TSS Total System Services

Table of Contents

 

 

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 March 31, 2015

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      To                     

Commission file number: 1-10254

 

 

 

Total System Services, Inc.

www.tsys.com

(Exact name of registrant as specified in its charter)

 

 

 

Georgia		58-1493818
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One TSYS Way, Post Office Box 1755,

Columbus, Georgia 31902

(Address of principal executive offices) (Zip Code)

(706) 649-2310

(Registrant’s telephone number, including area code)

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		x		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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: April 28, 2015
Common Stock, $0.10 par value		184,311,974 shares

 

 

 

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Table of Contents

TOTAL SYSTEM SERVICES, INC.

Table of Contents

 

		Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) — March 31, 2015 and December 31, 2014			3
Consolidated Statements of Income (unaudited) — Three months ended March 31, 2015 and 2014			4
Consolidated Statements of Comprehensive Income (unaudited) — Three months ended March 31, 2015 and 2014			5
Consolidated Statements of Cash Flows (unaudited) — Three months ended March 31, 2015 and 2014			6
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			35
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 6. Exhibits			36
Signatures			37
Exhibit Index			38

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

TOTAL SYSTEM SERVICES, INC.

Consolidated Balance Sheets

(Unaudited)

 

(in thousands, except per share data)		March 31, 2015				December 31, 2014
Assets
Current assets:
Cash and cash equivalents (Note 4)		$	328,112				289,183
Accounts receivable, net of allowance for doubtful accounts and billing adjustments of $5.8 million and $5.2 million as of 2015 and 2014, respectively			315,524				283,203
Deferred income tax assets			12,881				15,190
Prepaid expenses and other current assets (Note 4)			100,120				98,974
Current assets of discontinued operations (Note 2)			4,003				4,003
Total current assets			760,640				690,553
Goodwill			1,546,185				1,547,397
Other intangible assets, net of accumulated amortization of $200.2 million and $181.9 million as of 2015 and 2014, respectively			385,161				404,107
Computer software, net of accumulated amortization of $621.7 million and $613.3 million as of 2015 and 2014, respectively			365,382				366,148
Property and equipment, net of accumulated depreciation and amortization of $432.5 million and $423.2 million as of 2015 and 2014, respectively			285,413				290,585
Contract acquisition costs, net of accumulated amortization of $279.5 million and $276.1 million as of 2015 and 2014, respectively (Note 4)			236,227				236,305
Equity investments, net			105,957				100,468
Deferred income tax assets, net			6,703				7,002
Other assets			85,770				91,016
Total assets		$	3,777,438				3,733,581
Liabilities
Current liabilities:
Accounts payable		$	58,473				48,793
Current portion of long-term borrowings			41,791				43,784
Accrued salaries and employee benefits			25,990				38,001
Current portion of obligations under capital leases			3,735				7,127
Other current liabilities (Note 4)			210,501				154,805
Current liabilities of discontinued operations (Note 2)			4,003				4,003
Total current liabilities			344,493				296,513
Long-term borrowings, excluding current portion			1,389,883				1,398,132
Deferred income tax liabilities, net			209,446				211,820
Obligations under capital leases, excluding current portion			6,161				6,974
Other long-term liabilities			90,034				98,006
Total liabilities			2,040,017				2,011,445
Redeemable noncontrolling interest in consolidated subsidiary			23,397				22,492
Commitments and contingencies (Note 10)
Equity
Shareholders’ equity:
Common stock — $0.10 par value. Authorized 600,000 shares; 202,771 and 202,775 issued as of 2015 and 2014, respectively; 184,304 and 184,939 outstanding as of 2015 and 2014, respectively			20,277				20,278
Additional paid-in capital			179,305				171,270
Accumulated other comprehensive loss, net (Note 4)			(24,274	)			(11,926	)
Treasury stock, at cost (18,467 and 17,836 shares as of 2015 and 2014, respectively)			(493,058	)			(453,230	)
Retained earnings			2,025,427				1,966,370
Total shareholders’ equity			1,707,677				1,692,762
Noncontrolling interest in consolidated subsidiary			6,347				6,882
Total equity			1,714,024				1,699,644
Total liabilities and equity		$	3,777,438				3,733,581

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Income

(Unaudited)

 

		Three months ended March 31,
(in thousands, except per share data)		2015				2014
Total revenues		$	662,156				592,848
Cost of services			449,705				422,883
Selling, general and administrative expenses			89,955				89,268
Total operating expenses			539,660				512,151
Operating income			122,496				80,697
Nonoperating expenses, net			(9,209	)			(9,813	)
Income before income taxes and equity in income of equity investments			113,287				70,884
Income taxes			39,782				24,335
Income before equity in income of equity investments			73,505				46,549
Equity in income of equity investments, net of tax			5,394				4,096
Income from continuing operations, net of tax			78,899				50,645
Income from discontinued operations, net of tax			—				980
Net income			78,899				51,625
Net income attributable to noncontrolling interests			(1,144	)			(2,322	)
Net income attributable to Total System Services, Inc. (TSYS) common shareholders		$	77,755				49,303
Basic earnings per share (EPS) attributable to TSYS common shareholders (Note 11):
Income from continuing operations to TSYS common shareholders		$	0.42				0.26
Gain (loss) from discontinued operations to TSYS common shareholders			—				(0.00	)
Net income attributable to TSYS common shareholders*		$	0.42				0.26
Diluted EPS attributable to TSYS common shareholders (Note 11):
Income from continuing operations to TSYS common shareholders		$	0.42				0.26
Gain (loss) from discontinued operations to TSYS common shareholders			—				(0.00	)
Net Income attributable to TSYS common shareholders*		$	0.42				0.26
Amounts attributable to TSYS common shareholders:
Income from continuing operations		$	77,755				49,321
Gain (loss) from discontinued operations			—				(18	)
Net income		$	77,755				49,303

 

*	EPS amounts may not total due to rounding

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

		Three months ended March 31,
(in thousands)		2015				2014
Net income		$	78,899				51,625
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments			(13,361	)			1,581
Postretirement healthcare plan adjustments			147				(75	)
Unrealized gain on available-for-sale securities			592				570
Other comprehensive income (loss)			(12,622	)			2,076
Comprehensive income			66,277				53,701
Comprehensive income attributable to noncontrolling interests			870				2,827
Comprehensive income attributable to TSYS common shareholders		$	65,407				50,874

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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TOTAL SYSTEM SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

		Three months ended March 31,
(in thousands)		2015				2014
Cash flows from operating activities:
Net income		$	78,899				51,625
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			62,815				61,432
Provisions for fraud and other losses			8,684				9,639
Share-based compensation			8,143				7,611
Charges for transaction processing provisions			1,588				1,826
Provisions for bad debt expenses and billing adjustments			1,425				749
Deferred income tax expense			998				4,751
Amortization of debt issuance costs			458				452
Net loss (gain) on foreign currency			403				(425	)
Amortization of bond discount			98				94
Loss on disposal of equipment, net			2				2
Changes in value of private equity investments			(1,170	)			(312	)
Excess tax benefit from share-based payment arrangements			(3,793	)			(4,037	)
Equity in income of equity investments			(5,394	)			(4,096	)
Changes in operating assets and liabilities:
Accounts receivable			(36,598	)			(11,418	)
Accrued salaries and employee benefits			(11,549	)			(9,986	)
Prepaid expenses, other current assets and other long-term assets			1,302				(3,170	)
Accounts payable			2,030				15,738
Other current liabilities and other long-term liabilities			50,151				28,231
Net cash provided by operating activities			158,492				148,706
Cash flows from investing activities:
Additions to contract acquisition costs			(12,364	)			(17,903	)
Additions to licensed computer software from vendors			(11,581	)			(5,963	)
Purchases of property and equipment			(10,047	)			(13,641	)
Additions to internally developed computer software			(9,561	)			(9,735	)
Purchase of private equity investments			—				(822	)
Proceeds from sale of private equity investment			1,839				—
Net cash used in investing activities			(41,714	)			(48,064	)
Cash flows from financing activities:
Repurchase of common stock under plans and tax withholding			(54,415	)			(5,173	)
Dividends paid on common stock			(18,260	)			(18,788	)
Principal payments on long-term borrowings and capital lease obligations			(15,086	)			(22,277	)
Subsidiary dividends paid to noncontrolling shareholders			(500	)			(2,312	)
Purchase of noncontrolling interests			—				(37,500	)
Excess tax benefit from share-based payment arrangements			3,793				4,037
Proceeds from exercise of stock options			10,712				9,539
Net cash used in financing activities			(73,756	)			(72,474	)
Cash and cash equivalents:
Effect of exchange rate changes on cash and cash equivalents			(4,093	)			1,015
Net increase in cash and cash equivalents			38,929				29,183
Cash and cash equivalents at beginning of period			289,183				278,230
Cash and cash equivalents at end of period			328,112				307,413
Less cash and cash equivalents of discontinued operations at end of period			—				33,252
Cash and cash equivalents of continued operations at end of period		$	328,112				274,161
Supplemental cash flow information:
Interest paid		$	1,760				10,323
Income taxes paid, net		$	724				3,146

See accompanying Notes to Unaudited Consolidated Financial Statements

 

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TOTAL SYSTEM SERVICES, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies

Business

Total System Services, Inc.’s (TSYS’ or the Company’s) revenues are derived from providing payment processing, merchant services and related payment services to financial and nonfinancial institutions, generally under long-term processing contracts. The Company also derives revenues by providing general-purpose reloadable (GPR) prepaid debit cards and payroll cards and alternative financial services to underbanked consumers. The Company’s services are provided through four operating segments: North America Services, International Services, Merchant Services and NetSpend.

Through the Company’s North America Services and International Services segments, TSYS processes information through its cardholder systems for financial and nonfinancial institutions throughout the United States and internationally. The Company’s North America Services segment provides these services to clients in the United States, Canada, Mexico and the Caribbean. The Company’s International Services segment provides services to clients in Europe, India, Middle East, Africa, Asia Pacific and Brazil. The Company’s Merchant Services segment provides merchant services to merchant acquirers and merchants mainly in the United States. The Company’s NetSpend segment provides services to consumers in the United States.

Basis of Presentation

The accompanying unaudited consolidated financial statements of TSYS include the accounts of TSYS and its wholly- and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

These financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and, therefore, do not include all information and footnotes required by U.S. GAAP for complete financial statements. The preparation of the consolidated financial statements requires management of the Company to make estimates and assumptions relating to the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts. 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.

Certain prior period amounts may have been reclassified to conform to the current period’s presentation.

As discussed in Note 2, the Company’s financial statements reflect GP Network Corporation (GP Net) and TSYS Japan Godo Kaisha (TSYS Japan), formerly TSYS Japan Co., Ltd., as discontinued operations. The Company has segregated the net assets, net liabilities and operating results from continuing operations on the Unaudited Consolidated Balance Sheets and Unaudited Consolidated Statements of Income for all periods presented.

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 Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission (SEC). Results of interim periods are not necessarily indicative of results to be expected for the year.

Recently Adopted Accounting Pronouncements

In January 2015, the Company adopted Accounting Standards Update (ASU) 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments in this Update change the criteria for reporting discontinued operations and enhancing convergence of the Financial Accounting Standards Board’s (FASB) and the International Accounting Standard Board’s (IASB) reporting requirements for discontinued operations. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

 

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New Accounting Pronouncements

In April 2015, the FASB issued ASU 2015-05 “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license or a service agreement. The Company does not expect the adoption of this ASU to have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03 “Interest — Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Cost.” The amendments in this update will require entities to present debt issuance costs in the balance sheet as a direct deduction from the carrying amount of the corresponding debt liability, consistent with debt discounts. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. The guidance will be applied retrospectively. The Company does not expect the adoption of this guidance to have a material impact on the Company’s financial position, results of operations or cash flows.

In January 2015, the FASB issued ASU 2015-01 “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates from GAAP the concept of extraordinary items. For all entities, the ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted provided the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of this ASU to have a material impact on the financial position, results of operations or cash flows of the Company.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect on its ongoing financial reporting.

Note 2—Discontinued Operations

In accordance with GAAP, the Company determined its Japan-based businesses became discontinued operations in the first quarter of 2014.

The Company sold all of its stock of GP Net (representing 54% ownership of the company) and all of its stock of TSYS Japan (representing 100% ownership of the company) in April 2014. Both entities were part of the International Services segment. The sale of the Company’s stock in both of its operations in Japan was the result of management’s decision during the first quarter of 2014, to divest non-strategic businesses and focus resources on core products and services.

GP Net and TSYS Japan were not significant components of TSYS’ consolidated results.

The following table presents the main classes of assets and liabilities associated with discontinued operations as of March 31, 2015 and December 31, 2014:

 

(in thousands)		March 31, 2015				December 31, 2014
Other assets		$	4,003				4,003
Total liabilities			4,003				4,003

 

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The following table presents the summarized results of discontinued operations for the three months ended March 31, 2014:

 

(in thousands)		Three months ended March 31, 2014
Total revenues		$	16,248
Revenues before reimbursable items		$	16,248
Operating income		$	367
Income tax benefit		$	(44	)
Income from discontinued operations, net of tax		$	980
Income from discontinued operations, net of tax, attributable to noncontrolling interest		$	998
Loss from discontinued operations, net of tax, attributable to TSYS common shareholders		$	(18	)

The Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2014 include GP Net and TSYS Japan and are not considered material.

Note 3 — Fair Value Measurement

Refer to Note 3 of the Company’s audited financial statements for the year ended December 31, 2014, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC, for a discussion regarding fair value measurement.

GAAP requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant level of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:

Level 1 – Quoted prices for identical assets and liabilities in active markets.

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Unobservable inputs for the asset or liability.

The Company had no transfers between Level 1, Level 2 or Level 3 assets during the three months ended March 31, 2015.

The Company had nonrecurring fair value measurements related to discontinued operations. The Company determined that the carrying value of its assets and liabilities as of March 31, 2015 and December 31, 2014, approximate their fair values.

Note 4 — Supplementary Balance Sheet Information

Cash and Cash Equivalents

The Company maintains accounts outside the United States denominated in currencies other than the U.S. Dollar. All amounts in domestic accounts are denominated in U.S. Dollars.

Cash and cash equivalent balances are summarized as follows:

 

(in thousands)		March 31, 2015				December 31, 2014
Cash and cash equivalents in domestic accounts		$	275,583				225,396
Cash and cash equivalents in foreign accounts			52,529				63,787
Total		$	328,112				289,183

 

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Prepaid Expenses and Other Current Assets

Significant components of prepaid expenses and other current assets are summarized as follows:

 

(in thousands)		March 31, 2015				December 31, 2014
Prepaid expenses		$	34,716				35,334
Supplies inventory			12,964				14,340
Other			52,440				49,300
Total		$	100,120				98,974

Contract Acquisition Costs, net

Significant components of contract acquisition costs, net of accumulated amortization, are summarized as follows:

 

(in thousands)		March 31, 2015				December 31, 2014
Conversion costs, net of accumulated amortization of $140.8 million and $138.7 million as of 2015 and 2014, respectively		$	163,845				159,339
Payments for processing rights, net of accumulated amortization of $138.7 million and $137.4 million as of 2015 and 2014, respectively			72,382				76,966
Total		$	236,227				236,305

Amortization expense related to conversion costs, which is recorded in cost of services, was $5.5 million and $4.3 million for the three months ended March 31, 2015 and 2014, respectively.

Amortization related to payments for processing rights, which is recorded as a reduction of revenues, was $4.1 million and $3.3 million for the three months ended March 31, 2015 and 2014, respectively.

Other Current Liabilities

Significant components of other current liabilities are summarized as follows:

 

(in thousands)		March 31, 2015				December 31, 2014
Deferred revenues		$	43,317				41,773
Accrued income taxes			34,648				—
Accrued expenses			25,973				23,617
Dividends payable			19,094				19,006
Other			87,469				70,409
Total		$	210,501				154,805

 

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Accumulated Other Comprehensive Income (AOCI)

The income tax effects allocated to and the cumulative balance of accumulated other comprehensive income (loss) attributable to TSYS shareholders are as follows:

 

(in thousands)		Beginning Balance December 31, 2014				Pretax Amount				Tax Effect				Net-of-Tax Amount				Ending Balance March 31, 2015
Foreign currency translation adjustments and transfers from noncontrolling interests		$	(13,564	)			(14,393	)			(1,306	)			(13,087	)		$	(26,651	)
Unrealized gain on available-for-sale securities			1,105				938				346				592				1,697
Change in AOCI related to postretirement healthcare plans			533				230				83				147				680
Total		$	(11,926	)			(13,225	)			(877	)			(12,348	)		$	(24,274	)

There were no reclassifications of AOCI to net income or to other accounts for the three-month period ended March 31, 2015.

Note 5 — Long-Term Borrowings

Refer to Note 13 of the Company’s audited financial statements for the year ended December 31, 2014, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC, for a discussion regarding long-term borrowings.

Note 6 — Share-Based Compensation

Refer to Notes 1 and 19 of the Company’s audited financial statements for the year ended December 31, 2014, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC, for a discussion regarding the Company’s share-based compensation plans and policy.

Share-Based Compensation

Share-based compensation costs are classified as selling, general and administrative expenses on the Company’s statements of income and corporate administration and other expenses for segment reporting purposes. TSYS’ share-based compensation costs are expensed, rather than capitalized, as these awards are typically granted to individuals not involved in capitalizable activities. For the three months ended March 31, 2015, share-based compensation was $8.1 million, compared to $7.6 million for the same period in 2014.

Nonvested Share Awards

The Company granted shares of TSYS common stock to certain key employees. The nonvested stock bonus awards are for services to be provided in the future and vest over a period of up to four years. The market value of the TSYS common stock as of the date of issuance is charged as compensation expense over the vesting periods of the awards.

 

		Three months ended March 31,
		2015				2014
Number of shares			345,038				596,113
Market value (in millions)		$	13.0			$	18.2

Performance- and Market-Based Awards

During the first three months of 2015, TSYS authorized a total grant of 182,906 performance- and market-based shares to certain key executives, of which 128,034 awards have a performance-based vesting schedule (2015 performance shares) and 54,872 awards are market-based shares (2015 market-based shares).

The 2015 performance shares have a 2015-2017 performance period for which the Compensation Committee of the Board of Directors established the performance goal: adjusted EPS and, if such goal is attained in 2017, the performance shares will vest, up to a maximum of 200% of the total grant. Compensation expense for the 2015 performance shares is measured on the grant date based on the quoted market price of TSYS common stock. The Company estimates the probability of achieving the goals through the performance period and expenses the award on a straight-line basis. Compensation costs related to these performance shares are expected to be recognized through the end of 2017.

As of March 31, 2015 there was approximately $13.9 million of unrecognized compensation cost related to TSYS performance-based awards that is expected to be recognized until the end of 2017.

 

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The 2015 market-based shares have a 2015-2017 performance period for which the Compensation Committee of the Board of Directors established a market condition goal: Total Shareholder Return (TSR) as compared to the TSR of the companies in the S&P 500 over the performance period and, if such goal is attained in 2017, the market-based shares will vest, up to a maximum of 200% of the total grant. The fair value of the award was estimated on the grant date using a Monte Carlo simulation model. The Company expenses the award on a straight-line basis. Compensation costs related to these market-based shares are expected to be recognized through the end of 2017.

As of March 31, 2015, there was approximately $1.8 million of total unrecognized compensation cost related to TSYS market-based awards that is expected to be recognized over a remaining weighted average period of 1.8 years.

During the first three months of 2015, TSYS authorized a total grant of 165,543 performance shares to certain key employees with a performance-based vesting schedule (2015 broad-base performance shares). These 2015 performance shares have a 2015 performance period for which the Compensation Committee of the Board of Directors established two performance goals: revenue growth and adjusted EPS and, if such goals are attained in 2015, the performance shares will vest over the required service period through the end of 2017, up to a maximum of 200% of the total grant. Compensation expense for the award is measured on the grant date based on the quoted market price of TSYS common stock. The Company estimates the probability of achieving the goals through the performance period and expenses the award on a straight-line basis. Compensation costs related to these performance shares are expected to be recognized through the end of 2017.

During the first three months of 2014, TSYS authorized a total grant of 201,189 performance shares to certain key executives with a performance-based vesting schedule (2014 performance shares). These 2014 performance shares have a 2014-2016 performance period for which the Compensation Committee of the Board of Directors established two performance goals: revenues before reimbursable items and income from continuing operations and, if such goals are attained in 2016, the performance shares will vest, up to a maximum of 200% of the total grant. Compensation expense for the award is measured on the grant date based on the quoted market price of TSYS common stock. The Company estimates the probability of achieving the goals through the performance period and expenses the award on a straight-line basis. Compensation costs related to these performance shares are expected to be recognized until the end of 2016.

Stock Option Awards

The Company granted stock options to certain key executives. The grants will vest over a period of up to three years.

The weighted average fair value of the option grants was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:

 

		Three months ended March 31,
		2015				2014
Number of options granted			487,735				914,470
Weighted average exercise price		$	38.20			$	30.83
Risk-free interest rate			1.70	%			2.00	%
Expected volatility			21.00	%			25.00	%
Expected term (years)			6.3				6.5
Dividend yield			1.05	%			1.30	%
Weighted average fair value		$	8.03			$	7.60

As of March 31, 2015, there was approximately $7.8 million of total unrecognized compensation cost related to TSYS stock options that is expected to be recognized over a remaining weighted average period of 1.4 years.

 

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Note 7 — Income Taxes

Refer to Notes 1 and 15 of the Company’s audited financial statements for the year ended December 31, 2014, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC, for a discussion regarding income taxes.

TSYS is the parent of an affiliated group that files a consolidated U.S. federal income tax return and most state and foreign income tax returns on a separate entity basis. In the normal course of business, the Company is subject to examinations by these taxing authorities unless statutory examination periods lapse. TSYS is no longer subject to U.S. federal income tax examinations for years before 2011 and with few exceptions, the Company is no longer subject to income tax examinations from state and local or foreign tax authorities for years before 2008. There are currently federal income tax examinations in progress for the years 2009 through 2012 for a subsidiary which TSYS acquired in 2013. Additionally, a number of tax examinations are in progress by the relevant state tax authorities. Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS believes that its liability for uncertain tax positions relating to these jurisdictions for such years is adequate.

TSYS’ effective tax rate was 34.0% and 32.1% for the three months ended March 31, 2015 and 2014, respectively. The increased rate during the three months ended March 31, 2015 was primarily due to changes in discrete items, tax credits and the jurisdictional sources of income.

GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken in a tax return. The amount of unrecognized tax benefits did not change during the three months ended March 31, 2015.

TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the consolidated statements of income. Gross accrued interest and penalties on unrecognized tax benefits totaled $0.4 million and $0.3 million as of March 31, 2015 and December 31, 2014, respectively. The total amounts of unrecognized income tax benefits as of March 31, 2015 and December 31, 2014, that, if recognized, would affect the effective tax rates are $6.6 million and $6.5 million (net of the federal benefit on state tax issues), respectively, which include interest and penalties of $0.2 million and $0.2 million, respectively. TSYS does not expect any material changes to its calculation of uncertain tax positions during the next twelve months.

Note 8 — Segment Reporting and Major Customers

Refer to Note 22 of the Company’s audited financial statements for the year ended December 31, 2014, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC, for a discussion regarding segment reporting and major customers.

 

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The following table presents the Company’s operating results by segment:

Operating Segments

 

		Three months ended March 31,
(in thousands)		2015				2014
Revenues before reimbursable items
North America Services		$	266,219				224,368
International Services			73,730				76,773
Merchant Services			110,398				104,625
NetSpend			155,074				132,640
Intersegment revenues			(9,637	)			(5,656	)
Revenues before reimbursable items from external customers		$	595,784				532,750
Total revenues
North America Services		$	309,233				262,178
International Services			79,802				82,378
Merchant Services			129,104				122,690
NetSpend			155,074				132,640
Intersegment revenues			(11,057	)			(7,038	)
Revenues from external customers		$	662,156				592,848
Depreciation and amortization
North America Services		$	23,064				20,276
International Services			8,778				9,805
Merchant Services			4,277				3,400
NetSpend			2,293				1,735
Segment depreciation and amortization			38,412				35,216
Acquisition intangible amortization			23,867				24,313
Corporate Administration and Other			536				506
Total depreciation and amortization		$	62,815				60,035
Adjusted segment operating income
North America Services		$	102,570				74,578
International Services			6,983				4,555
Merchant Services			34,115				30,168
NetSpend			35,467				28,717
Total adjusted segment operating income			179,135				138,018
Acquisition intangible amortization			(23,867	)			(24,313	)
NetSpend merger and acquisition operating expenses			—				(1,253	)
Share-based compensation			(8,143	)			(7,611	)
Corporate Administration and Other			(24,629	)			(24,144	)
Operating income		$	122,496				80,697
		As of
		March 31, 2015				December 31,2014
Total assets
North America Services		$	3,373,386				3,327,160
International Services			332,940				356,590
Merchant Services			687,674				695,744
NetSpend			1,561,386				1,556,369
Intersegment eliminations			(2,177,948	)			(2,202,282	)
Total assets		$	3,777,438				3,733,581

 

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Revenues by Geographic Area

The following tables reconcile geographic revenues to external revenues by operating segment based on the domicile of the Company’s customers:

 

		Three months ended March 31, 2015
(in millions)		North America Services				International Services				Merchant Services				NetSpend				Total
United States		$	214.0				—				128.8				155.1			$	497.9
Canada			77.8				—				0.1				—				77.9
Europe*			0.2				67.6				—				—				67.8
Mexico			4.3				—				—				—				4.3
Other*			4.4				9.7				0.2				—				14.3
Total		$	300.7				77.3				129.1				155.1			$	662.2
		Three months ended March 31, 2014
(in millions)		North America Services				International Services				Merchant Services				NetSpend				Total
United States		$	185.3				—				122.5				132.6			$	440.4
Canada			62.9				—				0.1				—				63.0
Europe*			0.2				69.8				—				—				70.0
Mexico			3.9				—				—				—				3.9
Other*			3.8				11.5				0.2				—				15.5
Total		$	256.1				81.3				122.8				132.6			$	592.8

 

*	Revenues are impacted by movements in foreign currency exchange rates.

The Company maintains property and equipment, net of accumulated depreciation and amortization, in the following geographic areas:

 

		As of
(in millions)		March 31, 2015				December 31, 2014
United States		$	236.1				237.9
Europe*			42.9				45.5
Other*			6.4				7.2
Total		$	285.4				290.6

 

*	Property and equipment are impacted by movements in foreign currency exchange rates.

Major Customers

For the three months ended March 31, 2015 and 2014, the Company did not have any major customers.

Note 9 — Supplementary Cash Flow Information

Nonvested Awards

The Company issued shares of common stock to certain key employees during the first three months of 2015 and 2014, respectively. The grants were issued under nonvested stock bonus awards for services to be provided in the future. Refer to Note 6 for more information.

Equipment and Software Acquired Under Capital Lease Obligations

The Company acquired equipment and software under capital lease obligations in the amount of $0.7 million during the first three months of 2015 related to software and other peripheral hardware. The Company did not acquire any equipment or software under capital lease obligations during the first three months of 2014.

 

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Note 10 — Commitments and Contingencies

Refer to Note 16 of the Company’s audited financial statements for the year ended December 31, 2014, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC, for a discussion regarding commitments and contingencies.

Income Taxes

The total liability for uncertain tax positions as of March 31, 2015 was $6.7 million. Refer to Note 7 for more information on income taxes. The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, at this time, the Company does not expect a significant change related to these obligations within the next twelve months.

Legal Proceedings

General

The Company is subject to various legal proceedings and claims and is also subject to information requests, inquiries and investigations arising out of the ordinary conduct of its business. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that TSYS determines to be both probable and reasonably estimable in accordance with GAAP. In the opinion of management, based on current knowledge and in part upon the advice of legal counsel, all matters not specifically discussed below are believed to be adequately covered by insurance, or, if not covered, the possibility of losses from such matters are believed to be remote or such matters are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably.

Telexfree Matter

ProPay, Inc. (“ProPay”), a subsidiary of the Company, has been named as one of a number of defendants (including other merchant processors) in several purported class action lawsuits relating to the activities of Telexfree, Inc. and its affiliates and principals. Telexfree is a former merchant customer of ProPay. With regard to Telexfree, each purported class action lawsuit generally alleges that Telexfree engaged in an improper multi-tier marketing scheme involving voice-over Internet protocol telephone services. The plaintiffs in each of the purported class action complaints generally allege that the various merchant processor defendants, including ProPay, knowingly furthered the improper activities of Telexfree with knowledge that Telexfree did not have legitimate business operations. Telexfree filed for bankruptcy protection in Nevada. The bankruptcy was subsequently transferred to the Massachusetts Bankruptcy Court.

Specifically, ProPay has been named as one of a number of defendants (including other merchant processors) in each of the following purported class action complaints relating to Telexfree: (i) Waldermara Martin, et al. v. TelexFree, Inc., et al. (Case No. BK-S-14-12524-ABL) filed on May 3, 2014 in the United States Bankruptcy Court District of Nevada, (ii) Anthony Cellucci, et al. v. TelexFree, Inc., et. al. (Case No. 4:14-BK-40987) filed on May 15, 2014 in the United States Bankruptcy Court District of Massachusetts, (iii) Maduako C. Ferguson Sr., et al. v. Telexelectric, LLLP, et. al (Case No. 5:14-CV-00316-D) filed on June 5, 2014 in the United States District Court of North Carolina, (iv) Todd Cook v. TelexElectric LLLP et al. (Case No. 2:14-CV-00134), filed on June 24, 2014 in the United States District Court for the Northern District of Georgia, (v) Felicia Guevara v. James M. Merrill et al., CA No. 1:14-cv-22405-DPG), filed on June 27, 2014 in the United State District Court for the Southern District of Florida, and (vi) Reverend Jeremiah Githere, et al. v. TelexElectric LLLP et al. (Case No. 1:14-CV-12825-GAO), filed on June 30, 2014 in the United States District Court for the District of Massachusetts (together, the “Actions”). A motion to consolidate the Actions was filed by one of the plaintiffs. On October 21, 2014, the Actions were transferred to and consolidated before the United States District Court for the District of Massachusetts. After the consolidation motion was filed, an additional class action complaint was filed on August 20, 2014, in the United States Bankruptcy Court for the District of Massachusetts, Paulo Eduardo Ferrari et al. v. Telexfree, Inc. et al. (Case No. 14-04080). The Ferrari action was later transferred to the District of Massachusetts. To date, ProPay has not been served with the Ferrari complaint.

The United States District Court for the District of Massachusetts appointed lead plaintiffs’ counsel on behalf of the putative class of plaintiffs in the consolidated action. On March 31, 2015, the plaintiffs filed a First Consolidated Amended Complaint (the “Consolidated Complaint”). The Consolidated Complaint purports to bring claims on behalf of all persons who purchased certain TelexFree “memberships” and suffered a “net loss” between January 1, 2012 and April 16, 2014. The Consolidated Complaint supersedes the complaints filed prior to consolidation of the Actions, and alleges that ProPay aided and abetted tortious acts committed by TelexFree, and that ProPay was unjustly enriched in the course of providing payment processing

 

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services to TelexFree. On April 30, 2015, the plaintiffs filed a Second Consolidated Amended Complaint (the “Second Amended Complaint”), which amends and supersedes the Consolidated Complaint. Like the Consolidated Complaint, the Second Amended Complaint generally alleges that ProPay aided and abetted tortious acts committed by TelexFree, and that ProPay was unjustly enriched in the course of providing payment processing services to TelexFree. ProPay has not yet responded to the Second Amended Complaint.

ProPay has also received various subpoenas, a seizure warrant and other inquiries requesting information regarding Telexfree from (i) the Commonwealth of Massachusetts, Securities Division, (ii) United States Securities and Exchange Commission, (iii) US Immigration aand Customs Enforcement, and (iv) the bankruptcy Trustee of the Chapter 11 entities of Telexfree, Inc., Telexfree, LLC and Telexfree Financial, Inc. Pursuant to the seizure warrant served by the United States Attorney’s Office for the District of Massachusetts, ProPay delivered all funds associated with Telexfree held for chargeback and other purposes by ProPay to US Immigration and Customs Enforcement. In addition, ProPay received a notice of potential claim from the bankruptcy Trustee as a result of the relationship of ProPay with Telexfree and its affiliates.

The above proceedings and actions are preliminary in nature. While the Company and ProPay intend to vigorously defend matters arising out of the relationship of ProPay with Telexfree and believe ProPay has substantial defenses related to these purported claims, the Company currently cannot reasonably estimate losses attributable to these matters.

Note 11 – Earnings Per Share

The following table illustrates basic and diluted EPS for the three months ended March 31, 2015 and 2014:

 

		Three months ended March 31,
		2015								2014
(in thousands, except per share data)		Common Stock				Participating Securities				Common Stock				Participating Securities
Basic EPS:
Net income attributable to TSYS common shareholders		$	77,755								49,303
Less income allocated to nonvested awards			(712	)			712				(516	)			516
Net income allocated to common stock for EPS calculation (a)		$	77,043				712				48,787				516
Average common shares outstanding (b)			182,772				1,709				185,763				1,989
Basic EPS (a)/(b)		$	0.42				0.42				0.26				0.26
Diluted EPS:
Net income attributable to TSYS common shareholders		$	77,755								49,303
Less income allocated to nonvested awards			(709	)			709				(512	)			512
Net income allocated to common stock for EPS calculation (c)		$	77,046				709				48,791				512
Average common shares outstanding			182,772				1,709				185,763				1,989
Increase due to assumed issuance of shares related to common equivalent shares outstanding			1,082								2,632
Average common and common equivalent shares outstanding (d)			183,854				1,709				188,395				1,989
Diluted EPS (c)/(d)		$	0.42				0.42				0.26				0.26

The diluted EPS calculation excludes stock options and nonvested awards that are convertible into 0.9 million common shares for the three months ended March 31, 2015, and excludes 4.5 million common shares for the three months ended March 31, 2014, respectively, because their inclusion would have been anti-dilutive.

Note 12 — Subsequent Events

Management performed an evaluation of the Company’s activity and has concluded that there are no significant subsequent events requiring disclosure.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Financial Overview

TSYS’ revenues are derived from providing global payment processing services to financial and nonfinancial institutions, generally under long-term processing contracts. In addition, the Company derives revenues from providing processing services, acquiring solutions, related systems and integrated support services to merchant acquirers and merchants. The Company also derives revenues by providing general-purpose reloadable (GPR) prepaid debit cards and payroll cards and alternative financial services to underbanked and other consumers. The Company’s services are provided through the Company’s four operating segments: North America Services, International Services, Merchant Services and NetSpend.

Through the Company’s North America Services and International Services segments, TSYS processes information through its cardholder systems for financial institutions throughout the United States and internationally. The Company’s North America Services segment provides these services to clients in the United States, Canada, Mexico and the Caribbean. The Company’s International Services segment provides services to clients in Europe, India, Middle East, Africa, Asia Pacific and Brazil. The Company’s Merchant Services segment provides merchant services to merchant acquirers and merchants mainly in the United States. The Company’s NetSpend segment provides GPR prepaid debit and payroll cards and alternative financial service solutions to the underbanked and other consumers in the United States.

For a detailed discussion regarding the Company’s operations, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission (SEC).

A summary of the financial highlights for 2015, as compared to 2014, is provided below:

 

		Three months ended March 31,
(in millions)		2015				2014				Percent Change
Total revenues		$	662.2				592.8				11.7	%
Operating income			122.5				80.7				51.8
Net income attributable to TSYS common shareholders			77.8				49.3				57.7
Basic earnings per share (EPS) attributable to TSYS common shareholders			0.42				0.26				60.5
Diluted EPS attributable to TSYS common shareholders			0.42				0.26				61.8
Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA)1			193.5				149.6				29.3
Adjusted EPS2			0.54				0.38				41.2
Cash flows from operating activities			158.5				148.7				6.6

 

1	Adjusted EBITDA is net income excluding equity in income of equity investments, nonoperating income/(expense), income taxes, depreciation, amortization and share-based compensation expenses and other items.

2	Adjusted EPS is adjusted earnings divided by weighted average shares outstanding used for basic EPS calculations. Adjusted earnings is net income excluding the after-tax impact of share-based compensation expenses, amortization of acquisition intangibles and other items.

 

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Below is a summary of accounts on file (AOF) for the Company’s North America Services and International Services segments:

 

(in millions)		As of March 31,
AOF		2015				2014				Percent Change
Consumer Credit			364.5				234.8				55.3	%
Retail			28.3				27.5				2.6
Total Consumer			392.8				262.3				49.8
Commercial			42.3				40.4				4.8
Other			22.7				19.7				15.2
Subtotal Traditional1			457.8				322.4				42.0
Prepaid/Stored Value2			126.6				120.0				5.5
Government Services3			74.5				63.0				18.3
Commercial Card Single-Use4			64.8				50.8				27.5
Total AOF			723.7				556.2				30.1	%

 

1	Traditional accounts include consumer, retail, commercial, debit and other accounts. These accounts are grouped together due to the tendency to have more transactional activity than prepaid, government services and single-use accounts.

2	These accounts tend to have less transactional activity than the traditional accounts. Prepaid and stored value cards are issued by firms through retail establishments to be purchased by consumers to be used as of a later date. These accounts tend to be the least active of all accounts on file.

3	Government services accounts are disbursements of student loan accounts issued by the Department of Education, which have minimal activity.

4	Commercial card single-use accounts are one-time use accounts issued by firms to book lodging and other travel related expenses.

Financial Review

This Financial Review provides a discussion of critical accounting policies and estimates, related party transactions and off-balance sheet arrangements. This Financial Review also discusses the results of operations, financial position, 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. For a detailed discussion regarding these topics, refer to our Notes to Consolidated Financial Statements and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC.

Critical Accounting Policies and Estimates

Refer to Note 1 in the Notes to Unaudited Consolidated Financial Statements for more information on changes to the Company’s critical accounting policies, estimates and assumptions or the judgments affecting the application of those estimates and assumptions in 2015.

Related Party Transactions

The Company believes the terms and conditions of transactions between the Company and its equity investments, Total System Services de México, S.A. de. C.V. (TSYS de México) and China UnionPay Data Co., Ltd. (CUP Data), 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.

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. Neither the assets nor obligations related to these leases are included on the balance sheet.

 

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Contractual Obligations

The total liability for uncertain tax positions under GAAP as of March 31, 2015 is $6.7 million. Refer to Note 7 in the Notes to Unaudited Consolidated Financial Statements for more information on income taxes. The Company is not able to reasonably estimate the amount by which the liability will increase or decrease over time; however, as of this time, the Company does not expect a significant change related to these obligations within the twelve months.

Additionally, the Company has long-term obligations which consist of required minimum future payments under contracts with our distributors and other service providers for the NetSpend segment.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, refer to Note 1 in the Notes to Unaudited Consolidated Financial Statements and see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC.

Results of Operations

Revenues

The Company generates revenues by providing transaction processing and other payment-related services. The Company’s pricing for transactions and services is complex. Each category of revenue has numerous fee components depending on the types of transactions processed or services provided. TSYS reviews its pricing and implements pricing changes on an ongoing basis. In addition, standard pricing varies among its regional businesses, and such pricing can be customized further for its clients through tiered pricing of various thresholds for volume activity. TSYS’ revenues are based upon transactional information accumulated by its systems or reported by its customers. The Company’s revenues are impacted by currency translation of foreign operations, as well as doing business in the current economic environment.

Total revenues increased $69.3 million, or 11.7%, for the three months ended March 31, 2015, compared to the same period in 2014. The increase in revenues for the three months ended March 31, 2015 includes a decrease of $7.7 million related to the effects of currency translation of foreign-based subsidiaries and branches. The Company has included reimbursements received for out-of-pocket expenses as revenues and expenses. The largest reimbursable expense item for which TSYS is reimbursed by clients is postage. The Company’s reimbursable items are impacted with changes in postal rates and changes in the volumes of mailing activities by its clients. Reimbursable items for the three months ended March 31, 2015, were $66.4 million, an increase of $6.3 million or 10.4% compared to $60.1 million for the same period last year.

Excluding reimbursable items, revenues increased $63.0 million, or 11.8%, during the three months ended March 31, 2015, compared to 2014. The 11.8% increase in revenues excluding reimbursable items for the three months ended March 31, 2015, as compared to the same period in 2014, is the result of increases in organic growth, partially offset by decreases associated with currency translation.

Major Customers

For discussion regarding the Company’s major customers, refer to Note 8 in the Notes to Unaudited Consolidated Financial Statements and see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC.

The Company works to maintain a large and diverse customer base across various industries. Although for the three months ended March 31, 2015, the Company does not have a major customer on a consolidated basis, a significant amount of the Company’s revenues are derived from long-term contracts with large clients. TSYS derives revenues from providing various processing and other services to these clients, including processing of consumer and commercial accounts, as well as revenues for reimbursable items. The loss of one of the Company’s large clients could have a material adverse effect on the Company’s financial position, results of operations and cash flows.

 

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Operating Segments

TSYS’ services are provided through four operating segments: North America Services, International Services, Merchant Services and NetSpend. Refer to Note 8 in the Notes to Unaudited Consolidated Financial Statements for more information on the Company’s operating segments.

The Company’s North America and International segments have many long-term customer contracts with card issuers providing account processing and output services for printing and embossing items. These contracts generally require advance notice prior to the end of the contract if a client chooses not to renew. Additionally, some contracts may allow for early termination upon the occurrence of certain events such as a change in control. The termination fees paid upon the occurrence of such events are designed primarily to cover balance sheet exposure related to items such as capitalized conversion costs or client incentives associated with the contract and, in some cases, may cover a portion of lost future revenue and profit. Although these contracts may be terminated upon certain occurrences, the contracts provide the segment with a steady revenue stream since a vast majority of the contracts are honored through the contracted expiration date.

These services are provided throughout the period of each account’s use, starting from a card-issuing client processing an application for a card. Services may include processing the card application, initiating service for the cardholder, processing each card transaction for the issuing retailer or financial institution and accumulating the account’s transactions. Fraud management services monitor the unauthorized use of accounts which have been reported to be lost, stolen, or which exceed credit limits. Fraud detection systems help identify fraudulent transactions by monitoring each accountholder’s purchasing patterns and flagging unusual purchases. Other services provided include customized communications to cardholders, information verification associated with granting credit, debt collection and customer service.

TSYS’ revenues in its North America Services and International Services segments are derived from electronic payment processing. There are certain basic core services directly tied to accounts on file and transactions. These are provided to all of TSYS’ processing clients. The core services begin with an AOF.

The core services include housing an account on TSYS’ system (AOF), authorizing transactions (authorizations), accumulating monthly transactional activity (transactions) and providing a monthly statement (statement generation). From these core services, TSYS’ clients also have the option to use fraud and portfolio management services. Collectively, these services are considered volume-based revenues.

Non-volume related revenues include processing fees which are not directly associated with AOF and transactional activity, such as value added products and services, custom programming and certain other services, which are only offered to TSYS’ processing clients.

Additionally, certain clients license the Company’s processing systems and process in-house. Since the accounts are processed outside of TSYS for licensing arrangements, the AOF and other volumes are not available to TSYS. Thus, volumes reported by TSYS do not include volumes associated with licensing.

Output and managed services include offerings such as card production, statement production, correspondence and call center support services.

A summary of each segment’s results follows:

North America Services

The North America Services segment provides payment processing and related services to clients based primarily in North America. Growth in revenues and operating profit in this segment is derived from retaining and growing the core business and improving the overall cost structure. Growing the core business comes primarily from an increase in account usage, growth from existing clients and sales to new clients and the related account conversions. This segment has one major customer for the period ended March 31, 2015.

 

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Below is a summary of the North America Services segment:

 

		Three months ended March 31,
(in millions)		2015				2014				Percent Change
Total revenues		$	309.2				262.2				17.9	%
Revenues before reimbursable items			266.2				224.4				18.7
Adjusted segment operating income1			102.6				74.6				37.5
Adjusted segment operating margin2			38.5	%			33.2	%
Key indicators:
AOF			653.2				495.5				31.8
Transactions			3,310.7				2,327.6				42.2

 

1	Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

2	Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items.

The 17.9% increase in total segment revenues for the three months ended March 31, 2015 as compared to the same period in 2014, is driven by an increase in revenues associated with new business and organic growth, partially offset by client portfolio deconversions and price reductions. Reimbursable items for the three months ended March 31, 2015, were $43.0 million, an increase of 13.8%, compared to $37.8 million for the same period last year.

Excluding reimbursable items, revenues increased 18.7% for the three months ended March 31, 2015, as compared to the same period in 2014, as a result of increases from organic growth.

The increase in adjusted segment operating income for the three months ended March 31, 2015, as compared to 2014, is driven by an increase in revenues partially offset by increases in employee related expenses, and technology and equipment expenses.

For the three months ended March 31, 2015, approximately 51.3% of revenues before reimbursable items are driven by the volume of AOF and transactions processed and approximately 48.7% are derived from non-volume based revenues, such as processing fees, value-added products and services, custom programming and licensing arrangements.

 

		Three months ended March 31,
(in millions)		2015				2014				Percent Change
Volume-based revenues		$	136.5				112.2				21.6	%
Non-volume related revenues:
Processing fees			57.8				50.5				14.6
Value-added, custom programming, licensing and other			34.7				27.5				26.2
Output and managed services			37.2				34.2				8.8
Total non-volume related revenues			129.7				112.2				15.7
Total revenues before reimbursable items			266.2				224.4				18.7
Reimbursable items			43.0				37.8				13.8
Total revenues		$	309.2				262.2				17.9	%

During the first quarter of 2015, two of the Company’s largest prepaid processing clients in the North America segment informed TSYS that they do not intend to renew their prepaid processing agreements. The revenues associated with these clients, in the aggregate, accounted for approximately 2% of the Company’s total revenues in the first quarter of 2015. The Company expects the second of the two deconversions to take place in 2016.

 

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International Services

The International Services segment provides issuer and acquirer solutions to financial institutions and other organizations primarily based outside the North America region. Changes in revenues in this segment are derived from retaining and growing the core business. Growing the core business comes primarily from an increase in account usage, growth from existing clients and sales to new clients and the related account conversions. This segment has two major customers for the period ended March 31, 2015.

Below is a summary of the International Services segment:

 

		Three months ended March 31,
(in millions)		2015				2014				Percent Change
Total revenues		$	79.8				82.4				(3.1	)%
Revenues before reimbursable items			73.7				76.8				(4.0	)
Adjusted segment operating income1			7.0				4.6				53.3
Adjusted segment operating margin2			9.5	%			5.9	%
Key indicators:
AOF			70.5				60.7				16.1
Transactions			572.0				517.9				10.5

 

1	Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

2	Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items.

The 3.1% decrease in total segment revenues for the three months ended March 31, 2015, as compared to the same periods in 2014, is driven mainly by a decrease of $7.6 million associated with currency translation. Reimbursable items for the three months ended March 31, 2015, were $6.1 million, an increase of 8.3%, compared to $5.6 million for the three months ended March 31, 2014.

Excluding reimbursable items, revenues decreased 4.0% for the three months ended March 31, 2015 as compared to the same period in 2014 as a result of currency translation.

The increase in adjusted segment operating income for the three months ended March 31, 2015, as compared to the same period in 2014, is driven primarily by a decrease in selling, general and administrative expenses.

Movements in foreign currency exchange rates as compared to the U.S. Dollar can result in foreign denominated financial statements being translated into more or fewer U.S. Dollars, which impacts the comparison to prior periods when the U.S. Dollar was stronger or weaker.

For the three months ended March 31, 2015, approximately 39.3% of the revenues before reimbursable items are driven by the volume of accounts on file and transactions processed and approximately 60.7% are derived from non-volume based revenues, such as processing fees, value-added products and services, custom programming and licensing arrangements.

 

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		Three months ended March 31,
(in millions)		2015				2014				Percent Change
Volume-based revenues		$	29.0				32.1				(9.9	)%
Non-volume related revenues:
Processing fees			14.8				14.5				1.9
Value-added, custom programming, licensing and other			18.5				19.8				(6.5	)
Output and managed services			11.5				10.4				11.2
Total non-volume related revenues			44.8				44.7				0.3
Total revenues before reimbursable items			73.7				76.8				(4.0	)
Reimbursable items			6.1				5.6				8.3
Total revenues		$	79.8				82.4				(3.1	)%

Merchant Services

The Merchant Services segment provides merchant processing and related services to clients based primarily in the United States. Merchant services revenues are derived from providing processing services, acquiring solutions, related systems and integrated support services to merchant acquirers and merchants. Revenues from merchant services include processing all payment forms including credit, debit, prepaid, electronic benefit transfer and electronic check for merchants of all sizes across a wide array of market verticals. Merchant services include authorization and capture of transactions; clearing and settlement of transactions; information reporting services related to transactions; merchant billing services; and point-of-sale (POS) equipment sales and service. This segment has no major customers for the period ended March 31, 2015.

Below is a summary of the Merchant Services segment:

 

		Three months ended March 31,
(in millions)		2015				2014				Percent Change
Total revenues		$	129.1				122.7				5.2	%
Revenues before reimbursable items			110.4				104.6				5.5
Adjusted segment operating income1			34.1				30.2				13.1
Adjusted segment operating margin2			30.9	%			28.8	%
Key indicators:
POS transactions			984.6				982.2				0.2
Dollar sales volume		$	11,301.6				10,779.7				4.8

 

1	Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

2	Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items.

The 5.2% increase in total segment revenues for the three months ended March 31, 2015, as compared to the same period in 2014, is driven by higher processing volumes, product fees and processing fees. Reimbursable items for the three months ended March 31, 2015, were $18.7 million, an increase of 3.5%, compared to $18.1 million for the three months ended March 31, 2014.

Excluding reimbursable items, revenues increased $5.8 million, or 5.5%, for the three months ended March 31, 2015, as compared to the same period in 2014. For the three months ended March 31, 2015, the increase was the result of higher processing volumes, product fees and processing fees in the Company’s direct line of business partially offset by declines due to market factors such as industry consolidation and client in-sourcing in its indirect line of business.

The Merchant Services segment’s results are driven by dollar sales volume and the authorization and capture transactions processed at the point-of-sale. This segment’s authorization and capture transactions are primarily through Internet connectivity or dial-up.

 

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The increase in adjusted segment operating income for the three months ended March 31, 2015, is a result of higher revenues offset by higher expenses driven by higher revenues as compared to the same period in 2014.

For three months ended March 31, 2015, approximately 92.5% of the revenues of the Merchant Services segment, are influenced by several factors, including volumes related to transactions and dollar sales volume. The remaining 7.5% of this segment’s revenues are derived from value added services, chargebacks, managed services, investigation, risk and collection services performed

NetSpend

The NetSpend segment is a program manager for Federal Deposit Insurance Corporation (FDIC) insured depository institutions that issue GPR cards and payroll cards and provide alternative financial services to underbanked and other consumers in the United States. The products within this segment provide underbanked consumers with access to FDIC-insured depository accounts with a menu of pricing and features specifically tailored to their needs. This segment has an extensive distribution and reload network comprised of financial service centers, employers, and retail locations throughout the United States. The NetSpend segment markets prepaid cards through multiple distribution channels, including direct-to-consumer and online marketing programs, alternative financial service providers, traditional retailers, and contractual relationships with corporate employers.

The NetSpend segment’s revenues primarily consist of a portion of the service fees and interchange revenues received by NetSpend’s prepaid card Issuing Banks in connection with the programs managed by this segment. Cardholders are charged fees for transactions including fees for PIN and signature-based purchase transactions made using their prepaid cards, for Automated Teller Machine (ATM) withdrawals or other transactions conducted at ATMs, for balance inquiries, and monthly maintenance fees among others. Cardholders are also charged fees associated with additional products and services offered in connection with certain cards including the use of overdraft features, bill payment options, custom card designs and card-to-card transfers of funds initiated through call centers. The NetSpend segment also earns revenues from a portion of the interchange fees remitted by merchants when cardholders make purchase transactions using their cards. Subject to applicable law, interchange fees are fixed by the networks.

Below is a summary of the NetSpend segment:

 

		Three months ended March 31,
(in millions)		2015				2014				Percent Change
Total revenues (and revenues before reimbursable items)		$	155.1				132.6				16.9	%
Adjusted segment operating income1			35.5				28.7				23.5
Adjusted segment operating margin2			22.9	%			21.7	%
Key indicators:
Number of active cards3			4.2				3.7				14.7
Number of active cards with direct deposit4			2.4				2.1				16.1
Percentage of active cards with direct deposit			57.3	%			56.6	%
Gross dollar volume5		$	7,660.7				6,567.2				16.7

 

1	Adjusted segment operating income excludes acquisition intangible amortization and expenses associated with Corporate Administration and Other.

2	Adjusted segment operating margin equals adjusted segment operating income divided by revenues before reimbursable items.

3	Number of active cards represents the total number of prepaid cards that have had a PIN or signature-based purchase transaction, a point-of-sale load transaction or an ATM withdrawal within three months of the date of determination.

4	Number of active cards with direct deposit represents the number of active cards that have had a direct deposit load within three months of the date of determination.

5	Gross dollar volume represents the total dollar volume of debit transactions and cash withdrawals made using the prepaid cards the NetSpend segment manages.

For the three months ended March 31, 2015, 67.4% of revenues were derived from fees charged to cardholders and 32.6% of revenues were derived from interchange and other revenues. Service fee revenues are driven by the number of active cards, which totaled approximately 4.2 million as of March 31, 2015, and in particular by the number of cards with direct deposit. Cardholders with direct deposit generally initiate more transactions and generate more revenues than those that do not take advantage of this feature. Interchange revenues are driven by gross dollar volume, which totaled approximately $7.7 billion for the three months ended March 31, 2015. Substantially all of the NetSpend segment’s revenues are volume driven as they are driven by the active card and gross dollar volume indicators.

 

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Total segment revenues for the three months ended March 31, 2015, as compared to the same period in 2014, increased $22.5 million, or 16.9%. Service fee revenue increased $14.1 million, or 15.5%. The increase in service fee revenue was substantially driven by the increase in direct deposit accounts. Revenues from interchange and other value-added services increased $8.4 million, or 20.0%. This increase was primarily the result of a 16.7% increase in gross dollar volume.

Cardholder funds and deposits related to NetSpend’s prepaid products are held at FDIC-insured Issuing Banks for the benefit of the cardholders. NetSpend currently has active agreements with five Issuing Banks.

NetSpend’s prepaid card business derived approximately one-fourth of its revenues from cardholders acquired through one of its third-party distributors.

Operating Expenses

The Company’s operating expenses consist of cost of services and selling, general and administrative expenses. Cost of services describes the direct expenses incurred in performing a particular service for the Company’s customers, including the cost of direct labor expense in putting the service in saleable condition. Selling, general and administrative expenses are incurred in selling or marketing and for the direction of the enterprise as a whole, including accounting, legal fees, salaries, investor relations and mergers and acquisitions.

The Company’s cost of services increased 6.3% for the three months ended March 31, 2015, compared to $422.9 million for the same period last year. The Company’s selling, general and administrative expenses, including merger and acquisition expenses, increased 0.8% for the three months ended March 31, 2015 compared to $89.3 million for the same period last year. The increase in selling, general and administrative expenses, including merger and acquisition expenses, for the three months ended March 31, 2015, is due to increases in employment expenses partially offset by decreases in advertising expenses and legal fees.

Operating Income

Operating income increased 51.8% for the three months ended March 31, 2015, compared to the same period in 2014. The Company’s operating profit margin for the three months ended March 31, 2015, was 18.5%, compared to 13.6% for the same period last year. TSYS’ operating margins increased for the three months ended March 31, 2015, as compared to the same period in 2014, due primarily to an increase in total revenues.

Nonoperating Income (Expense)

Interest income for the three months ended March 31, 2015, was $248,000 an increase of $6,000 compared to $242,000 for the same period in 2014. Changes in interest income are primarily attributable to changes in the amount of cash available for investing.

Interest expense for the three months ended March 31, 2015, was $10.2 million, a decrease of $87,000 compared to $10.3 million for the three months ended March 31, 2014. The Company’s interest expense on bonds was $8.8 million for both the three months ended March 31, 2015 and 2014.

Occasionally, the Company will provide financing to its subsidiaries in the form of an intercompany loan, which is required to be repaid in U.S. Dollars. For its subsidiaries whose functional currency is other than the U.S. dollar, the translated balance of the financing (liability) is adjusted upward or downward to match the U.S. Dollar obligation (receivable) on the Company’s financial statements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation.

The Company records foreign currency translation adjustments on foreign-denominated balance sheet accounts. The Company’s International Services segment maintains several cash accounts denominated in foreign currencies, primarily in U.S. Dollars and British Pounds. As the Company translates the foreign-denominated cash balances into U.S. 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.

 

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For the three months ended March 31, 2015 and 2014, the Company recorded approximately $403,000 and $143,000 of net translation losses, respectively, related to intercompany loans and foreign-denominated balance sheet accounts.

The balance of the International Services segment’s foreign-denominated cash accounts subject to risk of translation gains or losses as of March 31, 2015, was approximately $8.1 million, the majority of which is denominated in U.S. Dollars and Euros. The net asset account balance subject to foreign currency exchange rates between the local currencies and the U.S. Dollar as of March 31, 2015, was $24.8 million.

The Company recorded a gain of $1.2 million on its investments in private equity for the three months ended March 31, 2015 as a result of a change in value.

Income Taxes

For a detailed discussion regarding income taxes, refer to Notes 1 and 15 in the Notes to Consolidated Financial Statements and “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC.

TSYS’ effective income tax rate for the three months ended March 31, 2015 was 34.0%, compared to 32.1% for the same period in 2014. The differences in the 2015 rates compared to 2014 rates reflect changes in discrete items, tax credits and in the jurisdictional sources of income. The calculation of the effective tax rate is income taxes adjusted for income taxes associated with noncontrolling interest and equity income divided by TSYS’ pretax income adjusted for noncontrolling interest in consolidated subsidiaries’ net income and equity pre-tax earnings of its equity investments. Refer to Note 7 in the Notes to Unaudited Condensed Consolidated Financial Statements for more information on income taxes.

In the normal course of business, TSYS is subject to examinations from various tax authorities. These examinations may alter the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions.

TSYS continually monitors and evaluates the potential impact of current events and circumstances on the estimates and assumptions used in the analysis of its income tax positions, and, accordingly, TSYS’ effective tax rate may fluctuate in the future.

No provision for U.S. federal and state income taxes has been made in the Company’s consolidated financial statements for those non-U.S. subsidiaries whose earnings are considered to be permanently reinvested. The amount of undistributed earnings considered to be “reinvested” which may be subject to tax upon distribution was approximately $91.6 million as of March 31, 2015. A distribution of these non-U.S. earnings in the form of dividends, or otherwise, would subject the Company to both U.S. federal and state income taxes, as adjusted for non-U.S. tax credits, and withholding taxes payable to the various non-U.S. countries. Determination of the amount of any unrecognized deferred income tax liability on these undistributed earnings is not practicable.

Equity in Income of Equity Investments

The Company has two equity investments located in Mexico and China that are accounted for under the equity method of accounting. TSYS’ share of income from its equity in equity investments was $5.4 million and $4.1 million for the three months ended March 31, 2015 and 2014, respectively.

Net Income

Net income for the three months ended March 31, 2015, increased 52.8%, or $27.3 million, to $78.9 million, compared to $51.6 million for the same period in 2014.

Net income attributable to non-controlling interest decreased $1.2 million for the three months ended March 31, 2015, compared to the same period in 2014. The decrease is driven by the sale of GP Network Corporation (GP Net).

Net income attributable to TSYS common shareholders for the three months ended March 31, 2015, increased 57.7%, or $28.5 million, to $77.8 million, or basic and diluted EPS of $0.42, compared to $49.3 million, or basic and diluted EPS of $0.26, for the same period in 2014.

 

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Non-GAAP Measures

Management evaluates the Company’s operating performance based upon operating margin excluding reimbursables, adjusted EBITDA, and adjusted EPS, which are all non-generally accepted accounting principle (non-GAAP) measures. TSYS also uses these non-GAAP financial measures to evaluate and assess TSYS’ financial performance against budget.

Although not a substitute for GAAP, TSYS believes that non-GAAP financial measures are important to enable investors to understand and evaluate its ongoing operating results. Accordingly, TSYS includes non-GAAP financial measures when reporting its financial results to shareholders and potential investors in order to provide them with an additional tool to evaluate TSYS’ ongoing business operations. TSYS believes that the non-GAAP financial measures are representative of comparative financial performance that reflects the economic substance of TSYS’ current and ongoing business operations.

Although non-GAAP financial measures are often used to measure TSYS’ operating results and assess its financial performance, they are not necessarily comparable to similarly titled captions of other companies due to potential inconsistencies in the method of calculation.

TSYS believes that its use of non-GAAP financial measures provides investors with the same key financial performance indicators that are utilized by management to assess TSYS’ operating results, evaluate the business and make operational decisions on a prospective, going-forward basis. Hence, management provides disclosure of non-GAAP financial measures to give shareholders and potential investors an opportunity to see TSYS as viewed by management, to assess TSYS with some of the same tools that management utilizes internally and to be able to compare such information with prior periods. TSYS believes that the presentation of GAAP financial measures alone would not provide its shareholders and potential investors with the ability to appropriately analyze its ongoing operational results, and therefore expected future results. TSYS therefore believes that inclusion of non-GAAP financial measures provides investors with additional information to help them better understand its financial statements just as management utilizes these non-GAAP financial measures to better understand the business, manage budgets and allocate resources.

Revenues Before Reimbursable Items and Operating Margin Excluding Reimbursable Items

 

		Three months ended March 31,
(in thousands)		2015				2014
Operating income (a)		$	122,496				80,697
Total revenues (b)		$	662,156				592,848
Less reimbursable items			66,372				60,098
Revenues before reimbursable items (c)		$	595,784				532,750
Operating margin (as reported) (a)/(b)			18.50	%			13.61	%
Operating margin excluding reimbursable items (a)/(c)			20.56	%			15.15	%

 

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The following tables provide a reconciliation of GAAP to the Company’s non-GAAP financial measures:

Adjusted EBITDA

 

		Three months ended March 31,
(in thousands)		2015				2014
Net income		$	78,899				51,625
Adjusted for:
Deduct: Income from discontinued operations			—				(980	)
Deduct: Equity in income of equity investments, net of tax			(5,394	)			(4,096	)
Add: Income taxes			39,782				24,335
Add: Nonoperating expenses, net			9,209				9,813
Add: Depreciation and amortization			62,815				60,035
EBITDA			185,311				140,732
Adjust for:
Add: Share-based compensation			8,143				7,611
Add: NetSpend merger and acquisition expenses			—				1,253
Adjusted EBITDA		$	193,454				149,596

Adjusted Earnings Per Share

 

		Three months ended March 31,
(in thousands except per share data)		2015				2014
Income from continuing operations attributable to TSYS common shareholders As reported (GAAP)		$	77,755				49,321
Adjust for amounts attributable to TSYS common shareholders (net of tax):
Acquisition intangible amortization, net of tax			15,761				15,813
Share-based compensation, net of tax			5,441				5,017
NetSpend merger and acquisition expenses*			—				1,204
Adjusted earnings		$	98,957				71,355
Basic EPS—Net income attributable to TSYS common shareholders As reported (GAAP)		$	0.42				0.26
Adjust for amounts attributable to TSYS common shareholders (net of tax):
Acquisition intangible amortization, net of tax			0.09				0.08
Share-based compensation, net of tax			0.03				0.03
NetSpend merger and acquisition expenses*			—				0.01
Adjusted EPS**		$	0.54				0.38
Average common shares and participating securities			184,481				187,752

 

*	Certain merger and acquisition costs are nondeductible for income tax purposes.

**	Adjusted EPS amounts may not total due to rounding.

Projected Outlook for 2015

As compared to 2014, TSYS expects its 2015 total revenues to increase by 7-9%, its revenues before reimbursable items to increase by 8%-10%, and its adjusted EPS from continuing operations attributable to TSYS common shareholders to increase by 12%-14%. The guidance is based on the following assumptions with respect to 2015: (1) there will be no significant movements in the London Interbank Offered Rate (LIBOR) and TSYS will not make any significant draws on

 

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the remaining balance of its revolving credit facility; (2) there will be no significant movement in foreign currency exchange rates related to TSYS’ business; (3) TSYS will not incur significant expenses associated with the conversion of new large clients other than that included in the 2015 estimate, additional acquisitions, or any significant impairment of goodwill or other intangibles; (4) there will be no deconversions of large clients during the year; and (5) the economy will not worsen. In addition, TSYS’ earnings guidance for 2015 does not include the impact of any future share repurchases.

Financial Position, Liquidity and Capital Resources

Cash Flows

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. TSYS has occasionally used borrowed funds to supplement financing of capital expenditures and acquisitions. For more information regarding borrowings, refer to Note 5 in the Notes to Unaudited Consolidated Financial Statements.

Cash Flows From Operating Activities

 

		Three months ended March 31,
(in thousands)		2015				2014
Net income		$	78,899				51,625
Depreciation and amortization			62,815				61,432
Other noncash items and charges, net			11,442				16,254
Net change in current and other assets and current and other liabilities			5,336				19,395
Net cash provided by operating activities		$	158,492				148,706

TSYS’ main source of funds is derived from operating activities, specifically net income. The increase in 2015 in net cash provided by operating activities was primarily the result of an increase in net income.

The decrease in other noncash items and charges, as compared to last year, is due primarily to a decrease in deferred income tax expense, partially offset by an increase in the provision for bad debt expenses and billing adjustments. Net change in current and other assets and current and other liabilities include accounts receivable, prepaid expenses, other current assets and other assets, accounts payable, accrued salaries and employee benefits, other current liabilities and other liabilities. The change in accounts receivable as of March 31, 2015, as compared to March 31, 2014, is the result of timing of collections compared to billings as well as increased billings. The change in accounts payable and other liabilities for the same period is the result of the payments of vendor invoices and the timing of payments.

Cash Flows From Investing Activities

 

		Three months ended March 31,
(in thousands)		2015				2014
Additions to contract acquisition costs		$	(12,364	)			(17,903	)
Additions to licensed computer software from vendors			(11,581	)			(5,963	)
Purchases of property and equipment, net			(10,047	)			(13,641	)
Additions to internally developed computer software			(9,561	)			(9,735	)
Purchase of private equity investments			—				(822	)
Proceeds from sale of private equity investment			1,839				—
Net cash used in investing activities		$	(41,714	)			(48,064	)

The primary use of cash for investing activities in 2015 was for investments in contract acquisition costs associated with obtaining and servicing new or existing clients. Other major uses of cash for investing activities in 2015 were for the purchase of licensed computer software, the addition of property and equipment, and internal development of computer software. The major uses of cash for investing activities in 2014 were investments in contract acquisition costs associated with obtaining and servicing new or existing clients, the purchase of licensed computer software conversions, the addition of property and equipment and internal development of computer software.

 

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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 clients to the Company’s processing systems. The Company’s investments in contract acquisition costs were $12.4 million for the three months ended March 31, 2015, compared to $17.9 million for the three months ended March 31, 2014. The decrease in contract acquisition costs is due to decreases in conversions.

Private Equity Investments

The Company has entered into a limited partnership agreement in connection with its agreement to invest in an Atlanta-based venture capital fund focused exclusively on investing in technology-enabled financial services companies. Pursuant to the limited partnership agreement, the Company has committed to invest up to $20.0 million in the fund so long as its ownership interest in the fund does not exceed 50%. The Company received approximately $1.8 million in a distribution of proceeds during the three months ended March 31, 2015 due to a sale of one of the investments. During the first three months of 2015, the Company did not make an additional investment in the fund. During the first three months of 2014, the Company made an additional investment of $822,000.

Cash Flows From Financing Activities

 

		Three months ended March 31,
(in thousands)		2015				2014
Repurchase of common stock under plans and tax withholding		$	(54,415	)			(5,173	)
Dividends paid on common stock			(18,260	)			(18,788	)
Principal payments on long-term borrowings and capital lease obligations			(15,086	)			(22,277	)
Subsidiary dividends paid to noncontrolling shareholders			(500	)			(2,312	)
Purchase of noncontrolling interest			—				(37,500	)
Excess tax benefit from share-based payment arrangements			3,793				4,037
Proceeds from exercise of stock options			10,712				9,539
Net cash (used in) provided by financing activities		$	(73,756	)			(72,474	)

The main uses of cash for financing activities in 2015 were the repurchase of outstanding shares of common stock, the payment of dividends and the principal payments on long-term borrowings and capital lease obligations. The main uses of cash in 2014 were the purchase of an additional 15% of the noncontrolling interest in Central Payment Co., LLC (CPAY), principal payments on long-term borrowings and capital lease obligations, the payment of dividends and the repurchase of outstanding shares of common stock. The main source of cash provided by financing activities in 2015 and 2014 were the proceeds from exercise of stock options.

Borrowings

Refer to Note 5 in the Notes to Unaudited Consolidated Financial Statements for more information on borrowings.

Stock Repurchase

For a detailed discussion regarding the Company’s stock repurchase plan, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC.

In January 2015, TSYS announced that its Board had approved a new stock repurchase plan to repurchase up to 20 million shares of TSYS stock. The shares may be purchased from time to time at prices considered appropriate. There is no expiration date of the plan. The previously existing stock plan was terminated.

Through March 31, 2015, the Company purchased 1.5 million shares for approximately $54.4 million, at an average price of $37.53.

 

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Dividends

Dividends on common stock of $18.3 million were paid during the three months ended March 31, 2015, compared to $18.8 million during the three months ended March 31, 2014.

Foreign Operations

TSYS operates internationally and is subject to adverse movements in foreign currency exchange rates. TSYS has not entered into foreign exchange forward contracts to reduce its exposure to foreign currency rate changes. TSYS continues to analyze potential hedging instruments to safeguard it from significant foreign currency translation risks.

TSYS maintains operating cash accounts outside the United States. Refer to Note 4 in the Notes to Unaudited Consolidated Financial Statements for more information on cash and cash equivalents. TSYS has adopted the permanent reinvestment exception under GAAP with respect to future earnings of certain foreign subsidiaries. While some of the foreign cash is available to repay intercompany financing arrangements, remaining amounts are not presently available to fund domestic operations and obligations without paying a significant amount of taxes upon its repatriation. Demand on the Company’s cash has increased as a result of its strategic initiatives. TSYS funds these initiatives through a balance of internally generated cash, external sources of capital, and, when advantageous, access to foreign cash in a tax efficient manner. Where local regulations limit an efficient intercompany transfer of amounts held outside of the U.S., TSYS will continue to utilize these funds for local liquidity needs. Under current law, balances available to be repatriated to the U.S. would be subject to U.S. federal income taxes, less applicable foreign tax credits. TSYS has provided for the U.S. federal tax liability on these amounts for financial statement purposes, except for foreign earnings that are considered permanently reinvested outside of the U.S. TSYS utilizes a variety of tax planning and financing strategies with the objective of having its worldwide cash available in the locations where it is needed.

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 2.2:1. As of March 31, 2015, TSYS had working capital of $416.1 million compared to $394.0 million as of December 31, 2014.

Legal Proceedings

Refer to Note 16 of the Company’s audited financial statements for the year ended December 31, 2014, which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC, for a discussion regarding commitments and contingencies including legal proceedings. Also, for more information regarding the Company’s legal proceedings, refer to Note 10 in the Notes to Unaudited Consolidated Financial Statements.

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: (i) TSYS’ expectation with respect to the effect of recent accounting pronouncements; (ii) TSYS’ expectation that it will be able to fund a significant portion of its capital expenditure needs through internally generated cash in the future; (iii) TSYS’ earnings guidance for 2015 total revenues, revenues before reimbursable items, and adjusted EPS attributable to TSYS’ common shareholders from continuing operations; (iv) TSYS’ belief with respect

 

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to lawsuits, claims and other complaints; (v) TSYS’ expectation with respect to certain tax matters; (vi) TSYS’ expectation with respect to the timing of deconversions and the assumptions underlying such statements. 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,” “estimates,” “projects,” “plans,” “may,” “could,” “should,” “would,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying these statements.

These statements are based upon the current beliefs and expectations of TSYS’ management and are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements. A number of important factors could cause actual results to differ materially from those contemplated by the Company’s forward-looking statements. Many of these factors are beyond TSYS’ ability to control or predict. These factors include, but are not limited to:

 

•

the material breach of security of any of TSYS’ systems;

 

•

TSYS incurs expenses associated with the signing of a significant client;

 

•

organic growth rates for TSYS’ existing clients are lower than anticipated whether as a result of unemployment rates, card delinquencies and charge off rates or otherwise or attrition rates of existing clients are higher than anticipated;

 

•

TSYS does not convert and deconvert clients’ portfolios as scheduled;

 

•

risks associated with foreign operations, including adverse developments with respect to foreign currency exchange rates;

 

•

adverse developments with respect to entering into contracts with new clients and retaining current clients;

 

•

consolidation in the financial services and other industries, including the merger of TSYS clients with entities that are not TSYS processing clients, the sale of portfolios by TSYS clients to entities that are not TSYS processing clients and financial institutions which are TSYS clients otherwise ceasing to exist;

 

•

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on TSYS and its clients;

 

•

adverse developments with respect to the payment card industry in general, including a decline in the use of cards as a payment mechanism;

 

•

the impact of potential and completed acquisitions, including the costs associated therewith, their being more difficult to integrate than anticipated, and the inability to achieve the anticipated growth opportunities and other benefits of the acquisitions;

 

•

the costs and effects of litigation, investigations or similar matters or adverse facts and developments relating thereto;

 

•

the impact of the application of and/or changes in accounting principles;

 

•

TSYS’ inability to timely, successfully and cost-effectively improve and implement processing systems to provide new products, increased functionality and increased efficiencies;

 

•

TSYS’ reliance on financial institution sponsors;

 

•

changes occur in laws, rules, regulations, credit card association rules, prepaid industry rules, or other industry standards affecting TSYS and its clients that may result in costly new compliance burdens on TSYS and its clients and lead to a decrease in the volume and/or number of transactions processed or limit the types and amounts of fees that can be charged to customers;

 

•

successfully managing the potential both for patent protection and patent liability in the context of rapidly developing legal framework for expansive patent protection;

 

•

one or more of the assumptions upon which TSYS’ earnings guidance for 2015 is based is inaccurate;

 

•

the effect of current domestic and worldwide economic and geopolitical conditions;

 

•

the impact on TSYS’ business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts;

 

•

other risk factors described in the “Risk Factors” and other sections of TSYS’ Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and other filings with the Securities and Exchange Commission; and

 

•

TSYS’ ability to manage the foregoing and other risks.

These forward-looking statements speak only as of the date on which they are made and TSYS does not intend to update any forward-looking statement as a result of new information, future developments or otherwise.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Exchange Risk

The Company is exposed to foreign exchange risk because it has assets, liabilities, revenues and expenses denominated in foreign currencies other than the U.S. Dollar. These currencies are translated into U.S. Dollars at current exchange rates, except for revenues, costs and expenses and net income, which are translated at the average exchange rate for each reporting period. Net exchange gains or losses resulting from the translation of assets and liabilities of foreign operations, net of tax, are accumulated in a separate section of shareholders’ equity entitled “accumulated other comprehensive loss, net.”

Currently, the Company does not use financial instruments to hedge exposure to exchange rate changes.

The following table presents the carrying value of the net assets of TSYS’ foreign operations in U.S. Dollars as of March 31, 2015:

 

(in millions)		March 31, 2015
Europe		$	187.0
China			98.2
Mexico			8.0
Canada			1.4
Other			37.8

The Company provides financing to its international operations through intercompany loans that require the operation to repay the financing in amounts denominated in currencies other than the local currency. The functional currency of the operation is the respective local currency. As it translates the foreign currency denominated financial statements into U.S. Dollars, the translated balance of the financing (liability) is adjusted upward or downward to match the obligation (receivable) on its financial statements. The upward or downward adjustment is recorded as a gain or loss on foreign currency translation.

TSYS records foreign currency translation adjustments associated with other balance sheet accounts. The International Services segment maintains several cash accounts denominated in foreign currencies, primarily in U.S. Dollars and British Pounds. As TSYS translates the foreign-denominated cash balances into U.S. 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 statements of income.

TSYS recorded a net translation loss of approximately $403,000 for the three months ended March 31, 2015 relating to the translation of cash and other balance sheet accounts. The balance of the Company’s foreign-denominated cash accounts subject to risk of translation gains or losses as of March 31, 2015, was approximately $8.1 million, the majority of which was denominated in U.S. Dollars and British Pounds.

The net asset account balance subject to foreign currency exchange rates between the local currencies and the U.S. Dollar as of March 31, 2015, was $24.8 million. The following table presents the potential effect on income before income taxes of hypothetical shifts in the foreign currency exchange rate between the local currencies and the U.S. Dollar of plus-or-minus 100 basis points, 500 basis points and 1,000 basis points based on the net asset account balance of $24.8 million as of March 31, 2015.

 

		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		$	248				1,240				2,480				(248	)			(1,240	)			(2,480	)

 

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Interest Rate Risk

TSYS is also exposed to interest rate risk associated with the investing of available cash and the use of debt. TSYS invests available cash in conservative short-term instruments and is subject to changes in interest rates.

The Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC, contains a discussion of interest rate risk and the Company’s debt obligations that are sensitive to changes in interest rates. Also, refer to Note 5 in the Notes to Unaudited Consolidated Financial Statements for more information on the Company’s long-term debt.

Item 4. Controls and Procedures.

We have evaluated the effectiveness of the design and operation of the Company’s 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 (“Exchange Act”). This evaluation was carried out under the supervision and with the participation of the Company’s management, including its chief executive officer and chief financial officer. Based on this evaluation, the chief executive officer and chief financial officer concluded that as of March 31, 2015, TSYS’ disclosure controls and procedures were designed and operating effectively to ensure that the information required to be disclosed by TSYS in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were also designed and operating effectively to ensure that the information required to be disclosed in the reports that TSYS files or submits under the Exchange Act is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure.

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, the Company’s internal control over financial reporting.

Part II — OTHER INFORMATION

Item 1. Legal Proceedings.

For information regarding TSYS’ legal proceedings, refer to Note 10 of the Notes to Unaudited Condensed Consolidated Financial Statements which is incorporated by reference into this item.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, one should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect the Company’s financial position, results of operations or cash flows. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s financial position, results of operations or cash flows.

There have been no material changes in the Company’s risk factors from those disclosed in the Company’s 2014 Annual Report on Form 10-K.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(in thousands, except per share data)		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number of Shares That May Yet Be Purchased Under the Plans of Programs
January 2015			—			$	—				—				20,000
February 2015			775				37.34				775				19,225
March 2015			675				37.74				1,450				18,550
Total			1,450			$	37.53

Item 6. Exhibits.

a) Exhibits

 

Exhibit Number		Description
10.1		Form of Senior Executive Stock Option Agreement for 2015 stock option awards under the Total System Services, Inc. 2012 Omnibus Plan
10.2		Form of Senior Executive Performance Share Agreement for 2015 performance share awards under the Total System Services, Inc. 2012 Omnibus Plan
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
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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TOTAL SYSTEM SERVICES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				TOTAL SYSTEM SERVICES, INC.
Date: May 7, 2015				by:		/s/ M. Troy Woods
						M. Troy Woods
						Chairman, President and Chief Executive Officer
Date: May 7, 2015				by:		/s/ Paul M. Todd
						Paul M. Todd
						Senior Executive Vice President and Chief Financial Officer

 

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TOTAL SYSTEM SERVICES, INC.

Exhibit Index

 

Exhibit Number		Description
10.1		Form of Senior Executive Stock Option Agreement for 2015 stock option awards under the Total System Services, Inc. 2012 Omnibus Plan
10.2		Form of Senior Executive Performance Share Agreement for 2015 performance share awards under the Total System Services, Inc. 2012 Omnibus Plan
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
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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EXHIBIT 10.1

TOTAL SYSTEM SERVICES, INC.

SENIOR EXECUTIVE STOCK OPTION AGREEMENT (2015)

THIS AGREEMENT (“Agreement”) is made effective as of February 27, 2015, by and between TOTAL SYSTEM SERVICES, INC., a Georgia corporation (the “Company”), with its principal office at One TSYS Way, Columbus, Georgia, and you (“Option Holder”), an employee of the Company, its Affiliate or its Subsidiary.

W I T N E S S E T H:

WHEREAS, the Board of Directors of the Company has adopted the Total System Services, Inc. 2012 Omnibus Plan (the “Plan”); and

WHEREAS, the Company recognizes the value to it of the services of the Option Holder and intends to provide the Option Holder with added incentive and inducement to contribute to the success of the Company; and

WHEREAS, the Company recognizes the potential benefits of providing employees the opportunity to acquire an equity interest in the Company and to more closely align the personal interests of employees with those of other shareholders; and

WHEREAS, on February 27, 2015, the Compensation Committee of the Board of Directors of the Company approved the grant to the Option Holder effective February 27, 2015 (the “Grant Date”), pursuant to Article 6 of the Plan, of an Option in respect of the number of Shares with an initial economic value equal to the product of (a) the Option Holder’s base salary as of the Grant Date multiplied by (b) 40% of his LTIP multiplier as determined by the Compensation Committee prior to the Grant Date. The Compensation Committee also designated the Option a Nonqualified Stock Option and fixed and determined the Option price and exercise and termination dates as set forth below.

NOW, THEREFORE, in consideration of grant of certain equity interests to you in connection with your employment, and your continued employment, by the Company, its Affiliate or its Subsidiary, the mutual promises and representations herein contained and other good and valuable consideration, it is agreed by and between the parties hereto as follows

1. The terms, provisions and definitions of the Plan are incorporated by reference and made a part hereof. All capitalized terms in this Agreement shall have the same meanings given to such terms in the Plan except where otherwise noted.

2. Subject to and in accordance with the provisions of the Plan, the Company hereby grants to the Option Holder a Nonqualified Stock Option to purchase, on the terms and subject to the conditions hereinafter set forth, all or any part of the aggregate shares of the common stock (par value $0.10 per share) so granted of the Company at the purchase price of $38.20 per Share, exercisable in the amounts and at the times set forth in Section 3 below, unless the Compensation Committee, in its sole and exclusive discretion, shall authorize the Option Holder to exercise all or part of the Option at an earlier date.

3. The Option will vest over the period February 27, 2015 – February 27, 2018 (the “Vesting Period”) in accordance with the following schedule:

 

If employment continues through		Percentage of Option Vested
February 27, 2016		33%
February 27, 2017		67%
February 27, 2018		100%

(a) In the event of Option Holder’s death or total and permanent disability, the Option shall become 100% vested and Option Holder (or the legal representative of Option Holder’s estate or legatee under Option Holder’s will) shall be able to exercise the Option in full for the remainder of the Option’s term.

(b) If Option Holder retires from the Company, its Affiliate or its Subsidiary on or after the date Option Holder attains age 65, or age 62 with 15 or more years of service, Option Holder shall be able to exercise the Option, as follows:

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(i) If Option Holder retires on or before February 27, 2016, the Option will vest and become exercisable for a percentage of the Option, with such percentage to be expressed as the ratio of the number of months since the Grant Date that Option Holder has been employed to 36. Partial months of employment will be counted as full months for purposes of this proration calculation. To the extent the Option is exercisable pursuant to this subparagraph; it will be exercisable for the remainder of the Option’s term.

(ii) If Option Holder retires after February 27, 2016, the Option Holder shall be deemed to have continued employment through the end of the Vesting Period and the Option shall become 67% vested on February 27, 2017 and 100% vested on February 27, 2018, and Option Holder shall be able to exercise the Option in full for the remainder of the Option’s term.

If Option Holder is involuntarily terminated by the Company or its Affiliate or Subsidiary, Option Holder will not be considered to have “retired” for purposes of this Section 3(b), regardless of whether Option Holder’s separation of employment occurs on or after the date Option Holder attains age 65, or age 62 with 15 or more years of service, unless the Committee determines otherwise, in its sole discretion. Furthermore, if Option Holder violates any of the covenants referenced in Section 9, his unvested Options shall be immediately forfeited.

(c) In the event of Option Holder’s separation of employment for any reason other than the reasons listed in Section 3(a) or 3(b), Option Holder shall be able to exercise the vested portion of the Option, determined as of the date of separation of employment, for 90 days following the date of such separation of employment. In the event of a Change of Control (as defined in Section 2.8 of the Plan), any applicable terms of Section 8 will supersede the terms of this Section 3.

Unless sooner terminated as provided in the Plan or in this Agreement, the Option shall terminate, and all rights of the Option Holder hereunder shall expire, on February 26, 2025. In no event may the Option be exercised after February 26, 2025.

4. The Option or any part thereof, may, to the extent that it is vested and exercisable, be exercised in the manner provided in the Plan. Payment of the aggregate Option price for the number of Shares purchased and any withholding taxes shall be made in the manner provided in the Plan.

5. The Option or any part thereof may be exercised during the lifetime of the Option Holder only by the Option Holder and only while the Option Holder is in the employ of the Company, except as otherwise provided in the Plan.

6. Unless otherwise designated by the Compensation Committee, the Option shall not be transferred, assigned, pledged or hypothecated in any way. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of a nontransferable Option or any right or privilege confirmed hereby contrary to the provisions hereof, the Option and the rights and privileges confirmed hereby shall immediately become null and void.

7. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Company’s Shares, any necessary adjustment shall be made in accordance with the provisions of Section 4.4 of the Plan.

8. In the event of a Change of Control (as defined in Section 2.8 of the Plan), the following provisions shall apply to the Option:

(a) If the Company is the surviving entity and any adjustments necessary to preserve the intrinsic value of the Option Holder’s outstanding Option have been made, or the Company’s successor at the time of the Change of Control irrevocably assumes the Company’s obligations under the Plan and this Agreement or replaces the Option Holder’s outstanding Option with stock options having substantially the same intrinsic value and having terms and conditions no less favorable to the Option Holder than those applicable to the Option immediately prior to the Change of Control (collectively, an “Equitable Assumption or Replacement”), and if the Option Holder’s employment is terminated within two years following the date of such Change of Control either (i) by the Company for any reason other than Cause or (ii) by the Option Holder for Good Reason (as the terms “Cause” and “Good Reason” are defined in the Company’s applicable Change of Control Agreement, the provisions of which are incorporated herein by reference), then the Option may be exercised to the extent exercisable upon such termination pursuant to the schedule in Section 3 above. In addition, the Option will also vest and become exercisable for an additional percentage of the Option determined by multiplying (i) the incremental percentage of the Option that has not yet vested and that would have become exercisable under such schedule on the next anniversary date if Option Holder’s employment had not terminated, with such percentage to be

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expressed as a number of Shares, by (ii) the ratio of the number of months since the immediately preceding anniversary date (or since the Grant Date, if the termination occurs prior to February 27, 2016) that Option Holder has been employed to 12. Partial months of employment will be counted as full months for purposes of this proration calculation. To the extent the Option is exercisable pursuant to this Section 8(a), it will be exercisable for the remainder of the Option’s term.

(b) If there is no Equitable Assumption or Replacement, then the Option may be exercised to the extent exercisable upon such Change of Control pursuant to the schedule in Section 3 above. In addition, the Option will also vest and become exercisable for an additional percentage of the Option determined by multiplying (i) the incremental percentage of the Option that has not yet vested and that would have become exercisable under such schedule on the next anniversary date if the Change of Control had not occurred, with such percentage to be expressed as a number of Shares, by (ii) the ratio of the number of months since the immediately preceding anniversary date (or since the Grant Date, if the Change of Control occurs prior to February 27, 2016) through the date of the Change of Control to 12. Partial months of employment will be counted as full months for purposes of this proration calculation.

9. By acceptance of this Option via electronic execution of this Agreement, you agree to the terms and conditions of the Restrictive Covenant Agreement that is attached hereto as Exhibit “A”, the provisions of which are incorporated herein and made a part of this Agreement by this reference.

Any notice to be given to the Company shall be addressed to the General Counsel of the Company at One TSYS Way, Post Office Box 1755, Columbus, Georgia 31901.

10. Nothing herein contained shall affect the right of the Option Holder to participate in and receive benefits under and in accordance with the provisions of any pension, insurance or other benefit plan or program of the Company as in effect from time to time and for which the Option Holder is eligible.

11. Nothing herein contained shall affect the right of the Company, subject to the terms of any written contractual arrangement to the contrary, to terminate the Option Holder’s employment at any time for any reason whatsoever.

12. This Agreement shall be binding upon and inure to the benefit of the Option Holder, his personal representatives, heirs, legatees. However, neither this Agreement nor any rights hereunder shall be assignable or otherwise transferable by the Option Holder except as expressly set forth in this Agreement or in the Plan.

13. If this Award and the Shares acquired upon exercise of this Option are subject to recovery under any law, government regulation or stock exchange listing requirement, this Award and the Shares shall be subject to such deductions and clawback as may be required to be made pursuant to such law, government regulation or stock exchange listing requirement (or any policy adopted by the Company pursuant to any such law, government regulation or stock exchange listing requirement) and the Committee shall require that Option Holder reimburse the Company all or part of any payment or transfer related to this Award and the Shares.

14. Any Shares Option Holder receives pursuant to the exercise of the Option are subject to the TSYS Share Retention Policy for Senior Executives.

15. The Company has issued the Option subject to the foregoing terms and conditions and the provisions of the Plan. Option Holder’s acceptance of the Option shall be made by electronic acknowledgement of this Agreement, and Option Holder agrees that his electronic acknowledgment of this Agreement shall be considered the equivalent of his written signature.

 

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EXHIBIT A

RESTRICTIVE COVENANT AGREEMENT

This RESTRICTIVE COVENANT AGREEMENT (this “Agreement”) is made and entered into by and between, an executive of Total System Services, Inc. or one of its Affiliates or Subsidiaries (‘‘Executive”), and TOTAL SYSTEM SERVICES, INC., a Georgia corporation or one of its Affiliates or Subsidiaries (collectively the “Company’‘). In consideration of the Company’s grant of certain equity interests to you in connection with your employment, and your continued employment, by the Company or one of its Affiliates or Subsidiaries, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, the parties agree as follows:

1. Acknowledgments.

(a) Executive acknowledges that during the course of Executive’s employment with the Company, Executive has had or will have access to Confidential Information (as defined below). Executive understands and agrees that such Confidential Information is of great competitive importance and commercial value to the Company and its affiliates (collectively, the “Company Group”), and that the improper use or disclosure of such Confidential Information by Executive would cause irreparable harm to the Company Group. Accordingly, Executive agrees that the restrictive covenants contained in this Agreement are reasonable, fair, and necessary to protect the Company Group’s legitimate business interests in safeguarding its Confidential Information and that any claim or cause of action of Executive against the Company Group will not constitute a defense to the enforcement of such restrictive covenants.

(b) Executive acknowledges that an important part of Executive’s duties is, has been, or will be to advance the business of the Company Group by directly or through the supervision of others, developing and maintaining substantial relationships with prospective or existing clients of the Company Group and/or developing and maintaining the goodwill of the Company Group associated with (i) an ongoing business, commercial or professional practice, or (ii) a specific geographic location, or (iii) a specific marketing or trade area and/or providing corporate support services for the Company Group including, but not limited to, legal, financial, human resources, technical, communication, and investor relations

(c) Executive acknowledges that in the course of Executive’s employment with the Company, Executive has, does or will customarily and regularly solicit clients or prospective clients and/or customarily and regularly engage in making sales or obtaining contracts for products or services to be performed by others, and/or perform each of the following duties: (i) have the primary duty of managing the enterprise in which the Executive is employed; (ii) customarily and regularly direct the work of two or more employees; and (iii) have the authority to hire or fire other employees or have particular weight given to Executive’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees, and/or by reason of the Company Group’s investment of time, training, money, trust, exposure to the public, or exposure to clients, vendors, or other business relationships has (i) gained a high level of notoriety, fame, reputation, or public persona as the Company Group’s representative or spokesperson or (ii) gained a high level of influence or credibility with the Company Group’s clients, vendors, or other business relationships and/or (iii) become intimately involved in the planning for or direction of the business of the Company Group or a defined unit of the business of the Company Group and/or (iv) obtained selective or specialized skills, knowledge, abilities, or client contacts or information.

2. Protection of Confidential Information.

(a) Non-disclosure of Confidential Information. From and after February 27, 2015, Executive shall hold in confidence all Confidential Information and shall not, either directly or indirectly, use, transmit, copy, publish, reveal, divulge or otherwise disclose or make accessible any Confidential Information to any person or entity without the prior written consent of the General Counsel of the Company. Executive’s obligation of non-disclosure as set forth herein shall continue for so long as the information in question continues to constitute Confidential Information. The restrictions in this section 2 are in addition to and not in lieu of any other obligations of Executive to protect Confidential Information, including, but not limited to, obligations arising under the Company Group’s policies, ethical rules, applicable law, or any other contract or agreement. Nothing in this Agreement is intended to or should be interpreted as diminishing any rights and remedies the Company Group has under applicable law related to the protection of confidential information or trade secrets.

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(b) Definition of Confidential Information. For purposes of this Agreement, “Confidential Information” means data or information relating to the business of the Company Group that has been or will be disclosed to Executive or of which Executive becomes aware as a consequence of or through Executive’s relationship with the Company Group and which has value to the Company Group or, if owned by someone else, has value to that third party, and is not generally known to the Company Group’s competitors. Confidential Information includes, but is not limited to, trade secrets, information regarding clients, contractors and the industry not generally known to the public, strategies, methods, books, records and documents, technical information concerning products, equipment, services and processes, procurement procedures, pricing and pricing techniques, information concerning past, current and prospective clients, investors and business affiliates, pricing strategies and price curves, plans or strategies for expansion or acquisitions, budgets, research, financial and sales data, communications information, evaluations, opinions and interpretations of information and data, marketing and merchandising techniques, electronic databases, models, specifications, computer programs, contracts, bids or proposals, technologies and methods, training methods and processes, organizational structure, personnel information, payments or rates paid to consultants or other service providers, and other such confidential or proprietary information, whether such information is developed in whole or in part by Executive, by others in the Company Group or obtained by the Company Group from third parties, and irrespective of whether such information has been identified by the Company Group as secret or confidential. Confidential Information does not include any data or information that has been voluntarily disclosed to the public by the Company Group (except where such public disclosure has been made by Executive without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means.

(c) Notice to Company Group. In the event Executive is requested or required pursuant to any legal, governmental, or investigatory proceeding or process or otherwise to disclose any Confidential Information, Executive shall promptly notify the General Counsel of the Company in writing (in no event later than five business days prior to the disclosure unless disclosure is required in less than five days, in which event Executive shall notify the Company Group as soon as possible), so that the Company Group may seek a protective order or other appropriate remedy, or, if it chooses, waive compliance with the applicable provision of this Agreement. Executive shall cooperate with the Company Group to preserve the confidentiality of such Confidential Information consistent with applicable law or court order, and shall use Executive’s best efforts to limit any such disclosure to the minimum disclosure necessary to comply with such law or court order.

3. Protection Against Unfair Competition. Executive agrees and covenants that for a period of two (2) years from and after his termination of employment with the Company, Executive shall not, directly or indirectly, whether through Executive or through another person or entity, perform any of the Prohibited Activities (as defined below) in the Territory (as defined below) or any part thereof for or on behalf of Executive or any other person or entity that competes with the Business of the Company Group (as defined below) or any part thereof.

(a) For purposes of this Agreement, Executive’s “Prohibited Activities” means activities of the type conducted, provided, or offered by Executive within two (2) years prior to his termination of employment with the Company, including supervisory, management, operational, business development, maintenance of client relationships, corporate strategy, community relations, public policy, regulatory strategy, sales, marketing, investor relations, financial, accounting, legal, human resource, technical and other similar or related activities.

(b) For purposes of this Agreement, the “Territory” means the United States of America, Mexico, Canada, Europe, and Brazil plus any other geographic area(s) in which Executive is performing services for or on behalf of the Company Group as of the date of Executive’s termination of employment.

(c) For purposes of this Agreement, the “Business of the Company Group” means the business of (i) providing payment processing services to financial and non-financial institutions, (ii) performing services, acquiring solutions and related systems and integrated support services to merchant acquiring and merchants, and related payment services to financial and nonfinancial institutions, and (iii) providing general-purpose reloadable prepaid debit cards and payroll cards and alternative financial services to underbanked consumers and others, or similar or related businesses or activities conducted, authorized, offered or provided by the Company Group within two (2) years prior to the date of Executive’s termination of employment.

4. Non-solicitation of Clients. Executive agrees and covenants that for a period of two (2) years from and after the date of Executive’s termination of employment, Executive shall not solicit or attempt to solicit, directly or by assisting others, any business from any of the Company Group’s clients, including actively sought prospective clients, with whom Executive had Material Contact during Executive’s employment by the Company Group for purposes of providing products or services that are competitive with those provided by the Company Group.

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(a) For purposes of this Agreement, products or services shall be considered competitive with those provided by the Company Group if such products or services are of the type conducted, authorized, offered or provided by the Company Group within two (2) years prior to the date of Executive’s termination of employment.

(b) For purposes of this Agreement, the term “Material Contact” means contact between Executive and each client or potential client (i) with whom Executive dealt on behalf of the Company Group, (ii) whose dealings with the Company Group were coordinated or supervised by Executive, (iii) about whom the Executive obtained Confidential Information in the ordinary course of business as a result of Executive’s association with the Company Group, or (iv) who receives products or services authorized by the Company Group, the sale or possession of which results or resulted in possible compensation, commissions, or earnings for Executive within two (2) years prior to the Executive’s termination of employment.

5. Non-solicitation of Employees. Executive agrees and covenants that for a period of two (2) years from and after the date he terminates employment, Executive shall not solicit or attempt to solicit, directly or by assisting others, any person who was an employee of the Company Group on, or within six (6) months before, the date of such solicitation or attempted solicitation and with whom Executive had contact while employed by, or serving as a director of, the Company, for purposes of inducing such person to leave the employment of the Company Group.

6. Non-disparagement. Executive agrees not to make, publish or communicate to any person or entity or in any public forum (including social media) at any time any defamatory or disparaging remarks, comments or statements concerning any of the Company Group, any of its affiliates, or any of their respective directors, officers and employees. Notwithstanding the foregoing, this section 6 does not in any way, restrict or impede Executive from exercising protected rights to the extent that such rights cannot be waived by agreement or from complying with any applicable law or regulation or a valid order of a court of competent jurisdiction or an authorized government agency.

7. Enforcement. Executive acknowledges and agrees that a breach of any of the restrictive covenants set forth in this Agreement would cause irreparable damage to the Company Group, the exact amount of which would be difficult to determine, and that the remedies at law for any such breach would be inadequate. Accordingly, Executive agrees that, in addition to any other remedy that may be available at law, in equity, or hereunder, the Company Group shall be entitled to specific performance and injunctive relief, without posting bond or other security, to enforce or prevent any breach of any of the restrictive covenants set forth in this Agreement. In any action for injunctive relief, the prevailing party will be entitled to collect reasonable attorneys’ fees and other reasonable costs from the non-prevailing party.

8. Tolling. In the event the enforceability of any of the restrictive covenants in this Agreement are challenged in a claim or counterclaim in court during the time periods set forth in this Agreement for such restrictive covenants, and Executive is not immediately enjoined from breaching any of the restrictive covenants herein, then if a court of competent jurisdiction later finds that the challenged restrictive covenant is enforceable, the time periods set forth in the challenged restrictive covenant(s) shall be deemed tolled upon the filing of the claim or counterclaim in court seeking or challenging the enforceability of this Agreement until the dispute is finally resolved and all periods of appeal have expired; provided, however, that to the extent Executive complies with such restrictive covenant(s) during such challenge, the time periods set forth in the challenged restrictive covenant(s) shall not be deemed tolled.

9. Notification to Subsequent Employer. Executive agrees to notify any subsequent employer of the existence and terms of this Agreement. In addition, Executive authorizes the Company Group to provide a copy of this Agreement to third parties, including but not limited to Executive’s subsequent, anticipated, or possible future employers.

 

10.

Notices.

(a) All notices provided for or required by this Agreement shall be in writing and shall be deemed to have been properly given when sent to the other party by facsimile (confirmation of receipt required) or when received by the other party if mailed by certified or registered mail, return receipt requested, as follows:

 

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(b) Either party hereto may change the address to which notice is to be sent by written notice to the other party in accordance with the provisions of this section 10.

11. Governing Law; Venue. This Agreement shall be deemed to be made in, and in all respects shall be interpreted, construed, and governed by and in accordance with the laws of the State of Georgia, irrespective of its choice-of-law rules. Any action arising under or related to this Agreement, shall be filed exclusively in the state or federal courts with jurisdiction over Muscogee County, Georgia or Gwinnett County, Georgia and each of the parties hereby consents to the jurisdiction and venue of such courts.

12. Assignability. This Agreement is personal to Executive and may not be assigned by Executive. Any purported assignment by Employee shall be null and void from the initial date of the purported assignment. This Agreement shall be assignable by the Company and shall inure to the benefit of the Company and its successors and assigns.

13. Severability. Should any provision of this Agreement be declared or determined by any court of competent jurisdiction to be unenforceable or invalid for any reason, the validity of the remaining parts, terms or provisions of this Agreement shall not be affected thereby and the invalid or unenforceable part, term or provision shall be deemed not to be a part of this Agreement.

14. Third Party Beneficiaries. The parties agree that the Company Group and each member thereof are intended third party beneficiaries of this Agreement, with full rights to enforce this Agreement. Except as stated in the preceding sentence, this Agreement does not confer any rights or remedies upon any person or entity other than the parties to this Agreement and their respective successors and permitted assigns.

15. Modification. No provision of this Agreement may be modified or waived except in writing signed by Executive and a duly authorized representative of the Company. The writing shall specifically reference this Agreement and the provision that the Company and Executive intend to waive or modify. Notwithstanding the foregoing, if it is determined by a court of competent jurisdiction that any restrictive covenant set forth in this Agreement is excessive in duration or scope or is unreasonable or unenforceable, it is the intention of the parties that such restriction may be modified by the court to render it enforceable to the maximum extent permitted by law.

16. Survival. Executive’s obligations under this Agreement shall survive the termination of Executive’s employment for any reason, and shall thereafter be enforceable whether or not such termination is claimed or found to be wrongful or to constitute or result in a breach of any contract or of any other duty owed or claimed to be owed to Executive by the Company.

17. Electronic Signature. Executive’s acceptance and execution of this Agreement shall be made by electronic acknowledgment, and Executive agrees that his or her electronic acknowledgment of this Agreement shall be considered the equivalent of his or her written signature.

 

EXHIBIT 10.2

TOTAL SYSTEM SERVICES, INC.

SENIOR EXECUTIVE PERFORMANCE SHARE AGREEMENT (2015-2017)

Total System Services, Inc. (“Company”) confirms that on February 27, 2015, the Compensation Committee of the Board of Directors of the Company approved, effective February 27, 2015 (the “Grant Date”), the award of the opportunity to receive Performance Shares with an initial economic value equal to the product of (a) your base salary on the Grant Date multiplied by (b) 60% of your LTIP multiplier as determined by the Committee prior to the Grant Date (such initial economic value being the “2015-2017 Performance Opportunity”), subject to adjustment based on specified performance measures for the period 2015-2017. The 2015-2017 Performance Opportunity will be converted into Performance Shares pursuant to the provisions of Section 1 below, with thirty percent (30%) of the 2015-2017 Performance Opportunity converted pursuant to Section 1(d) and seventy percent (70%) converted pursuant to Section 1(e).

In consideration of the Company’s grant of certain equity interests to you in connection with your employment, and your continued employment, by TSYS or one of its Affiliates or Subsidiaries, you agree that the Performance Shares that you receive in connection with this 2015-2017 Performance Opportunity, if any, are subject to the terms and conditions of this Performance Share Agreement (this “Agreement”) and the Total System Services, Inc. 2012 Omnibus Plan (the “Plan”) and that you are bound by the terms and conditions set forth in this Agreement, including the covenants set forth in Section 4 of this Agreement. Any other capitalized word used in this Agreement and not defined in this Agreement, including each form of that word, is defined in the Plan.

1. Standard Performance Terms.

(a) In General. The terms of this Section 1 shall be referred to as the “Standard Performance Terms” and will apply to your Performance Shares except in so far as Sections 2 (Change of Employment Status) or 3 (Change of Control) apply.

(b) Performance Period. The number of Performance Shares you receive in connection with the 2015-2017 Performance Opportunity will be determined on the basis of the Company’s performance during the performance period beginning on January 1, 2015 and ending on December 31, 2017 (the “Performance Period”).

(c) Initial Performance Shares. The 2015-2017 Performance Opportunity initially will equal a number of Performance Shares determined by dividing the 2015-2017 Performance Opportunity by the closing price of the Company’s Shares on the New York Stock Exchange on the Grant Date (your “Initial Performance Shares”).

(d) Performance Goals Based on Relative TSR. The Committee will set the performance goals for thirty percent (30%) of your Initial Performance Shares based on the percentile ranking of the Company’s total shareholder return performance (“TSR”) relative to the S&P 500, determined as of February 27, 2015, subject to adjustment (“Relative TSR”) for the Performance Period. Within 90 days after the beginning of the Performance Period, the Committee will establish a target Relative TSR, as well as minimum and maximum threshold levels of Relative TSR.

After the end of the Performance Period, the Committee will certify the Relative TSR and the number of Performance Shares payable based on the Company’s performance against the pre-established target, minimum and maximum threshold levels of Relative TSR as set forth in this Section 1(d).

 

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If the Relative TSR equals the target for the Performance Period, then the number of Performance Shares payable will equal 100% of your Initial Performance Shares that are subject to this Section 1(d);

 

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If the Relative TSR equals the minimum threshold for the Performance Period, then the number of Performance Shares payable will equal 50% of your Initial Performance Shares that are subject to this Section 1(d);

 

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If the Relative TSR equals or exceeds the maximum threshold for the Performance Period, then the number of Performance Shares payable will equal 200% of your Initial Performance Shares that are subject to this Section 1(d);

 

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If the Relative TSR falls between the minimum threshold and the target for the Performance Period, or between the target and the maximum threshold for the Performance Period, then the percentage of your Initial Performance Shares that are subject to this Section 1(d) and the number of Performance Shares that are payable will be mathematically interpolated; and

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If the Relative TSR is less than the minimum threshold for the Performance Period, then none of your Initial Performance Shares that are subject to this Section 1(d) will be payable.

“S&P 500” generally means the companies constituting the Standard & Poor’s 500 Index as of the beginning of the Performance Period (including the Company) and which continue to be actively traded under the same ticker symbol on an established securities market though the end of the Performance Period. A component company of the S&P 500 that is acquired at any time during the Performance Period (i.e., company and ticker symbol disappear) will be eliminated from the S&P 500 for the entire Performance Period. A component company of the S&P 500 filing for bankruptcy protection (and thus no longer publicly traded) at any time during the Performance Period will be deemed to remain in the S&P 500 (at an assumed TSR of minus 100%).

“TSR” means with respect to the Company or other S&P 500 component company: the change in the closing market price of its common stock (as quoted in the principal market on which it is traded), plus dividends and other distributions paid on such common stock during the Performance Period, divided by the closing market price of its common stock on the last business day immediately preceding the Performance Period. The TSR for the common stock of an S&P 500 component company shall be adjusted to take into account stock splits, reverse stock splits, and special dividends that occur during the Performance Period, and assumes that all cash dividends and cash distributions are immediately reinvested in common stock of the entity using the closing market price on the dividend payment date.

(e) Performance Goals Based on Adjusted EPS Growth. The Committee will set the performance goals for seventy percent (70%) of your Initial Performance Shares based on the compounded annual growth rate of the Company’s adjusted earnings per share (as reflected on the Company’s financial statements) for the Performance Period (the “Adjusted EPS Growth”), subject to adjustment as provided in Section 1(f). Within 90 days after the beginning of the Performance Period, the Committee will establish a target Adjusted EPS Growth, as well as minimum and maximum threshold levels of Adjusted EPS Growth.

After the end of the Performance Period, the Committee will certify the Adjusted EPS Growth and the number of Performance Shares payable based on the Company’s performance against the pre-established target, minimum and maximum threshold levels of Adjusted EPS Growth as follows:

 

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If the Adjusted EPS Growth equals the target for the Performance Period, then the number of Performance Shares payable will equal 100% of your Initial Performance Shares that are subject to this Section 1(e);

 

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If the Adjusted EPS Growth equals the minimum threshold for the Performance Period, then the number of Performance Shares payable will equal 50% of your Initial Performance Shares that are subject to this Section 1(e);

 

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If the Adjusted EPS Growth equals or exceeds the maximum threshold for the Performance Period, then the number of Performance Shares payable will equal 200% of your Initial Performance Shares that are subject to this Section 1(e);

 

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If the Adjusted EPS Growth falls between the minimum threshold and the target for the Performance Period, or between the target and the maximum threshold for the Performance Period, then the percentage of your Initial Performance Shares that are subject to this Section 1(e) and the number of Performance Shares that are payable will be mathematically interpolated; and

 

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If the Adjusted EPS Growth is less than the minimum threshold for the Performance Period, then none of your Initial Performance Shares that are subject to this Section 1(e) will be payable.

(f) Adjustments. In determining the Adjusted EPS Growth, the Committee will (i) exclude the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results; (ii) exclude the effect of differences in currency rates compared to management’s operating plan (constant currency); (iii) exclude foreign currency exchange gains or losses included in non-operating income; and (iv) exclude the effect of extraordinary non-recurring items as described in ASC 225 and/or in management’s discussion and analysis of financial condition and results of operations appearing in the Company’s annual report to shareholders.

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2. Change of Employment Status. Except as otherwise provided in this Section 2 or Section 3, you must remain employed with the Company, its Affiliate or its Subsidiary through the Performance Period in order to fully vest in your Performance Shares. For purposes of this Section 2, your transfer between the Company and its Affiliate or Subsidiary, or among Affiliates and Subsidiaries, will not be a termination of employment. In the event of a Change of Control, any applicable terms of Section 3 (Change of Control) will supersede the terms of this Section 2.

(a) Long-Term Disability or Death. If your employment with the Company, its Affiliate or its Subsidiary terminates during the Performance Period due to (i) your long-term disability (determined on the basis of your qualification for long-term disability benefits under a plan or arrangement offered by the Company, its Affiliate or its Subsidiary) or (ii) your death, the number of Performance Shares that you, or your beneficiary, will be entitled to receive will equal the product of the number of your Initial Performance Shares multiplied by the ratio of the number of months you were employed during the Performance Period to the total number of months in the Performance Period (partial months of employment will be counted as full number of months).

(b) Retirement. If you retire from the Company, its Affiliate or its Subsidiary on or after the date you attain (i) age 65 or (ii) age 62 with 15 or more years of service, the Standard Performance Terms will continue to apply through the end of the Performance Period, and the number of Performance Shares you receive at the end of the Performance Period will be determined as follows:

(1) If you retire before February 27, 2016, the number of Performance Shares you receive at the end of the Performance Period will be prorated based on the ratio of the number of months you were employed during the Performance Period to the total number of months in the Performance Period (partial months of employment will be counted as full number of months); and

(2) If you retire on or after February 27, 2016, you will be treated as if you had remained employed through the end of the Performance Period for the purpose of determining the number of shares you receive at the end of the Performance Period.

If you are involuntarily terminated by the Company, its Affiliate or its Subsidiary, you will not be considered to have “retired” for purposes of this Section 2(b), regardless of whether your termination occurs on or after the date you attained (i) age 65 or (ii) age 62 with 15 or more years of service, unless the Committee determines otherwise, in its sole discretion. Moreover, if you violate any of the covenants set forth in Section 4, your Initial Performance Shares will be forfeited immediately.

(c) Other Termination of Employment. Except as set forth in Section 2(a) or (b), if you voluntarily terminate employment or if you are involuntarily terminated by the Company, its Affiliate or its Subsidiary before the end of the Performance Period, your Initial Performance Shares will be forfeited immediately.

3. Change of Control. In the event of a Change of Control in which the Company is the surviving entity or in which the Company’s successor assumes the Company’s obligations under this Agreement, or if the Performance Shares are otherwise equitably converted or substituted, and if your employment is subsequently terminated within two (2) years following the date of such Change of Control (and before the end of the Performance Period) either (a) by the Company for any reason other than Cause or (b) by you for Good Reason (as the terms “Cause” and “Good Reason” are defined in the Company’s applicable Change of Control Plan Document, the provisions of which are incorporated herein by reference), then your Initial Performance Shares will be deemed to have been earned as of the date of termination and paid out on a pro rata basis as follows:

The number of Performance Shares you receive will equal the product of the number of your Initial Performance Shares multiplied by the ratio of the number of months you were employed during the Performance Period to the total number of months in the Performance Period (partial months of employment will be counted as full number of months).

In the event of a Change of Control in which the Company’s successor does not assume the Company’s obligations under this Agreement, or the Performance Shares are not otherwise equitably converted or substituted, your Initial Performance Shares will be deemed to have been earned as of the effective date of the Change of Control and paid out on a pro rata basis as follows:

The number of Performance Shares you receive will equal the product of the number of your Initial Performance Shares multiplied by the ratio of the number of months you were employed during the Performance Period to the total number of months in the Performance Period (partial months of employment will be counted as full number of months).

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4. Restrictive Covenants. By electronic execution of this Agreement, you agree to the terms and conditions of the Restrictive Covenant Agreement that is attached hereto as Exhibit “A”, the provisions of which are incorporated herein and made a part of this Agreement by this reference.

5. Nontransferability of Awards. Except as provided in Section 6 or as otherwise permitted by the Committee, you may not sell, transfer, pledge, assign or otherwise alienate or hypothecate any of your Performance Shares, and all rights with respect to your Performance Shares are exercisable during your lifetime only by you.

6. Beneficiary Designation. You may name any beneficiary or beneficiaries (who may be named contingently or successively) who may then exercise any right under this Agreement in the event of your death. Each beneficiary designation for such purpose will revoke all such prior designations. Beneficiary designations must be properly completed on a form prescribed by the Committee and must be filed with the Company during your lifetime. If you have not designated a beneficiary, your rights under this Agreement will pass to and may be exercised by your estate.

7. Tax Withholding. The Company will withhold from any payment made under this Agreement or any other amounts payable to you by the Company an amount sufficient to satisfy the minimum statutory Federal, state, and local tax withholding requirements relating to such payment.

8. Adjustments. In accordance with Section 4.4 of the Plan, the Committee will make appropriate adjustments in the terms and conditions of your Performance Shares in recognition of a corporate event or transaction affecting the Company (such as a common stock dividend, common stock split, recapitalization, payment of an extraordinary dividend, merger, consolidation, combination, spin-off, distribution of assets to stockholders other than ordinary cash dividends, exchange of shares, or other similar corporate change), to prevent unintended dilution or enlargement of the potential benefits of your Performance Shares. The Committee’s determinations pursuant to this Section 8 will be conclusive.

9. Timing and Form of Payment.

(a) If Shares are to be paid to you, you will receive evidence of ownership of those Shares.

(b) If payment is due and payable under the Standard Performance Terms or under Section 2(b), payment will be made in Shares in 2018 as soon as administratively practicable following the date the Committee certifies the Relative TSR and Adjusted EPS Growth, and the number of Performance Shares payable based on the applicable pre-established target, minimum threshold and maximum threshold annual growth rate percentages.

(c) The intent of the parties is that payments under this Agreement comply with or be exempt from Section 409A of the Code and the regulations and guidance promulgated thereunder (collectively “Code Section 409A”) and the Company shall have complete discretion to interpret and construe this Agreement in any manner that establishes an exemption from (or compliance with) the requirements of Code Section 409A. If for any reason, such as imprecision in drafting, any provision of this Agreement does not accurately reflect its intended establishment of an exemption from (or compliance with) Code Section 409A, as demonstrated by consistent interpretations or other evidence of intent, such provision shall be considered ambiguous as to its exemption from (or compliance with) Code Section 409A and shall be interpreted by the Company in a manner consistent with such intent, as determined in the discretion of the Company. A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement unless such termination is also a “separation from service” within the meaning of Code Section 409A, and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “such a separation from service.” Any provision of this Agreement to the contrary notwithstanding, if the Company determines that you are a “specified employee,” within the meaning of Code Section 409A, then to the extent any payment that you are entitled to under this Agreement on account of your separation from service would be considered nonqualified deferred compensation under Code Section 409A, such payment shall be paid or provided at the date which is the earlier of (i) six (6) months and one day after such separation from service and (ii) the date of your death (the “Delay Period”). Upon the expiration of the Delay Period, all payments delayed pursuant to this Section 9(c) shall be paid in a lump-sum, without interest, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

 

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10. Dividend Equivalents. The Initial Performance Shares will be credited with dividend equivalents equal to the amount of cash dividend payments that would have otherwise been paid if the shares of the Company’s common stock represented by the Initial Performance Shares (including deemed reinvested additional shares attributable to the Initial Performance Shares pursuant to this paragraph) were actually outstanding (the “Dividend Equivalents”). These Dividend Equivalents will be deemed to be reinvested in additional shares of the Company’s common stock determined by dividing the deemed cash dividend amount by the Fair Market Value of a share of the Company’s common stock on the applicable dividend payment date. Such credited amounts will be added to the Initial Performance Shares and will vest or be forfeited in accordance with Section 2 or 3, as applicable, based on the vesting or forfeiture of the Initial Performance Shares to which they are attributable. In addition, the Initial Performance Shares will be credited with any dividends or distributions that are paid in shares of the Company’s common stock represented by the Initial Performance Shares and will otherwise be adjusted by the Committee for other capital or corporate events as provided for in the Plan.

11. No Guarantee of Employment. This Agreement is not a contract of employment and it is not a guarantee of employment for life or any period of time. Nothing in this Agreement interferes with or limits in any way the right of the Company, its Affiliate or its Subsidiary to terminate your employment at any time. This Agreement does not give you any right to continue in the employ of the Company, its Affiliate or its Subsidiary.

12. Governing Law; Choice of Forum. This Agreement will be construed in accordance with and governed by the laws of the State of Georgia, the state in which the Company is incorporated, without giving effect to the principles of conflicts of law of that state. Any action to enforce this Agreement or any action otherwise regarding this Agreement must be brought in a court in the State of Georgia, to which jurisdiction the Company and you consent.

13. Miscellaneous. For purposes of this Agreement, “Committee” includes any direct or indirect delegate of the Committee (to the extent permitted by Code Section 162(m)), and, unless otherwise specified herein, the word “Section” refers to a Section in this Agreement. The Committee has absolute discretion to interpret and make determinations under this Agreement. Any determination or interpretation by the Committee pursuant to this Agreement will be final and conclusive. In the event of a conflict between any term of this Agreement and the terms of the Plan, the terms of the Plan control. This Agreement and the Plan represent the entire agreement between you and the Company, and you and all Affiliates or Subsidiaries, regarding your Performance Shares. No promises, terms, or agreements of any kind regarding your Performance Shares that are not set forth, or referred to, in this Agreement or in the Plan are part of this Agreement. In the event any provision of this Agreement is held illegal or invalid, the rest of this Agreement will remain enforceable. If you are an Employee of an Affiliate or Subsidiary, your Performance Shares are being provided to you by the Company on behalf of that Affiliate or Subsidiary, and the value of your Performance Shares will be considered a compensation obligation of that Affiliate or Subsidiary. Your Performance Shares are not Shares and do not give you the rights of a holder of Shares. The issuance of Shares pursuant to your Performance Shares is subject to all applicable laws, rules and regulations, and to any approvals by any governmental agencies or national securities exchanges as may be required. No Shares will be issued if that issuance would result in a violation of applicable law, including the federal securities laws and any applicable state or foreign securities laws.

14. Equity Recovery. If this Award and the Performance Shares or Shares you receive pursuant to this Agreement are subject to recovery under any law, government regulation or stock exchange listing requirement, the Award, the Performance Shares, and the Shares shall be subject to such deductions and clawback as may be required to be made pursuant to such law, government regulation or stock exchange listing requirement (or any policy adopted by the Company pursuant to any such law, government regulation or stock exchange listing requirement and the Committee shall require that you reimburse the Company all or part of any payment or transfer related to this Award, the Performance Shares and the Shares.

15. Share Retention Policy. Any Shares you receive pursuant to this Agreement are subject to the TSYS Share Retention Policy for Senior Executives.

16. Amendments. The Committee has the exclusive right to amend this Agreement as long as the amendment does not adversely affect your 2015-2017 Performance Opportunity in any material way (without your written consent) and is otherwise consistent with the Plan. The Company will give written notice to you (or, in the event of your death, to your beneficiary or estate) of any amendment as promptly as practicable after its adoption.

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17. Electronic Signature. Your acceptance and execution of this Agreement shall be made by electronic acknowledgement, and you agree that your electronic acknowledgment of this Agreement shall be considered the equivalent of your written signature.

 

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EXHIBIT A

RESTRICTIVE COVENANT AGREEMENT

This RESTRICTIVE COVENANT AGREEMENT (this “Agreement”) is made and entered into by and between, an executive of Total System Services, Inc. or one of its Affiliates or Subsidiaries (‘‘Executive”), and TOTAL SYSTEM SERVICES, INC., a Georgia corporation or one of its Affiliates or Subsidiaries (collectively the “Company’‘). In consideration of the Company’s grant of certain equity interests to you in connection with your employment, and your continued employment, by the Company or one of its Affiliates or Subsidiaries, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties, the parties agree as follows:

1. Acknowledgments.

(a) Executive acknowledges that during the course of Executive’s employment with the Company, Executive has had or will have access to Confidential Information (as defined below). Executive understands and agrees that such Confidential Information is of great competitive importance and commercial value to the Company and its affiliates (collectively, the “Company Group”), and that the improper use or disclosure of such Confidential Information by Executive would cause irreparable harm to the Company Group. Accordingly, Executive agrees that the restrictive covenants contained in this Agreement are reasonable, fair, and necessary to protect the Company Group’s legitimate business interests in safeguarding its Confidential Information and that any claim or cause of action of Executive against the Company Group will not constitute a defense to the enforcement of such restrictive covenants.

(b) Executive acknowledges that an important part of Executive’s duties is, has been, or will be to advance the business of the Company Group by directly or through the supervision of others, developing and maintaining substantial relationships with prospective or existing clients of the Company Group and/or developing and maintaining the goodwill of the Company Group associated with (i) an ongoing business, commercial or professional practice, or (ii) a specific geographic location, or (iii) a specific marketing or trade area and/or providing corporate support services for the Company Group including, but not limited to, legal, financial, human resources, technical, communication, and investor relations

(c) Executive acknowledges that in the course of Executive’s employment with the Company, Executive has, does or will customarily and regularly solicit clients or prospective clients and/or customarily and regularly engage in making sales or obtaining contracts for products or services to be performed by others, and/or perform each of the following duties: (i) have the primary duty of managing the enterprise in which the Executive is employed; (ii) customarily and regularly direct the work of two or more employees; and (iii) have the authority to hire or fire other employees or have particular weight given to Executive’s suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees, and/or by reason of the Company Group’s investment of time, training, money, trust, exposure to the public, or exposure to clients, vendors, or other business relationships has (i) gained a high level of notoriety, fame, reputation, or public persona as the Company Group’s representative or spokesperson or (ii) gained a high level of influence or credibility with the Company Group’s clients, vendors, or other business relationships and/or (iii) become intimately involved in the planning for or direction of the business of the Company Group or a defined unit of the business of the Company Group and/or (iv) obtained selective or specialized skills, knowledge, abilities, or client contacts or information.

2. Protection of Confidential Information.

(a) Non-disclosure of Confidential Information. From and after February 27, 2015, Executive shall hold in confidence all Confidential Information and shall not, either directly or indirectly, use, transmit, copy, publish, reveal, divulge or otherwise disclose or make accessible any Confidential Information to any person or entity without the prior written consent of the General Counsel of the Company. Executive’s obligation of non-disclosure as set forth herein shall continue for so long as the information in question continues to constitute Confidential Information. The restrictions in this section 2 are in addition to and not in lieu of any other obligations of Executive to protect Confidential Information, including, but not limited to, obligations arising under the Company Group’s policies, ethical rules, applicable law, or any other contract or agreement. Nothing in this Agreement is intended to or should be interpreted as diminishing any rights and remedies the Company Group has under applicable law related to the protection of confidential information or trade secrets.

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(b) Definition of Confidential Information. For purposes of this Agreement, “Confidential Information” means data or information relating to the business of the Company Group that has been or will be disclosed to Executive or of which Executive becomes aware as a consequence of or through Executive’s relationship with the Company Group and which has value to the Company Group or, if owned by someone else, has value to that third party, and is not generally known to the Company Group’s competitors. Confidential Information includes, but is not limited to, trade secrets, information regarding clients, contractors and the industry not generally known to the public, strategies, methods, books, records and documents, technical information concerning products, equipment, services and processes, procurement procedures, pricing and pricing techniques, information concerning past, current and prospective clients, investors and business affiliates, pricing strategies and price curves, plans or strategies for expansion or acquisitions, budgets, research, financial and sales data, communications information, evaluations, opinions and interpretations of information and data, marketing and merchandising techniques, electronic databases, models, specifications, computer programs, contracts, bids or proposals, technologies and methods, training methods and processes, organizational structure, personnel information, payments or rates paid to consultants or other service providers, and other such confidential or proprietary information, whether such information is developed in whole or in part by Executive, by others in the Company Group or obtained by the Company Group from third parties, and irrespective of whether such information has been identified by the Company Group as secret or confidential. Confidential Information does not include any data or information that has been voluntarily disclosed to the public by the Company Group (except where such public disclosure has been made by Executive without authorization) or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means.

(c) Notice to Company Group. In the event Executive is requested or required pursuant to any legal, governmental, or investigatory proceeding or process or otherwise to disclose any Confidential Information, Executive shall promptly notify the General Counsel of the Company in writing (in no event later than five business days prior to the disclosure unless disclosure is required in less than five days, in which event Executive shall notify the Company Group as soon as possible), so that the Company Group may seek a protective order or other appropriate remedy, or, if it chooses, waive compliance with the applicable provision of this Agreement. Executive shall cooperate with the Company Group to preserve the confidentiality of such Confidential Information consistent with applicable law or court order, and shall use Executive’s best efforts to limit any such disclosure to the minimum disclosure necessary to comply with such law or court order.

3. Protection Against Unfair Competition. Executive agrees and covenants that for a period of two (2) years from and after his termination of employment with the Company, Executive shall not, directly or indirectly, whether through Executive or through another person or entity, perform any of the Prohibited Activities (as defined below) in the Territory (as defined below) or any part thereof for or on behalf of Executive or any other person or entity that competes with the Business of the Company Group (as defined below) or any part thereof.

(a) For purposes of this Agreement, Executive’s “Prohibited Activities” means activities of the type conducted, provided, or offered by Executive within two (2) years prior to his termination of employment with the Company, including supervisory, management, operational, business development, maintenance of client relationships, corporate strategy, community relations, public policy, regulatory strategy, sales, marketing, investor relations, financial, accounting, legal, human resource, technical and other similar or related activities.

(b) For purposes of this Agreement, the “Territory” means the United States of America, Mexico, Canada, Europe, and Brazil plus any other geographic area(s) in which Executive is performing services for or on behalf of the Company Group as of the date of Executive’s termination of employment.

(c) For purposes of this Agreement, the “Business of the Company Group” means the business of (i) providing payment processing services to financial and non-financial institutions, (ii) performing services, acquiring solutions and related systems and integrated support services to merchant acquiring and merchants, and related payment services to financial and nonfinancial institutions, and (iii) providing general-purpose reloadable prepaid debit cards and payroll cards and alternative financial services to underbanked consumers and others, or similar or related businesses or activities conducted, authorized, offered or provided by the Company Group within two (2) years prior to the date of Executive’s termination of employment.

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4. Non-solicitation of Clients. Executive agrees and covenants that for a period of two (2) years from and after the date of Executive’s termination of employment, Executive shall not solicit or attempt to solicit, directly or by assisting others, any business from any of the Company Group’s clients, including actively sought prospective clients, with whom Executive had Material Contact during Executive’s employment by the Company Group for purposes of providing products or services that are competitive with those provided by the Company Group.

(a) For purposes of this Agreement, products or services shall be considered competitive with those provided by the Company Group if such products or services are of the type conducted, authorized, offered or provided by the Company Group within two (2) years prior to the date of Executive’s termination of employment.

(b) For purposes of this Agreement, the term “Material Contact” means contact between Executive and each client or potential client (i) with whom Executive dealt on behalf of the Company Group, (ii) whose dealings with the Company Group were coordinated or supervised by Executive, (iii) about whom the Executive obtained Confidential Information in the ordinary course of business as a result of Executive’s association with the Company Group, or (iv) who receives products or services authorized by the Company Group, the sale or possession of which results or resulted in possible compensation, commissions, or earnings for Executive within two (2) years prior to the Executive’s termination of employment.

5. Non-solicitation of Employees. Executive agrees and covenants that for a period of two (2) years from and after the date he terminates employment, Executive shall not solicit or attempt to solicit, directly or by assisting others, any person who was an employee of the Company Group on, or within six (6) months before, the date of such solicitation or attempted solicitation and with whom Executive had contact while employed by, or serving as a director of, the Company, for purposes of inducing such person to leave the employment of the Company Group.

6. Non-disparagement. Executive agrees not to make, publish or communicate to any person or entity or in any public forum (including social media) at any time any defamatory or disparaging remarks, comments or statements concerning any of the Company Group, any of its affiliates, or any of their respective directors, officers and employees. Notwithstanding the foregoing, this section 6 does not in any way, restrict or impede Executive from exercising protected rights to the extent that such rights cannot be waived by agreement or from complying with any applicable law or regulation or a valid order of a court of competent jurisdiction or an authorized government agency.

7. Enforcement. Executive acknowledges and agrees that a breach of any of the restrictive covenants set forth in this Agreement would cause irreparable damage to the Company Group, the exact amount of which would be difficult to determine, and that the remedies at law for any such breach would be inadequate. Accordingly, Executive agrees that, in addition to any other remedy that may be available at law, in equity, or hereunder, the Company Group shall be entitled to specific performance and injunctive relief, without posting bond or other security, to enforce or prevent any breach of any of the restrictive covenants set forth in this Agreement. In any action for injunctive relief, the prevailing party will be entitled to collect reasonable attorneys’ fees and other reasonable costs from the non-prevailing party.

8. Tolling. In the event the enforceability of any of the restrictive covenants in this Agreement are challenged in a claim or counterclaim in court during the time periods set forth in this Agreement for such restrictive covenants, and Executive is not immediately enjoined from breaching any of the restrictive covenants herein, then if a court of competent jurisdiction later finds that the challenged restrictive covenant is enforceable, the time periods set forth in the challenged restrictive covenant(s) shall be deemed tolled upon the filing of the claim or counterclaim in court seeking or challenging the enforceability of this Agreement until the dispute is finally resolved and all periods of appeal have expired; provided, however, that to the extent Executive complies with such restrictive covenant(s) during such challenge, the time periods set forth in the challenged restrictive covenant(s) shall not be deemed tolled.

9. Notification to Subsequent Employer. Executive agrees to notify any subsequent employer of the existence and terms of this Agreement. In addition, Executive authorizes the Company Group to provide a copy of this Agreement to third parties, including but not limited to Executive’s subsequent, anticipated, or possible future employers.

10. Notices.

(a) All notices provided for or required by this Agreement shall be in writing and shall be deemed to have been properly given when sent to the other party by facsimile (confirmation of receipt required) or when received by the other party if mailed by certified or registered mail, return receipt requested, as follows:

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(b) Either party hereto may change the address to which notice is to be sent by written notice to the other party in accordance with the provisions of this section 10.

11. Governing Law; Venue. This Agreement shall be deemed to be made in, and in all respects shall be interpreted, construed, and governed by and in accordance with the laws of the State of Georgia, irrespective of its choice-of-law rules. Any action arising under or related to this Agreement, shall be filed exclusively in the state or federal courts with jurisdiction over Muscogee County, Georgia or Gwinnett County, Georgia and each of the parties hereby consents to the jurisdiction and venue of such courts.

12. Assignability. This Agreement is personal to Executive and may not be assigned by Executive. Any purported assignment by Employee shall be null and void from the initial date of the purported assignment. This Agreement shall be assignable by the Company and shall inure to the benefit of the Company and its successors and assigns.

13. Severability. Should any provision of this Agreement be declared or determined by any court of competent jurisdiction to be unenforceable or invalid for any reason, the validity of the remaining parts, terms or provisions of this Agreement shall not be affected thereby and the invalid or unenforceable part, term or provision shall be deemed not to be a part of this Agreement.

14. Third Party Beneficiaries. The parties agree that the Company Group and each member thereof are intended third party beneficiaries of this Agreement, with full rights to enforce this Agreement. Except as stated in the preceding sentence, this Agreement does not confer any rights or remedies upon any person or entity other than the parties to this Agreement and their respective successors and permitted assigns.

15. Modification. No provision of this Agreement may be modified or waived except in writing signed by Executive and a duly authorized representative of the Company. The writing shall specifically reference this Agreement and the provision that the Company and Executive intend to waive or modify. Notwithstanding the foregoing, if it is determined by a court of competent jurisdiction that any restrictive covenant set forth in this Agreement is excessive in duration or scope or is unreasonable or unenforceable, it is the intention of the parties that such restriction may be modified by the court to render it enforceable to the maximum extent permitted by law.

16. Survival. Executive’s obligations under this Agreement shall survive the termination of Executive’s employment for any reason, and shall thereafter be enforceable whether or not such termination is claimed or found to be wrongful or to constitute or result in a breach of any contract or of any other duty owed or claimed to be owed to Executive by the Company.

17. Electronic Signature. Executive’s acceptance and execution of this Agreement shall be made by electronic acknowledgment, and Executive agrees that his or her electronic acknowledgment of this Agreement shall be considered the equivalent of his or her written signature.

 

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, M. Troy Woods, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Total System Services, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 7, 2015						/s/ M. Troy Woods
						M. Troy Woods
						Chairman, President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Paul M. Todd, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Total System Services, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 7, 2015						/s/ Paul M. Todd
						Paul M. Todd
						Senior Executive Vice President and
						Chief Financial Officer

EXHIBIT 32

CERTIFICATION OF PERIODIC REPORT

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, M. Troy Woods, the Chairman, President and Chief Executive Officer of Total System Services, Inc. (the “Company”), and Paul M. Todd, the Senior Executive Vice President and Chief Financial Officer of the Company, hereby certify that, to the best of his knowledge:

 

(1)	The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 (the “Report”) fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934; and

 

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

May 7, 2015						/s/ M. Troy Woods
						M. Troy Woods
						Chairman, President and Chief Executive Officer
May 7, 2015						/s/ Paul M. Todd
						Paul M. Todd
						Senior Executive Vice President
						and Chief Financial Officer

This certification “accompanies” the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q, irrespective of any general incorporation language contained in such filing).