated amounts.
For a detailed discussion regarding the Company's critical accounting
policies and estimates, see "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report on
Form 10-K for the year ended December 31, 2003. There have been no material
changes to the Company's critical accounting policies, estimates and assumptions
or the judgments affecting the application of those estimates and assumptions in
2004.
Related Party Transactions
The Company provides electronic payment processing and other services to
its parent company, Synovus Financial Corp. (Synovus), and its affiliates, and
for Vital Processing Services L.L.C. (Vital). The services are performed under
contracts that are similar to its contracts with other customers. The Company
believes the terms and conditions of transactions between the Company and these
related parties are comparable to those which could have been obtained in
transactions with unaffiliated parties. The Company's margins with respect to
related party transactions are comparable to margins recognized in transactions
with unrelated third parties. The amounts related to these transactions are
disclosed on the face of TSYS' consolidated financial statements.
Lease Guarantee
To assist Vital in leasing its corporate facility, the Company and Visa
U.S.A. (Visa) are guarantors, jointly and severally, for the lease payments on
Vital's Tempe, Arizona facility. The lease on the facility expires in July 2007.
The total future minimum lease payments remaining at June 30, 2004 is $4.5
million. If Vital fails to perform its obligations with regard to the lease,
TSYS and Visa will be required to perform in the same manner and to same extent
as is required by Vital.
Line of Credit
On June 30, 2003, TSYS obtained a $45.0 million long-term line of credit
from a banking affiliate of Synovus. The line is an automatic draw down
facility. The interest rate for the line of credit is the London Interbank
Offered Rate (LIBOR) plus 150 basis points. In addition, there is a charge of 15
basis points on any funds unused. The line of credit is unsecured and includes
covenants requiring the Company to maintain certain minimum financial ratios. At
June 30, 2004 and December 31, 2003, TSYS did not have an outstanding balance on
the line of credit. As the LIBOR rate changes, TSYS will be subject to interest
rate risk.
- 20 -
Off-Balance Sheet Arrangements
Operating Leases: As a method of funding its operations, TSYS employs
noncancelable operating leases for computer equipment, software and facilities.
These leases allow the Company to provide the latest technology while avoiding
the risk of ownership because of potential rapid technological obsolescence.
Neither the assets nor obligations related to these leases are included on the
balance sheet.
Results of Operations
The following table sets forth certain income statement captions as a
percentage of total revenues and the percentage increases or decreases in those
items for the three months ended June 30, 2004 and 2003:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
----------------------------- ------------------------
2004 2003 2004 vs. 2003
------------- ---------- ------------------------
Revenues:
Electronic payment processing services 66.2 % 68.8 % 8.2 %
Other services 14.5 10.0 62.4
------------- ----------
Revenues before reimbursable items 80.7 78.8 15.1
Reimbursable items 19.3 21.2 2.4
------------- ----------
Total revenues 100.0 100.0 12.4
------------- ----------
Expenses:
Salaries and other personnel expense 28.4 32.4 (1.6)
Net occupancy and equipment expense 22.8 19.6 31.2
Other operating expenses 13.2 9.4 55.1
------------- ----------
Expenses before reimbursable items 64.4 61.4 17.8
Reimbursable items 19.3 21.2 2.4
------------- ----------
Total expenses 83.7 82.6 13.8
------------- ----------
Operating income 16.3 17.4 5.6
Nonoperating income 0.2 1.1 nm
------------- ----------
Income before income taxes, minority
interest and equity in income of joint
ventures 16.5 18.5 0.0
Income taxes 6.3 7.0 2.0
Minority interest in consolidated subsidiary's
net income (0.1) (0.1) 52.9
Equity in income of joint ventures 2.3 1.9 39.3
------------- ----------
Net income 12.4 % 13.3 % 4.6 %
============= ==========
nm = not meaningful
- 21 -
Results of Operations (continued)
The following table sets forth certain income statement captions as a
percentage of total revenues and the percentage increases or decreases in those
items for the six months ended June 30, 2004 and 2003:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
----------------------------- ------------------------
2004 2003 2004 vs. 2003
------------- ---------- ------------------------
Revenues:
Electronic payment processing services 65.3 % 67.8 % 8.8 %
Other services 14.4 10.0 62.7
------------- ----------
Revenues before reimbursable items 79.7 77.8 15.7
Reimbursable items 20.3 22.2 3.1
------------- ----------
Total revenues 100.0 100.0 12.9
------------- ----------
Expenses:
Salaries and other personnel expense 29.6 31.4 6.5
Net occupancy and equipment expense 21.6 20.0 21.7
Other operating expenses 12.6 9.1 56.0
------------- ----------
Expenses before reimbursable items 63.8 60.5 19.1
Reimbursable items 20.3 22.2 3.1
------------- ----------
Total expenses 84.1 82.7 14.8
------------- ----------
Operating income 15.9 17.3 4.0
Nonoperating income 0.0 0.6 nm
------------- ----------
Income before income taxes, minority
interest and equity in income of joint
ventures 15.9 17.9 0.7
Income taxes 6.1 6.6 4.8
Minority interest in consolidated subsidiary's
net income (0.0) (0.1) 38.5
Equity in income of joint ventures 2.1 1.8 36.4
------------- ----------
Net income 11.9 % 13.0 % 3.6 %
============= ==========
nm = not meaningful
Revenues
Total revenues increased $31.9 million and $65.8 million, or 12.4% and
12.9%, respectively, during the three and six months ended June 30, 2004,
compared to the same periods in 2003. The increase in revenues for 2004 includes
increases of $2.8 million and $5.8 million related to the effects of currency
translation of its foreign-based subsidiaries and branches. Excluding
reimbursable items, revenues increased $30.6 million and $62.4 million, or 15.1%
and 15.7%, respectively, during the three and six months ended June 30, 2004,
compared to the same periods in 2003.
- 22 -
Results of Operations (continued)
Accounts on File (AOF) Data (in millions):
AOF
2004 2003 % Change
------------- ------------ -----------------
At June 30, 287.0 262.5 9.4
QTD Average 285.0 260.7 9.4
YTD Average 281.6 256.4 9.8
AOF by Portfolio Type
June 30, 2004 June 30, 2003
---------------------------- --------------------------
AOF % AOF % % Change
----------------------------------- ------------- -------------- ------------ ------------- ----------------
Consumer 152.0 52.9 145.0 55.2 4.8
Retail 86.5 30.2 82.6 31.5 4.8
Commercial 22.9 8.0 20.3 7.7 13.0
Debit/stored value 14.6 5.1 6.7 2.6 117.8
Government services/EBT 11.0 3.8 7.9 3.0 39.4
----------------------------------- ------------- -------------- ------------ -------------
Total 287.0 100.0 262.5 100.0 9.4
============= ============== ============ =============
AOF by Geographic Area
June 30, 2004 June 30, 2003
----------------------------- ------------------------------
AOF % AOF % % Change
---------------------------------- ----------------------------- ------------------------------ ------------------
Domestic 240.1 83.7 217.3 82.8 10.5
International 46.9 16.3 45.2 17.2 3.7
---------------------------------- ----------------------------- ------------------------------
Total 287.0 100.0 262.5 100.0 9.4
============================= ==============================
Note: The accounts on file distinction between domestic and international is
based on the geographic domicile of processing clients.
Activity in AOF
June 2003 to June June 2002 to June
2004 2003
---------------------- --------------------
Beginning balance 262.5 226.7
Internal growth of existing clients 29.6 23.8
New clients 6.6 21.5
Purges/Sales (7.4) (9.4)
Deconversions (4.3) (0.1)
---------------------- --------------------
Ending balance 287.0 262.5
====================== ====================
Electronic Payment Processing Services
Electronic payment processing revenues are generated primarily from charges
based on the number of accounts on file, transactions and authorizations
processed, statements mailed, credit bureau reports, cards embossed and mailed,
and other processing services for cardholder accounts on file. Cardholder
accounts on file include active and inactive consumer credit, retail, debit,
stored value, student loan and commercial card accounts. Due to the number of
cardholder accounts processed by TSYS and the expanding use of cards as well as
increases in the scope of services offered to clients, revenues relating to
electronic payment processing services have continued to grow. Revenues from
- 23 -
Results of Operations (continued)
electronic payment processing services increased $14.6 million, or 8.2%, for the
three months ended June 30, 2004, respectively, compared to the same period in
2003. Revenues from electronic payment processing services increased $30.5
million, or 8.8%, for the six months ended June 30, 2004, respectively, compared
to the same period in 2003.
On March 3, 2003, the Company announced that Bank One had selected TSYS to
upgrade its credit card processing. Under the long-term software licensing and
services agreement, TSYS is to provide electronic payment processing services to
Bank One's credit card accounts for at least two years starting in 2004
(excluding statement and card production services). Following the provision of
processing services, TSYS is to license a modified version of its TS2 consumer
and commercial software to Bank One through a perpetual license with a six-year
payment term. The Company uses the percentage-of-completion accounting method
for its agreement with Bank One and recognizes revenues in proportion to costs
incurred. TSYS' revenues from Bank One were approximately 5.1% of total revenues
for the six months ended June 30, 2004.
On January 14, 2004, J.P. Morgan Chase & Co. (Chase) and Bank One announced
an agreement to merge. On January 20, 2004, Circuit City announced an agreement
to sell its private-label credit card business to Bank One. TSYS has a long-term
agreement with Circuit City Stores, Inc. (Circuit City) until April 2006. On
July 1, 2004, Bank One and Chase merged under the name of Chase.
On July 7, 2004, the Company and Chase announced that they were engaged in
exclusive negotiations for the Company to provide processing services for the
combined Bank One and Chase card portfolios. Both companies expect to reach a
definitive agreement in the near future. Though no definitive agreement has been
signed by the Company and Chase covering the combined portfolio and no
conversion schedule has been agreed upon for the preexisting Chase portfolio,
the Company continues to provide processing services for the Circuit City
private label portfolio for Chase and is proceeding with the scheduled
conversion of the Bank One portfolio to TSYS, with such conversion scheduled to
take place in the third and fourth quarters of 2004. The impact of the yet
unsigned definitive agreement between the Company and Chase for the combined
Bank One and Chase portfolios on the financial position, results of operations
and cash flows of TSYS cannot be determined at this time. However, the earnings
per share contribution from the previously signed Bank One agreement is expected
to range from $0.03 to $0.04 in 2004, and to exceed $0.04 per share on an annual
basis beginning in 2005 through the payment term of the license.
In October 2003, Circuit City announced that it had sold its Visa and
MasterCard portfolio, which includes credit card receivables and related cash
reserves, to FleetBoston. On March 31, 2004, Bank of America merged with
FleetBoston. TSYS has been informed by Bank of America that TSYS will continue
to process the Circuit City portfolio acquired by FleetBoston, and that
FleetBoston will be converting its card portfolio to TSYS in March 2005.
TSYS anticipates that it will execute an amendment to its processing
agreement with Bank of America to encompass the processing of the FleetBoston
portfolio, including the Circuit City portfolio acquired by FleetBoston. The
impact of the yet unsigned amendment between the Company and Bank of America on
the financial position, results of operations and cash flows of TSYS cannot be
determined at this time.
- 24 -
Results of Operations (continued)
In July 2003, Sears and Citigroup announced an agreement for the sale by
Sears to Citigroup of the Sears credit card and financial services businesses.
Sears and Citigroup are both clients of TSYS, and TSYS considers its
relationships with both companies to be very positive. TSYS and Sears are
parties to a 10-year agreement, which was renewed in January of 2000, under
which TSYS provides transaction processing for more than 83.0 million Sears
accounts. For the six months ended June 30, 2004, TSYS' revenues from the
TSYS/Sears agreement represented 5.7% of TSYS' consolidated revenues. The
agreement includes provisions for termination for convenience prior to its
expiration upon the payment of a termination fee. The TSYS/Sears agreement also
grants to Sears the one-time right to market test TSYS' pricing and
functionality after May 1, 2004. Potential results of such market test, in which
TSYS would be a participant, include continuation of the processing agreement
under its existing terms, continuation of the processing agreement under
mutually agreed modified terms, or termination of the processing agreement after
May 1, 2006 without a termination fee. The impact of the transaction between
Sears and Citigroup on the financial position, results of operations and cash
flows of TSYS cannot be determined at this time.
TSYS provides processing services to its clients worldwide and plans to
continue to expand its service offerings internationally in the future.
Total revenues from clients based in Mexico were $2.9 million for the three
months ended June 30, 2004, a 68.7% decrease compared to the $9.1 million for
the same period last year. Total revenues from clients based in Mexico were $5.8
million for the six months ended June 30, 2004, a 66.0% decrease compared to the
$17.1 million for the same period last year. During 2003, the Company's largest
client in Mexico notified TSYS that the client would be utilizing its internal
global platform and deconverted in the fourth quarter of 2003. This client
represented approximately 70% of TSYS' revenues from Mexico. Another Mexican
client notified the Company of its intentions to utilize its internal global
platform and to deconvert in mid-2004. This client represented approximately 21%
of TSYS' revenues from Mexico prior to the deconversion of TSYS' largest client
in Mexico. As a result, management expects that electronic payment processing
revenues for 2004 from Mexico will decrease significantly when compared to
electronic payment processing revenues from Mexico for 2003.
The Company's electronic payment processing services revenues are also
impacted by the use of optional value added products and services of TSYS'
processing systems. Value added products and services are optional features to
which each client can choose to subscribe in order to potentially increase the
financial performance of its portfolio. Value added products and services
include: risk management tools and techniques, such as credit evaluation, fraud
detection and prevention, and behavior analysis tools; and revenue enhancement
tools and customer retention programs, such as loyalty programs and bonus
rewards. These revenues can increase or decrease over time as clients subscribe
to or cancel these services.
For the three months ended June 30, 2004 and 2003, value added products and
services represented 12.9% and 13.9%, respectively, of total revenues. Revenues
from these products and services, which include some reimbursable items paid to
third-party vendors, increased 3.7%, or $1.3 million, for the three months ended
June 30, 2004 compared to the same period last year.
- 25 -
Results of Operations (continued)
For the six months ended June 30, 2004 and 2003, value added products and
services represented 13.3% and 14.0%, respectively, of total revenues. Revenues
from these products and services increased 6.9%, or $4.9 million, for the six
months ended June 30, 2004 compared to the same period last year.
Revenues associated with ProCard are included in electronic payment
processing services. These services include providing customized, Internet,
Intranet and client/server software solutions for commercial card management
programs. Revenues from these services increased 19.5% to $7.0 million for the
three months ended June 30, 2004, compared to $5.9 million for the same period
last year. For the six months ended June 30, 2004, revenues from these services
increased 20.9% to $13.3 million compared to $11.0 million for the same period
last year.
Other Services
Revenues from other services consist primarily of revenues generated by
TSYS' wholly owned subsidiaries. Revenues from other services increased $16.1
million, or 62.4%, for the three months ended June 30, 2004, compared to the
same period in 2003. Revenues from other services increased $31.9 million, or
62.7%, for the six months ended June 30, 2004, compared to the same period in
2003. Other service revenues increased primarily as a result of increased debt
collection services performed by TSYS Total Debt Management, Inc. and the
revenues associated with Enhancement Services Corporation (ESC).
On April 28, 2003, TSYS completed the acquisition of ESC for $36.0 million
in cash. ESC provides targeted loyalty consulting and travel, as well as gift
card and merchandise reward programs to more than 40 national and regional
financial institutions in the United States. The Company believes the
acquisition of ESC enhances TSYS processing services by adding distinct value
differentiation for TSYS and its clients. For the three months ended June 30,
2004, TSYS' revenues include $4.7 million related to ESC's revenues and are
included in other services, compared to $3.1 million for the same period in
2003. For the six months ended June 30, 2004, TSYS' revenues include $9.6
million of ESC's revenues, compared to $3.1 million for the same period in 2003.
Major Customers
A significant amount of the Company's revenues is derived from long-term
contracts with large clients, including certain major customers. For the three
months ended June 30, 2004, the Company had two major customers. The major
customers for the three months ended June 30, 2004 accounted for approximately
27.9%, or $80.7 million, of total revenues. For the three months ended June 30,
2003, TSYS had two major customers that accounted for 30.2%, or $77.7 million,
of total revenues.
For the six months ended June 30, 2004, the Company had two major
customers. The major customers for the six months ended June 30, 2004 accounted
for approximately 28.0%, or $161.0 million, of total revenues. For the six
months ended June 30, 2003, TSYS had two major customers that accounted for
30.1%, or $153.0 million, of total revenues. The loss of one of the Company's
major customers, or other significant clients, could have a material adverse
effect on the Company's financial position, results of operations and cash
flows.
- 26 -
Results of Operations (continued)
Reimbursable Items
Reimbursable items increased $1.3 million, or 2.4%, for the three months
ended June 30, 2004, as compared to the same period last year. Reimbursable
items increased $3.5 million, or 3.1%, for the six months ended June 30, 2004,
as compared to the same period last year. The majority of reimbursable items
relates to the Company's domestic-based clients and is primarily costs
associated with postage.
Operating Expenses
Total expenses increased 13.8% and 14.8% for the three and six months ended
June 30, 2004, respectively, compared to the same periods in 2003. The increases
in expenses for the three and six months ended June 30, 2004 includes an
increase of $2.1 million and $4.6 million, respectively, related to the effects
of currency translation of its foreign-based subsidiaries and branches.
Excluding reimbursable items, total expenses increased 17.8% and 19.1% for the
three and six months ended June 30, 2004, respectively, compared to the same
periods in 2003. The increases in operating expenses are attributable to changes
in each of the expense categories as described below.
Salaries and other personnel expenses decreased $1.4 million, or 1.6%, for
the three months ended June 30, 2004 compared to the same period in 2003. For
the six months ended June 30, 2004, salaries and other personnel expenses
increased $10.4 million, or 6.5%, compared to the same period in 2003. The
change in employment expenses is associated with the normal salary increases and
related benefits, as well as lower levels of employment costs categorized as
software development and contract acquisition costs. These increases were offset
with a reduction in the accrual for performance-based incentive benefits. The
number of employees decreased at June 30, 2004 when compared to June 30, 2003 as
a result of the workforce reduction announced in February 2004.
Employee Data:
(Full-time Equivalents) 2004 2003 % Change
----------------------------------- ------------- ------------ -----------------
At June 30, 5,519 5,543 (0.4)
QTD Average 5,504 5,421 1.5
YTD Average 5,564 5,370 3.6
During the second quarter of 2003, TSYS added approximately 220 employees
associated with the ESC acquisition and the creation of a wholly-owned
subsidiary named TSYS Technology Center, Inc. (TTC) in Boise, Idaho. Initially
employing 77 team members, the TTC team members will support technology efforts
throughout TSYS, including government services, customer care, programming, and
systems development.
- 27 -
Results of Operations (continued)
Net occupancy and equipment expense increased $15.7 million, or 31.2%, for
the three months ended June 30, 2004 over the same period in 2003. For the six
months ended June 30, 2004, net occupancy and equipment expense increased $22.1
million, or 21.7%, over the same period in 2003. Due to rapidly changing
technology in computer equipment, TSYS' equipment needs are met to a large
extent through operating leases. Computer equipment and software rentals, which
represent the largest component of net occupancy and equipment expense,
increased approximately $3.2 million and $3.6 million for the three and six
months ended June 30, 2004, respectively, compared to the same periods in 2003.
Depreciation and amortization increased $1.9 million and $3.4 million during the
three and six months ended June 30, 2004, respectively, compared to the same
periods in 2003, mainly the result of increased amortization of licensed
computer software from vendors. Repairs and maintenance expenses increased
$175,000 and $4.8 million for the three and six months ended June 30, 2004,
compared to the same periods last year.
During the second quarter of 2004, the Company decided to change its
approach for entry into the Asia-Pacific market. As a result, the Company
recognized a $10.1 million charge to net occupancy and equipment expense for the
write-off of the double-byte software development project. The $10.1 million
impairment charge is reflected in the domestic-based services segment.
Other operating expenses for the three and six months ended June 30, 2004
increased $13.4 million and $25.9 million, or 55.1% and 56.0%, respectively, as
compared to the same periods in 2003. Other operating expenses include, among
other things, amortization of conversion costs, professional advisory fees and
court costs associated with its debt collection business. The Company's
amortization of conversion costs increased $1.3 million and $2.7 million for the
three and six months ended June 30, 2004, as compared to the same periods last
year. As a result of a new debt-collection agreement with an existing client
signed in the third quarter of 2003, the Company recognized $8.2 million and
$18.0 million of attorney court costs and commissions in operating expenses for
the three and six months ended June 30, 2004, respectively, that it expects to
recover in future periods. The Company anticipates that these debt collection
costs will continue.
Other operating expenses also include charges for processing errors,
contractual commitments and bad debt expense. As described in the Critical
Accounting Policies section in the 2003 Form 10-K, management's evaluation of
the adequacy of its transaction processing reserves and allowance for doubtful
accounts is based on a formal analysis which assesses the probability of losses
related to contractual contingencies, processing errors and uncollectible
accounts. Increases and decreases in transaction processing provisions and
charges for bad debt expense are reflected in other operating expenses. For the
three and six months ended June 30, 2004, the Company's transaction processing
expenses increased $2.2 million and $2.9 million, respectively, compared to the
same periods in 2003.
Operating Income
Operating income remained fairly stable for the three and six months ended
June 30, 2004, respectively, over the same periods in 2003. The Company's
operating profit margin for the three months ended June 30, 2004 was 16.3%,
compared to 17.4% for the same period last year. The Company's operating profit
margin for the six months ended June 30, 2004 was 15.9%, compared to 17.3% for
the same period last year. The margins for 2004 decreased when compared to the
same periods in 2003 mainly as a result of the impact of the new debt
collections agreement by TDM, the
- 28 -
Results of Operations (continued)
impairment charge for the double-byte project, reduction in the accrual for
performance-based incentive benefits and the decrease in revenues from clients
in Mexico.
Management believes that reimbursable items distort operating profit margin
as defined by generally accepted accounting principles. Management evaluates the
Company's operating performance based upon operating margin excluding
reimbursable items. Management believes that operating profit margin excluding
reimbursable items is more useful because reimbursable items do not impact
profitability as the Company receives reimbursement for expenses incurred on
behalf of its clients. Excluding reimbursable items, the Company's operating
profit margin for the three months ended June 30, 2004 was 20.2%, compared to
22.0% for the three months ended June 30, 2003; for the six months ended June
30, 2004, the Company's operating margin excluding reimbursables was 19.9%,
compared to 22.2% for the same period last year.
Below is the reconciliation between reported operating margin and adjusted
operating margin excluding reimbursable items for the three and six months ended
June 30, 2004 and 2003, respectively:
Three Months Ended Six Months Ended
June 30, June 30,
- ---------------------------------------------------- --- ----------------------------------- ------------------------------------
2004 2003 2004 2003
- ---------------------------------------------------- --- ----------------- ----------------- ------------------ -----------------
Operating income (a) $ 47,272 44,755 91,414 87,923
================= ================= ================== =================
Total revenues (b) $ 289,622 257,699 574,858 509,052
================= ================= ================== =================
Operating margin (as reported) (a)/(b) 16.3% 17.4% 15.9% 17.3%
================= ================= ================== =================
Revenue before reimbursable items (c) $ 233,690 203,061 458,294 395,940
================= ================= ================== =================
Adjusted operating margin (a)/(c) 20.2 % 22.0% 19.9% 22.2%
================= ================= ================== =================
Nonoperating Income (Expense)
Interest income for the three months ended June 30, 2004 was $537,000, a
decrease of $693,000, compared to $1.2 million for the same period in 2003.
Interest income for the six months ended June 30, 2004 was $1.0 million, a
decrease of approximately $900,000, compared to $1.9 million for the same period
in 2003. The decrease is related to less cash available to invest.
Interest expense for the three months ended June 30, 2004 was $39,000, an
increase of $22,000, compared to $17,000 for the same period in 2003. Interest
expense for the six months ended June 30, 2004 was $782,000, an increase of
$752,000, compared to $30,000 for the same period in 2003. The increase is the
result of the interest expense related to the Company's software obligations. On
March 31, 2004, TSYS paid the remaining obligations for mainframe software
licenses. As a result, quarterly interest expense for the remainder of 2004 will
decrease as compared to the first quarter of 2004.
The Company records foreign currency translation adjustments on
foreign-denominated balance sheet accounts. The Company maintains several cash
accounts denominated in foreign currencies, primarily in Euros and British
Pounds Sterling (BPS). As the Company translates the foreign-denominated cash
balances into US dollars, the translated cash balance is adjusted upward or
downward depending upon the foreign currency exchange movements. The upward or
downward adjustment is recorded as a gain or loss on foreign currency
translation in the Company's statements of income. As those cash accounts have
increased, the upward or downward adjustments have increased. The majority
- 29 -
Results of Operations (continued)
of the translation loss of $30,000 and $101,000 for the three and six months
ended June 30, 2004, respectively, relates to the translation of cash accounts.
The balance of the Company's foreign-denominated cash accounts subject to risk
of translation gains or losses at June 30, 2004 was approximately $1.9 million,
the majority of which is denominated in BPS.
Income Taxes
TSYS' effective income tax rate for the three months ended June 30, 2004
was 34.2%, compared to 34.7% for the same period in 2003. TSYS' effective income
tax rate for the six months ended June 30, 2004 was 34.2%, compared to 33.9% for
the same period in 2003. The increase in the effective income tax rates for the
six months ended June 30, 2004, as compared to the same period in 2003, is the
result of a change in credits expected to be realized. The calculation of the
effective tax rate is income taxes divided by TSYS' pretax income adjusted for
minority interest in consolidated subsidiary's net income and equity earnings of
the Vital joint venture. The Company expects its effective income tax rate for
2004 to be approximately 34%.
Equity in Income of Joint Ventures
TSYS' share of income from its equity in joint ventures was $6.7 million
and $4.8 million for the three months ended June 30, 2004 and 2003,
respectively. TSYS' share of income from its equity in joint ventures was $12.3
million and $9.0 million for the six months ended June 30, 2004 and 2003,
respectively. The increase for the quarter is primarily attributable to the
improvement in Vital's operating results as a result of increased volumes.
Vital Processing Services L.L.C. (Vital)
Vital, a limited liability company, is a merchant processing joint venture
of TSYS and Visa U.S.A. ("VISA"). The company is a leader in providing
integrated end-to-end electronic transaction processing services primarily to
large financial institutions and other merchant acquirers. Vital processes all
payment forms including credit, debit, electronic benefit transfer and check
truncation for merchants of all sizes across a wide array of retail market
segments. Vital's unbundled products and services include: authorization and
capture of electronic transactions; clearing and settlement of electronic
transactions; information reporting services related to electronic transactions;
merchant billing services; and point of sale terminal sales and service. Vital's
products and services are marketed to merchant acquirers through a direct sales
force, which concentrates on developing long-term relationships with existing
and prospective clients.
The Company considers Vital to be an integral part of its overall
processing operations and an important part of its overall market strategy.
Prior to forming the joint venture, TSYS performed back-end merchant processing
services for its clients. The revenues and expenses associated with merchant
processing were included in operating profits. In the ordinary course of
business, TSYS, which still owns the merchant processing software, provides
back-end processing services to Vital. For the three months ended June 30, 2004
and 2003, TSYS generated $5.9 million and $5.3 million of revenue from Vital,
respectively. For each of the six month periods ended June 30, 2004 and 2003,
TSYS generated $11.0 million of revenue from Vital, respectively.
During the three months ended June 30, 2004, the Company's equity in income
of joint ventures related to Vital was $6.4 million, a 39.9% increase, or $1.8
million, compared to $4.6 million for the same period last year. During the six
months ended June 30, 2004, the Company's equity in income of
- 30 -
Results of Operations (continued)
joint ventures related to Vital was $11.6 million, a 36.2% increase, or $3.1
million, compared to $8.5 million for the same period last year.
The following is a summary of Vital's consolidated statements of income for
the three and six months ended June 30, 2004 and 2003:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- ----------------------------------------
(in thousands) 2004 2003 2004 2003
----------------- ----------------- ------------------ -- ------------------
Revenues before reimbursable items $62,102 56,029 124,480 112,449
Total revenues 70,743 62,953 140,680 125,496
Operating income 11,434 8,708 22,729 17,207
Net income* 11,539 8,847 22,977 17,483
* Vital is a limited liability company and is taxed in a manner similar to a
partnership; therefore, net income related to Vital does not include income
tax expense
Vital provides products and services through its merchant services
offerings. The company's revenues are primarily generated from charges based on:
the number of transactions processed; the number of merchant accounts on its
systems; the number of reports provided (electronic and paper) to acquirers and
merchants; and the sale and service of point of sale terminal equipment.
Revenues generated by these activities depend upon a number of factors, such as
demand for and price of Vital's services, the technological competitiveness of
its product offerings, its reputation for providing timely and reliable service,
competition within the industry, and general economic conditions.
Processing contracts with large clients, representing a significant portion
of the company's total revenues, generally provide for discounts on certain
services based on the volume of transactions processed by the client.
Transaction volumes are influenced by both the number and type of merchants. The
growth or loss of merchants impacts the results of operations from period to
period. Operating results may also be significantly impacted by a customer who
sells all, or a portion of, its merchant acquiring business. Consolidation among
financial institutions has resulted in an increasingly concentrated client base,
which results in revenues being concentrated in a small number of customers.
Vital's revenues increased $7.8 million, or 12.4%, for the three months
ended June 30, 2004 compared to the same period in 2003. Vital's revenues
increased $15.2 million, or 12.1%, for the six months ended June 30, 2004
compared to the same period in 2003. The increases in 2004, as compared to the
same periods in 2003, included increases of $1.7 million and $3.2 million in
reimbursable items for the three and six months ended June 30, 2004,
respectively. The remaining increase was primarily the result of increases in
the number of transactions processed and revenues associated with the Company's
terminal deployment business.
Vital's major expense items include salaries and other personnel expense
and cost of network and telecommunication expenses. Salaries and other personnel
expense consists of the cost of personnel who develop and maintain processing
applications, operate computer networks and provide customer
- 31 -
Results of Operations (continued)
support; wages and related expenses paid to sales personnel; and costs
associated with non-revenue producing customer support functions, administrative
employees and management.
Other expenses consist primarily of the cost of network telecommunications
capability; transaction processing systems including depreciation and
amortization, maintenance and other system costs; third party service providers
including TSYS and VISA; and terminal equipment cost of sales. Vital has
agreements with both TSYS and VISA to provide key services related to its
business. Vital is dependent on both TSYS and VISA to perform on their
obligations under these agreements. Vital's results of operation could be
significantly impacted by material changes in the terms and conditions of the
agreements with TSYS and VISA, changes in performance standards and the
financial condition of both TSYS and VISA.
Vital, as a limited liability company, is treated similar to a partnership
for income tax purposes. As a result, no provision for current or deferred
income taxes has been made in Vital's financial statements. Vital's taxable
income or loss is reportable on the tax returns of its owners based on their
proportionate interest in Vital.
TSYS de Mexico
The Company has a joint venture with a number of Mexican banks and records
its 49% ownership in the joint venture using the equity method of accounting.
The operation, Total System Services de Mexico, S.A. de C.V. (TSYS de Mexico),
prints statements and provides card-issuing support services to the joint
venture clients.
During the three and six months ended June 30, 2004, the Company's equity
in income of joint ventures related to TSYS de Mexico was $318,000 and $693,000,
respectively, representing a 27.5% and 39.7% increase, or $68,000 and $197,000,
compared to $250,000 and $496,000, respectively, for the same periods last year.
TSYS pays TSYS de Mexico a processing support fee for certain client
relationship and network services that TSYS de Mexico has assumed from TSYS.
TSYS paid TSYS de Mexico a processing support fee of $45,600 and $183,600 for
the three months ended June 30, 2004 and 2003, respectively. TSYS paid TSYS de
Mexico a processing support fee of $108,300 and $379,900 for the six months
ended June 30, 2004 and 2003, respectively. This processing support fee
decreased as a result of the deconversion of TSYS' largest client in Mexico.
Net Income
Net income for the three months ended June 30, 2004 increased 4.6% to $35.9
million, or basic and diluted earnings per share of $0.18, compared to $34.3
million, or basic and diluted earnings per share of $0.17, for the same period
in 2003. Net income for the six months ended June 30, 2004 increased 3.6% to
$68.4 million, or basic and diluted earnings per share of $0.35, compared to
$66.0 million, or basic earnings per share of $0.34 and diluted earnings per
share of $0.33, for the same period in 2003.
- 32 -
Results of Operations (continued)
Net Profit Margin
The Company's net profit margin for the three months ended June 30, 2004
was 12.4%, compared to 13.3% for the same period last year. The Company's net
profit margin for the six months ended June 30, 2004 was 11.9%, compared to
13.0% for the same period last year.
Management believes that reimbursable items distort net profit margin as
defined by generally accepted accounting principles. Management evaluates the
Company's operating performance based upon net margin excluding reimbursable
items. Management believes that net profit margin excluding reimbursable items
is more useful because reimbursable items do not impact profitability as the
Company receives reimbursement for expenses incurred on behalf of its clients.
Excluding reimbursable items, the Company's net profit margin for the three
months ended June 30, 2004 was 15.4%, compared to 16.9% for the three months
ended June 30, 2003. Excluding reimbursable items, the Company's net profit
margin for the six months ended June 30, 2004 was 14.9%, compared to 16.7% for
the three months ended June 30, 2003.
Below is the reconciliation between reported net profit margin and adjusted
net profit margin excluding reimbursable items for the three and six months
ended June 30, 2004 and 2003:
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------- --- ----------------------------------- ------------------------------------
2004 2003 2004 2003
- --------------------------------------------------- --- ----------------- ----------------- ----------------- ------------------
Net income (a) $ 35,886 34,306 68,447 66,042
================= ================= ================= ==================
Total revenues (b) $ 289,622 257,699 574,858 509,052
================= ================= ================= ==================
Net profit margin (as reported) (a)/(b) 12.4% 13.3% 11.9% 13.0%
================= ================= ================= ==================
Revenue before reimbursable items (c) $ 233,690 203,061 458,294 395,940
================= ================= ================= ==================
Adjusted net profit margin (a)/(c) 15.4% 16.9% 14.9% 16.7%
================= ================= ================= ==================
Projected Outlook for 2004 and 2005
TSYS expects its 2004 earnings per share (EPS) to exceed its 2003 EPS by
5-7% and its revenues (excluding reimbursables) to exceed its 2003 revenues by
11-13%. The forecast does not include any revenues or expenses associated with
signing and converting any new major clients and does not include the effect of
any potential changes to relationships with certain large clients.
TSYS anticipates 10-15% growth in EPS in 2005, based on the following
assumptions: revenue before reimbursables items increasing between 10-12%,
driven by 6-9% growth in revenue from existing electronic payment processing
clients, no significant client losses occurring through 2005 and Vital's
earnings growing by at least 5%.
Financial Position, 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 of
funding its operations and growth has been cash generated from current
operations and the use of leases and the occasional use of borrowed funds to
supplement financing of capital expenditures.
- 33 -
Financial Position, Liquidity and Capital Resources (continued)
Cash Flows From Operating Activities
TSYS' main source of funds is derived from operating activities,
specifically net income. During the six months ended June 30, 2004, the Company
generated $112.5 million in cash from operating activities compared to $110.7
million for the same period last year. The cash from operating activities for
2004 included refunds of $11.8 million from taxing authorities for overpayment
of taxes for prior years. The cash from operating activities for 2003 included a
payment from Bank One. On March 3, 2003, the Company announced that Bank One
selected TSYS to upgrade its credit card processing. As part of that agreement,
the Company received a $30 million payment from Bank One, which is included in
billings in excess of costs and profit on uncompleted contracts on the balance
sheet.
Cash Flows From Investing Activities
The major uses of cash for investing activities have been the addition of
property and equipment, the internal development and purchase of computer
software and investments in contract acquisition costs associated with the
servicing of new and existing clients. The major source of funds from investing
activities is the dividend payment from its joint ventures. The Company used
$44.4 million in cash for investing activities for the six months ended June 30,
2004, compared to $176.1 million for the same period in 2003.
Property and Equipment
Capital expenditures for property and equipment during the three month
periods ended June 30, 2004 and 2003 were $19.8 million and $102.4 million,
respectively. For the six month period ended June 30, 2004, capital expenditures
for property and equipment were $39.3 million compared to $107.4 million during
the same period last year. On July 30, 2003, the Company announced the
groundbreaking for a new TSYS data center in Knaresborough, England. The 47,000
square-foot facility will replace the current center in Harrogate, England. It
is being built on three acres and includes 15,000 square feet of office space.
The new data center is estimated to cost approximately (British Pounds Sterling
symbol) 20 million and should be completed by the end of the third quarter of
2004.
On April 30, 2003, the Company provided written notice that it intended to
terminate its lease agreement with a special purpose entity for the Company's
corporate campus. On June 30, 2003, the Company terminated the lease arrangement
and purchased the corporate campus for $93.5 million through a combination of
cash and long-term debt financing through a banking affiliate of Synovus.
Licensed Computer Software from Vendors
Expenditures for licensed computer software from vendors were $6.6 million
and $8.5 million for the three months ended June 30, 2004 and 2003,
respectively. Expenditures for licensed computer software from vendors for the
six months ended June 30, 2004 were $14.0 million, compared to $20.0 million for
the same period in 2003. These additions relate to annual site licenses for
mainframe processing systems whose fees are based upon a measure of TSYS'
computer processing capacity, commonly referred to as millions of instructions
per second or MIPS.
- 34 -
Financial Position, Liquidity and Capital Resources (continued)
Software Development Costs
Additions to capitalized software development costs, including enhancements
to and development of TS2 processing systems, were $1.7 million and $5.1 million
for the three month periods ended June 30, 2004 and 2003, respectively.
Additions to capitalized software development costs for the six months ended
June 30, 2004 were $3.7 million, compared to $9.0 million for the same period in
2003. The decline in the amount capitalized as software development costs in
2004, as compared to 2003, is the result of several projects being completed in
2003.
The following is a summary of the additions to software development costs
by project for the three and six months ended June 30, 2004 and 2003,
respectively:
Three Months Ended Six Months Ended
Software Development Projects June 30, June 30,
--------------------------- ------------------------
(in millions) 2004 2003 2004 2003
---------------------------------------------- ------------ ---------- --------- -----------
TSYS ProphIT $ 0.6 3.5 1.6 6.8
Integrated Payments 0.1 0.3 0.5 0.4
Double Byte - 0.1 - 0.5
Other Capitalized Software Development Costs 1.0 1.2 1.6 1.3
---------------------------------------------- ------------ ---------- --------- -----------
Total $1.7 5.1 3.7 9.0
============ ========== ========= ===========
The Company continues to develop TSYS ProphIT(SM), a Web-based process
management system that provides direct access to account information and other
system interfaces to help streamline an organization's business processes. TSYS
ProphIT is currently being offered to TSYS' processing clients with general
release of the core platform having occurred in the fourth quarter of 2003.
Continued development of TSYS ProphIT provides increased and enhanced
functionality to the core platform, to include additional customer service
functions. The Company capitalized approximately $0.6 million for the three
months ended June 30, 2004, bringing the total amount capitalized for 2004 to
$1.6 million on TSYS ProphIT. The Company has invested a total of $29.9 million
since the project began.
The Company is developing its Integrated Payments Platform supporting the
online and offline debit and stored value markets, which will give clients
access to all national and regional networks, EBT programs, ATM driving and
switching services for online debit processing. The Company capitalized
approximately $132,000 for the three months ended June 30, 2004, bringing the
total capitalized in 2004 to $521,000 on these additional systems. The Company
has invested a total of $8.2 million since the project began. The Company
expects to complete the system in phases.
Due to the complexity of the differences between the English language and
Asian languages, computer systems require two bytes to store an Asian character
compared to one byte in the English language. With the opening of a branch
office in Japan to facilitate its marketing of card processing services, TSYS
began modifying its current TS2 system to be able to accommodate language and
currency differences with Asia, commonly referred to as the "double byte
project." The Company had invested a total of $10.1 million since the project
began.
- 35 -
Financial Position, Liquidity and Capital Resources (continued)
As discussed earlier, during the second quarter of 2004, the Company
decided to change its approach for entry into the Asia-Pacific market. As a
result, the Company recognized a $10.1 million impairment charge in net
occupancy and equipment expense for the write-off of the double-byte software
development project. The $10.1 million impairment charge is reflected in the
domestic-based services segment.
Dividends Received from Joint Ventures
During the six months ended June 30, 2004, the Company received a dividend
payment of $15.0 million from its Vital joint venture, and the Company received
a dividend payment of $0.9 million from TSYS de Mexico. During the six months
ended June 30, 2003, the Company received $5.3 million in dividend payments from
its joint ventures.
Contract Acquisition Costs
TSYS makes cash payments for processing rights, third-party development
costs and other direct salary related costs in connection with converting new
customers to the Company's processing systems. The Company's investments in
contract acquisition costs were $1.4 million for the three months ended June 30,
2004, bringing the total for 2004 to $3.3 million, compared to $13.4 million for
the six months ended June 30, 2003. The Company had a cash payment for
processing rights of $3.0 million during the six months ended June 30, 2003.
Conversion cost additions were $3.3 million and $10.4 million for the six months
ended June 30, 2004 and 2003, respectively.
Cash Flows From Financing Activities
The major use of cash for financing activities has been the principal
payments on capital lease and software obligations, the payment of dividends and
the purchase of stock under the stock repurchase plan as described below. The
main source of cash from financing activities has been the occasional use of
borrowed funds. Net cash used in financing activities for the six months ended
June 30, 2004 was $49.9 million mainly as a result of the payments related to
the software obligations, and to a lesser extent, the purchases of common stock
and payments of dividends. Financing activities provided $4.4 million in cash
for the six months ended June 30, 2003 primarily the result of proceeds from the
issuance of long-term debt.
Software Obligations
On March 31, 2004, the Company paid in full the obligations related to
licensed mainframe software. The effective interest rates related to the
software obligations were well above current market rates.
Stock Repurchase Plan
On April 15, 2003, TSYS announced that its board had approved a stock
repurchase plan to purchase up to 2 million shares, which represents slightly
more than five percent of the shares of TSYS stock held by shareholders other
than Synovus. The shares may be purchased from time to time over the next two
years and will depend on various factors including price, market conditions,
acquisitions and the general financial position of TSYS. Repurchased shares will
be used for general corporate purposes. For the first six months of 2004, the
Company purchased 52,200 shares at an average cost of $22.76 per share. Since
the plan was announced, the Company has purchased 577,491 shares at an average
cost of $19.07 per share.
- 36 -
Financial Position, Liquidity and Capital Resources (continued)
Dividends
Dividends on common stock of $3.9 million were paid during the three months
ended June 30, 2004, bringing the total for 2004 to $7.9 million. On April 15,
2004, the Company announced it would double its quarterly dividend from $0.02 to
$0.04 per share, payable on July 1, 2004.
Foreign Exchange
TSYS operates internationally and is subject to potentially adverse
movements in foreign currency exchange rates. Since December 2000, TSYS has not
entered into foreign exchange forward contracts to reduce its exposure to
foreign currency rate changes.
Impact of Inflation
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 more efficient computer hardware and software, it can
minimize the impact of inflation.
Working Capital
TSYS may seek additional external sources of capital in the future. 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. Management expects that TSYS will
continue to be able to fund a significant portion of its capital expenditure
needs through internally generated cash in the future, as evidenced by TSYS'
current ratio of 2.1:1. At June 30, 2004, TSYS had working capital of $152.0
million compared to $127.4 million at December 31, 2003.
Legal Proceedings
The Company has received notification from the United States Attorneys'
Office for the Northern District of California that the United States Department
of Justice is investigating whether the Company and/or one of its large credit
card processing clients violated the False Claims Act, 31 U.S.C. SS3729-33, in
connection with mailings made on behalf of the client from July 1997 through
November 2001. The subject matter of the investigation relates to the U.S.
Postal Service's Move Update Requirements. In general, the Postal Service's Move
Update Requirements are designed to reduce the volume of mail that is returned
to sender as undeliverable as addressed. In effect, these requirements provide,
among other things, various procedures that may be utilized to maintain the
accuracy of mailing lists in exchange for discounts on postal rates. The Company
has received a subpoena from the Office of the Inspector General of the U.S.
Postal Service, and has produced documents responsive to the subpoena, and
expects to provide further documentation to the government in connection with
this investigation. The Company intends to fully cooperate with the Department
of Justice in the investigation, and there can be no assurance as to the timing
or outcome of the investigation, including whether the investigation will result
in any criminal or civil fines, penalties, judgments or treble damage or other
claims against the Company. The Company is not in a position to estimate whether
or not any loss may arise out of this investigation. As a result, no reserve or
accrual has been recorded in the Company's financial statements relating to this
matter.
- 37 -
Recently Issued Accounting Standards
The Company's Annual Report on Form 10-K for the year ended December 31,
2003, as filed with the Securities and Exchange Commission, contains a
discussion of recently issued accounting standards and the expected impact on
our financial statements. There have been no accounting standards issued since
then that are expected to have a material impact on the financial statements of
the Company.
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued
an Exposure Draft titled "Share-Based Payment, an amendment of FASB Statements
No. 123 and 95," that addresses accounting for equity based compensation
arrangements. The proposed Statement would eliminate the ability to account for
share-based compensation transactions using Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and replace some of the
existing requirements under FASB No. 123, "Accounting for Stock-Based
Compensation." The proposed statement would require that such arrangements are
accounted for using a fair-value-based method of accounting and the related cost
expensed over the corresponding service period. The issuance of a final
statement in the same format as the exposure draft would have a significant
impact on the Company's results of operations. It is anticipated that the final
statement will be issued in the fourth quarter of 2004 and may be effective for
the first quarter of 2005.
Forward-Looking Statements Certain statements contained in this filing
which are not statements of historical fact constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
(the Act). These forward-looking statements include, among others, TSYS' belief
with respect to its current market share and its growth opportunities, TSYS'
expectation with respect to the impact of the Bank One contract on its earnings
per share growth for 2004 and 2005 and thereafter through the payment term of
the license, TSYS' expectation that it will reach a definitive agreement with
JPMorgan Chase in the near future, TSYS' scheduled conversion of the Bank One
portfolio, TSYS' anticipated execution of an amendment to its processing
agreement with Bank of America to encompass the processing of the FleetBoston
portfolio, TSYS' expected growth in earnings per share and revenues for 2004,
TSYS' expected growth in earnings per share for 2005, the expected cost and
completion date for TSYS' new data center located in England, any matter that
may arise out of the United States Department of Justice's investigation, and
the assumptions underlying such statements, including, with respect to TSYS'
expected growth in earnings per share for 2005, an increase in revenues before
reimbursable items of 10-12%, a 6-9% growth in revenues from existing electronic
payment processing clients, Vital Processing Services growing earnings by at
least 5% and no significant client losses through 2005. In addition, certain
statements in future filings by TSYS with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of TSYS which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenue, income or loss, earnings or loss per share, the payment or nonpayment
of dividends, capital structure and other financial items; (ii) statements of
plans and objectives of TSYS or its management or Board of Directors, including
those relating to products or services; (iii) statements of future economic
performance; and (iv) statements of assumptions underlying such statements.
Words such as "believes," "anticipates," "expects," "intends," "targeted," and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.
- 38 -
Forward-Looking Statements (continued)
Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. A number of important factors
could cause actual results to differ materially from those contemplated by the
forward-looking statements in this filing. Many of these factors are beyond
TSYS' ability to control or predict. The factors include, but are not limited
to: (i) TSYS and JPMorgan Chase are not able to satisfactorily conclude
negotiations with respect to a definitive agreement; (ii) TSYS does not convert
the Bank One card portfolio as scheduled; (iii) revenues are lower than
anticipated; (iv) revenues from TSYS' existing customers are lower than
anticipated; (v) Vital's earnings are lower than anticipated; (vi) adverse
developments with respect to TSYS' sub-prime or retail clients; (vii) lower than
anticipated internal growth rates for TSYS' existing clients; (viii) TSYS'
inability to control expenses and increase market share; (ix) TSYS' inability to
successfully bring new products to market, including, but not limited to stored
value products, e-commerce products, loan processing products and other
processing services; (x) the inability of TSYS to grow its business through
acquisitions or successfully integrate acquisitions; (xi) TSYS' inability to
increase the revenues derived from international sources; (xii) adverse
developments with respect to entering into contracts with new clients and
retaining current clients; (xiii) the merger of TSYS clients with entities that
are not TSYS clients or the sale of portfolios by TSYS clients to entities that
are not TSYS clients, including the acquisition by Citigroup of the Sears
portfolio and the merger of FleetBoston with Bank of America; (xiv) TSYS'
inability to anticipate and respond to technological changes, particularly with
respect to ecommerce; (xv) adverse developments with respect to the successful
conversion of clients; (xvi) the absence of significant changes in foreign
exchange spreads between the United States and the countries TSYS transacts
business in, to include Mexico, United Kingdom, Japan, Canada and the European
Union; (xvii) changes in consumer spending, borrowing and saving habits,
including the mix of payments between cash and cards; (xviii) changes in laws,
regulations, credit card association rules or other industry standards affecting
TSYS' business which require significant product redevelopment efforts; (xix)
the effect of changes in accounting policies and practices as may be adopted by
the Financial Accounting Standards Board or the Securities and Exchange
Commission; (xx) the costs and effects of litigation or adverse facts and
developments relating thereto; (xxi) adverse developments with respect to the
credit card industry in general; (xxii) TSYS' inability to successfully manage
any impact from slowing economic conditions or consumer spending; (xxiii) the
occurrence of catastrophic events that would impact TSYS' or its major
customers' operating facilities, communications systems and technology, or that
has a material negative impact on current economic conditions or levels of
consumer spending; (xxiv) successfully managing the potential both for patent
protection and patent liability in the context of rapidly developing legal
framework for expansive software patent protection; (xxv) hostilities increase
in the Middle East or elsewhere; and (xxvi) overall market conditions.
Such forward-looking statements speak only as of the date on which such
statements are made, and TSYS undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
- 39 -
TOTAL SYSTEM SERVICES, INC.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
TSYS is exposed to foreign exchange risk because it has assets,
liabilities, revenues and expenses denominated in foreign currencies including
the Euro, British Pound, Mexican Peso, Canadian Dollar and Japanese Yen. These
currencies are translated into U.S. dollars at current exchange rates, except
for revenues, costs and expenses, and net income, which are translated at the
average exchange rates for each reporting period. Net exchange gains or losses
resulting from the translation of assets and liabilities of TSYS' foreign
operations, net of tax, are accumulated in a separate section of shareholders'
equity titled accumulated other comprehensive income or loss. The amount of
other comprehensive income for the three months ended June 30, 2004 and 2003 was
$632,000 and $2.8 million, respectively. The amount of other comprehensive
income for the six months ended June 30, 2004 was $2.6 million compared to $1.6
million for the six months ended June 30, 2003. Currently, TSYS does not use
financial instruments to hedge its exposure to exchange rate changes.
The carrying value of the net assets of its foreign operations in Europe,
Mexico, Canada and Japan was approximately (in U.S. dollars) $138.0 million,
$3.9 million, $433,000 and $11.4 million, respectively, at June 30, 2004.
The Company also records foreign currency translation adjustments
associated with other balance sheet accounts. The Company maintains several cash
accounts denominated in foreign currencies, primarily in Euros and British Pound
Sterling (BPS). As the Company translates the foreign-denominated cash balances
into US dollars, the translated cash balance is adjusted upward or downward
depending upon the foreign currency exchange movements. The upward or downward
adjustment is recorded as a gain or loss on foreign currency translation in the
Company's statements of income. As those cash accounts have increased, the
upward or downward adjustments have increased. The majority of the translation
loss of $101,000 for the six months ended June 30, 2004 relates to the
translation of cash accounts. The balance of the foreign-denominated cash
accounts subject to risk of translation gains or losses at June 30, 2004 was
approximately $1.9 million, the majority of which is denominated in BPS.
The following represents the potential effect on income before income taxes
of hypothetical shifts in the foreign currency exchange rate between the BPS and
the U.S. dollar of plus or minus 100 basis points, 500 basis points and 1,000
basis points based on the foreign-denominated cash account balance at June 30,
2004.
---------------------------------------------------------------------------------------------
Effect of Basis Point Change
---------------------------------------------------------------------------------------------
Increase in basis point of Decrease in basis point of
--------------- ----------------- ---------------- ------------ -------------- --------------
(in thousands) 100 500 1,000 100 500 1,000
- ---------------------------------- --- --------------- ----------------- ---------------- ------------ -------------- --------------
Effect on income before income
taxes $ (19) (96) (192) 19 96 192
--------------- ----------------- ---------------- ------------ -------------- --------------
The foreign currency risks associated with other currencies is not
significant.
- 40 -
TOTAL SYSTEM SERVICES, INC.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk (continued)
Interest Rate Risk
TSYS is also exposed to interest rate risk associated with the investing of
available cash and the use of long-term debt associated with its line of credit
as discussed below. TSYS invests available cash in conservative short-term
instruments and is primarily subject to changes in the short-term interest
rates.
In connection with the purchase of the campus, TSYS obtained a $45.0
million long-term line of credit from a banking affiliate of Synovus. The line
is an automatic draw down facility. The interest rate for the line of credit is
the London Interbank Offered Rate (LIBOR) plus 150 basis points. In addition,
there is a charge of 15 basis points on any funds unused. As the LIBOR rate
changes, TSYS will be subject to interest rate risk. At June 30, 2004, TSYS did
not have an outstanding balance on the line of credit.
Concentration of Credit Risk
TSYS works to maintain a large and diverse client base across various
industries to minimize the credit risk of any one client to TSYS' accounts
receivable amounts. In addition, TSYS performs ongoing credit evaluations of its
certain clients' and certain suppliers' financial condition. TSYS does, however,
have two major customers that account for a large portion of its revenues, which
subject it to credit risk.
- 41 -
TOTAL SYSTEM SERVICES, INC.
Item 4 -Controls and Procedures
We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
quarterly report as required by Rule 13a-15 of the Securities Exchange Act of
1934, as amended. This evaluation was carried out under the supervision and with
the participation of our management, including our chief executive officer and
chief financial officer. Based on this evaluation, these officers have concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information relating to TSYS (including its consolidated
subsidiaries) required to be included in our periodic Securities and Exchange
Commission filings. No change in TSYS' internal control over financial reporting
occurred during the period covered by this report that materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
- 42 -
TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The following table sets forth information regarding the Company's
purchases of its common stock on a monthly basis during the three months ended
June 30, 2004:
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
Maximum Number of
Total Number of Shares Shares That May Yet Be
Purchased as Part of Purchased Under the
Publicly Announced Plans or Programs
Total Number of Shares Average Price Paid per Plans or Programs
Period Purchased Share
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
1,422,509
April 2004 - - - 1,422,509
May 2004 - - - 1,422,509
June 2004 - - - 1,422,509
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
Total - $-.-
======================== ========================
In April 2003, the Company announced a plan to purchase up to 2.0 million
shares of its common stock from time to time and at various prices over the
ensuing two years. During the six months ended June 30, 2004, the Company
repurchased 52,200 shares of its common stock at an average price of $22.76.
Over the course of the plan, through June 30, 2004, the Company has repurchased
577,491 shares of its common stock at a cost of $11,013,106, or an average cost
of $19.07 per share.
- 43 -
TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
The annual shareholders' meeting of Total System Services, Inc. was held
April 15, 2004. There were two proposals voted on at the meeting.
Proposal I voted on at the meeting was the election of seven directors.
Following is a tabulation of votes for each nominee:
VOTES
NOMINEE FOR WITHHELD AUTHORITY TO VOTE
------------------------------------ -------------------------- -----------------------------
Sidney E. Harris 185,763,992 2,121,274
Alfred W. Jones III 187,636,078 249,188
Mason H. Lampton 187,630,682 254,584
John T. Turner 187,588,401 296,865
M. Troy Woods 187,586,400 298,866
James D. Yancey 187,588,099 297,167
Rebecca K. Yarbrough 186,855,939 1,029,327
Proposal II voted on at the meeting was the ratification of the appointment
of KPMG LLP as the Independent Auditor. Following is a tabulation of votes:
FOR 184,928,994
AGAINST 2,847,608
ABSTAIN 108,664
- 44 -
TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit Number Description
------------------- --------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
b) Forms 8-K since the previous Form 10-Q filing.
1. The report dated July 7, 2004 included the following event:
On July 7, 2004, Total System Services, Inc. ("Registrant")
issued a press release announcing that it is in exclusive
negotiations with J.P. Morgan Chase & Co. to provide processing
services for the 87 million cardmembers of Chase Card Services.
2. The report dated July 20, 2004 included the following event:
On July 20, 2004, Total System Services, Inc. ("Registrant")
issued a press release and held an investor call and webcast to
disclose financial results for the first six months ended June
30, 2004.
- 45 -
TOTAL SYSTEM SERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this
TOTAL SYSTEM SERVICES, INC.
Date: August 6, 2004 by: /s/ Philip W. Tomlinson
-------------------------------
Philip W. Tomlinson
Chief Executive Officer
Date: August 6, 2004 by: /s/ James B. Lipham
--------------------------------
James B. Lipham
Chief Financial Officer
- 46 -
TOTAL SYSTEM SERVICES, INC.
Exhibit Index
Exhibit Number Description
--------------------- --------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
- 47 -