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, 2003
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
______________________________________________
[T|SYS| LOGO OMITTED]
Total System Services, Inc.
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Georgia 58-1493818
_______________________________________________________________________________
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
1600 First Avenue, 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF: May 14, 2003
- ---------------------------------------- -------------------------------------
Common Stock, $.10 par value 196,621,470
[T|SYS| LOGO OMITTED]
TOTAL SYSTEM SERVICES, INC.
INDEX
Page
Number
------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2003 (unaudited) and December 31, 2002 ........................... 2
Consolidated Statements of Income (unaudited) - Three months ended March 31, 2003 and 2002 ............... 4
Consolidated Statements of Cash Flows (unaudited) - Three months ended March 31, 2003 and 2002 ........... 5
Notes to Unaudited Consolidated Financial Statements ..................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......................................... 37
Item 4. Management's Analysis of Disclosure Controls and Procedures ........................................ 39
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ................................................................... 40
Signatures ................................................................................................... 41
Certifications ............................................................................................... 42
- 1 -
TOTAL SYSTEM SERVICES, INC.
Part I - Financial Information
Consolidated Balance Sheets
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (includes $106.6 million and $85.7 million
on deposit with a related party at 2003 and 2002, respectively) $ 138,240,738 109,171,206
Restricted cash (includes $5.0 million and $4.0 million on deposit with
a related party at 2003 and 2002, respectively) 4,961,222 4,035,052
Accounts receivable, net of allowance for doubtful accounts and billing
adjustments of $7.6 million and $8.0 million at 2003 and 2002, respectively 126,178,305 121,439,387
Deferred income tax assets 4,501,241 8,785,539
Prepaid expenses and other current assets 24,973,278 22,547,590
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 298,854,784 265,978,774
Property and equipment, less accumulated depreciation and amortization of
$131.9 million and $127.8 million at 2003 and 2002, respectively 120,102,792 120,835,260
Computer software, less accumulated amortization of $159.9 million and
$149.6 million at 2003 and 2002, respectively 202,971,311 200,297,026
Contract acquisition costs 127,476,997 123,728,968
Other assets 79,423,155 72,027,482
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 828,829,039 782,867,510
============================================
- 2 -
Consolidated Balance Sheets (continued)
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 10,858,537 10,365,836
Accrued salaries and employee benefits 16,687,543 43,314,882
Current portion of long-term debt and obligations under capital leases 65,673 68,110
Billings in excess of costs on uncompleted contracts 29,721,990 -
Other current liabilities (includes $2.9 million and $2.9 million payable to
related parties at 2003 and 2002, respectively) 67,085,721 60,232,889
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 124,419,464 113,981,717
Long-term debt and obligations under capital leases, excluding current portion 45,426 67,354
Accounts payable 375,000 562,500
Deferred income tax liabilities 71,759,091 63,306,186
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 196,598,981 177,917,757
- ---------------------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiary 2,858,644 2,743,863
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock - $.10 par value. Authorized 600,000,000 shares; 197,254,087
and 197,254,087 issued at 2003 and 2002, respectively; 197,049,470 and
197,049,470 outstanding at 2003 and 2002, respectively 19,725,409 19,725,409
Additional paid-in capital 35,182,014 35,143,089
Accumulated other comprehensive income (loss) (108,469) 1,052,897
Treasury stock (3,316,703) (3,316,703)
Retained earnings 577,889,163 549,601,198
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 629,371,414 602,205,890
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 828,829,039 782,867,510
============================================
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 3 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Income
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Three months ended
March 31,
-----------------------------------------
2003 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Electronic payment processing services (includes $4.6 million and
$6.6 million from related parties for 2003 and 2002, respectively) $ 167,826,388 143,157,227
Other services (includes $1.5 million and $1.7 million from related parties for
2003 and 2002, respectively) 25,052,653 27,658,434
-----------------------------------------
Revenues before reimbursable items 192,879,041 170,815,661
Reimbursable items (includes $2.5 million and $2.3 million from related parties
for 2003 and 2002, respectively) 58,474,113 57,107,345
-----------------------------------------
Total revenues 251,353,154 227,923,006
-----------------------------------------
Expenses:
Salaries and other personnel expense 76,096,376 68,732,046
Net occupancy and equipment expense 51,619,800 44,230,147
Other operating expenses (includes $2.2 million and $2.3 million to related
parties for 2003 and 2002, respectively) 22,016,527 21,879,919
(Gain) loss on disposal of equipment, net (21,529) 1,845
-----------------------------------------
Expenses before reimbursable items 149,711,174 134,843,957
Reimbursable items 58,474,113 57,107,345
-----------------------------------------
Total expenses 208,185,287 191,951,302
-----------------------------------------
Operating income 43,167,867 35,971,704
-----------------------------------------
Nonoperating income (expense):
Interest income, net (includes $230,000 and $235,000 from related parties
for 2003 and 2002, respectively) 638,291 368,203
Loss on foreign currency translation, net (626,189) (189,228)
-----------------------------------------
Total nonoperating income 12,102 178,975
-----------------------------------------
Income before income taxes, minority interest and equity in income
of joint ventures 43,179,969 36,150,679
Income taxes 15,514,319 13,256,743
Minority interest in consolidated subsidiary's net income (117,608) 13,926
Equity in income of joint ventures 4,187,950 4,473,675
-----------------------------------------
Net income $ 31,735,992 27,381,537
=========================================
Basic earnings per share $ 0.16 0.14
=========================================
Diluted earnings per share $ 0.16 0.14
=========================================
Weighted average common shares outstanding 197,049,470 196,962,984
Increase due to assumed issuance of shares related to stock options outstanding 182,363 760,193
-----------------------------------------
Weighted average common and common equivalent shares outstanding 197,231,833 197,723,177
=========================================
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 4 -
TOTAL SYSTEM SERVICES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended
March 31,
------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 31,735,992 27,381,537
Adjustments to reconcile net income to net cash provided by operating
Minority interest in consolidated subsidiary's net income 117,608 (13,926)
Loss on foreign currency translation, net 626,189 189,228
Equity in income of joint ventures (4,187,950) (4,473,675)
Depreciation and amortization 22,047,710 16,673,912
Charges for bad debt and billing adjustments (290,707) 1,160,669
Charges for transaction processing 52,064 658,497
Deferred income tax expense 12,277,222 8,531,772
(Gain)Loss on disposal of equipment, net (21,529) 1,845
(Increase) decrease in:
Accounts receivable (4,639,152) 1,084,520
Prepaid expenses and other assets (5,669,083) 1,311,821
Increase (decrease) in:
Accounts payable (320,668) (18,156,514)
Accrued salaries and employee benefits (26,607,491) 959,905
Billings in excess of costs on uncompleted contracts 29,721,990 -
Other current liabilities 5,978,402 14,122,569
------------------------------------------
Net cash provided by operating activities 60,820,597 49,432,160
------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (5,072,074) (2,800,783)
Additions to computer software (15,455,720) (15,868,017)
Proceeds from disposal of equipment 36,600 2,062
Cash acquired in acquisition of subsidiary - 2,858,384
Increase in contract acquisition costs (8,765,482) (9,176,780)
------------------------------------------
Net cash used in investing activities (29,256,676) (24,985,134)
------------------------------------------
- 5 -
Consolidated Statements of Cash Flows (continued)
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Three months ended
March 31,
------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on capital lease obligations (24,365) (28,679)
Dividends paid on common stock (3,448,371) (2,921,657)
Proceeds from exercise of stock options - 40,844
------------------------------------------
Net cash used in financing activities (3,472,736) (2,909,492)
------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 978,347 (385,499)
------------------------------------------
Net increase in cash and cash equivalents $ 29,069,532 21,152,035
Cash and cash equivalents at beginning of year 109,171,206 58,658,500
------------------------------------------
Cash and cash equivalents at end of period $ 138,240,738 79,810,535
==========================================
Cash paid for interest $ 12,376 12,987
==========================================
Cash paid for income taxes (net of refunds received) $ (1,900,909) 13,965,118
==========================================
Significant noncash transaction: In January 2002, the Company acquired TSYS
Total Debt Management, Inc. through the issuance of 2,175,000 shares of common
stock with a market value of $43.5 million.
See accompanying Notes to Unaudited Consolidated Financial Statements.
- 6 -
TOTAL SYSTEM SERVICES, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements represent the
accounts of Total System Services, Inc.(R) (TSYS(R); its wholly owned
subsidiaries, Columbus Depot Equipment CompanySM (CDECSM), Columbus Productions,
Inc.SM (CPI), TSYS Canada, Inc.SM (TCI), TSYS Total Debt Management, Inc. (TDM)
and ProCard, Inc. (ProCard); and its majority owned foreign subsidiary, GP
Network Corporation (GP Net). These financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. All adjustments, consisting of normal recurring accruals, which, in
the opinion of management, are necessary for a fair presentation of financial
position and results of operations for the periods covered by this report have
been included. The accompanying unaudited consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and related notes appearing in the Company's 2002 annual report
previously filed on Form 10-K.
Note 2 - Supplementary Balance Sheet Information
Cash and cash equivalent balances are summarized as follows:
March 31, 2003 December 31, 2002
-------------------------- --------------------------
Cash and cash equivalents in domestic accounts $ 106,602,674 $ 84,462,671
Cash and cash equivalents in foreign accounts 31,638,064 24,708,535
-------------------------- --------------------------
Total $ 138,240,738 $ 109,171,206
========================== ==========================
The Company maintains accounts outside the United States denominated in
U.S. dollars, Euros, British Pounds Sterling, Canadian dollars and Japanese Yen.
Significant components of prepaid expenses and other current assets are
summarized as follows:
March 31, 2003 December 31, 2002
------------------------- ---------------------------
Prepaid expenses $ 10,793,381 $ 8,228,801
Other 14,179,897 14,318,789
------------------------- ---------------------------
Total $ 24,973,278 $ 22,547,590
========================= ===========================
Significant components of contract acquisition costs are summarized as
follows:
March 31, 2003 December 31, 2002
------------------------- ---------------------------
Payments for processing rights, net $ 89,040,277 $ 89,740,749
Conversion costs, net 38,436,720 33,988,219
------------------------- ---------------------------
Total $ 127,476,997 $ 123,728,968
========================= ===========================
Amortization related to payments for processing rights, which is recorded
as a reduction of revenues, was $2.9 million and $2.4 million for the three
months ended March 31, 2003 and 2002, respectively.
- 7 -
Notes to Unaudited Consolidated Financial Statements (continued)
Amortization expense related to conversion costs, which is recorded in
other operating expenses, was $1.3 million and $764,000 for the three months
ended March 31, 2003 and 2002, respectively.
Significant components of other assets are summarized as follows:
March 31, 2003 December 31, 2002
------------------------- ---------------------------
Equity investments, net $ 58,390,745 $ 54,181,246
Goodwill, net 3,619,090 3,619,178
Other 17,413,320 14,227,058
------------------------- ---------------------------
Total $ 79,423,155 $ 72,027,482
========================= ===========================
Significant components of other current liabilities are summarized as
follows:
March 31, 2003 December 31, 2002
------------------------- -----------------------------
Customer postage deposits $ 14,551,410 $ 16,054,531
Deferred revenues 8,131,435 8,554,131
Transaction processing provisions 4,638,038 5,347,010
Dividends payable 3,448,366 3,448,709
Other 36,316,472 26,828,508
------------------------- -----------------------------
Total $ 67,085,721 $ 60,232,889
========================= =============================
Note 3 - Comprehensive Income
Comprehensive income for TSYS consists of net income and foreign currency
translation adjustments recorded as a component of shareholders' equity.
Comprehensive income for the three months ended March 31 is as follows:
2003 2002
-------------------------- --------------------------
Net income $ 31,735,992 $ 27,381,537
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of tax (1,161,366) (1,010,435)
-------------------------- --------------------------
Comprehensive income $ 30,574,626 $ 26,371,102
========================== ==========================
The income tax effects allocated to and the cumulative balance of
accumulated other comprehensive loss are as follows:
Balance at December 31, Pretax Balance at
2002 amount Tax benefit March 31, 2003
- ---------------------------------------------------------------------------------------------------------------------------
Foreign currency translation
adjustments $1,052,897 (1,733,786) 572,420 ($108,469)
=======================================================================================
Note 4 - Segment Reporting and Major Customers
The Company reports selected information about operating segments in
accordance with Statement of Financial Accounting Standards No. 131 (SFAS 131).
The Company's segment information reflects the information that the chief
operating decision makers (CODMs) use to make resource allocation and strategic
decisions. The CODMs at TSYS consist of the chief executive officer, the
president and the four executive vice presidents.
- 8 -
Notes to Unaudited Consolidated Financial Statements (continued)
Through online accounting and electronic payment processing systems, Total
System Services, Inc. provides electronic payment processing services and other
related services to card-issuing institutions in the United States, Mexico,
Canada, Honduras, Europe and the Caribbean. The reportable units are segmented
based upon geographic locations. Domestic-based processing services include
electronic payment processing services and other services provided from the
United States. Domestic-based processing services segment includes the financial
results of TSYS, excluding its foreign branch offices, and the following
subsidiaries: CDEC, CPI, TDM and ProCard. International-based processing
services include electronic payment processing services and other services
provided outside the United States. International-based processing services
include the financial results of TCI, GP Net and TSYS' branch offices in Europe
and Japan.
Domestic-based International-based
Operating Segments processing services processing services Consolidated
- ----------------------------------------------------------------------------------------------------------------------------------
At March 31, 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 824,111,794 90,042,013 $ 914,153,807
Intersegment eliminations (85,324,768) - (85,324,768)
---------------------- -------------------- ------------------------
Total assets $ 738,787,026 90,042,013 $ 828,829,039
====================== ==================== ========================
- ----------------------------------------------------------------------------------------------------------------------------------
At December 31, 2002
- ----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets $ 777,509,354 92,145,647 $ 869,655,001
Intersegment eliminations (86,787,491) - (86,787,491)
---------------------- -------------------- ------------------------
Total assets $ 690,721,863 92,145,647 $ 782,867,510
====================== ==================== ========================
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 233,119,344 18,710,703 $ 251,830,047
Intersegment revenue (1,395) (475,498) (476,893)
---------------------- -------------------- ------------------------
Revenue from external customers $ 233,117,949 18,235,205 $ 251,353,154
====================== ==================== ========================
Depreciation and amortization $ 19,551,223 2,496,487 $ 22,047,710
====================== ==================== ========================
Segment operating income $ 41,480,714 1,687,153 $ 43,167,867
====================== ==================== ========================
Income taxes $ 14,897,744 616,575 $ 15,514,319
====================== ==================== ========================
Equity in income of joint ventures $ 3,941,467 246,483 $ 4,187,950
====================== ==================== ========================
Net income $ 30,806,223 929,769 $ 31,735,992
====================== ==================== ========================
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue $ 213,399,086 15,073,373 $ 228,472,459
Intersegment revenue (151,456) (397,997) (549,453)
---------------------- -------------------- ------------------------
Revenue from external customers $ 213,247,630 14,675,376 $ 227,923,006
====================== ==================== ========================
Depreciation and amortization $ 14,673,945 1,999,967 $ 16,673,912
====================== ==================== ========================
Segment operating income $ 36,026,885 (55,181) $ 35,971,704
====================== ==================== ========================
Income taxes $ 13,151,160 105,583 $ 13,256,743
====================== ==================== ========================
Equity in income of joint ventures $ 4,226,441 247,234 $ 4,473,675
====================== ==================== ========================
Net income $ 27,413,781 (32,244) $ 27,381,537
====================== ==================== ========================
- 9 -
Notes to Unaudited Consolidated Financial Statements (continued)
Revenues for domestic-based processing services include electronic payment
processing services and other services provided from the United States to
clients based in the United States or other countries. Revenues from
international-based processing services include electronic payment processing
services and other services provided outside the United States to clients based
predominantly outside the United States.
The following geographic area data represent revenues for the three months
ended March 31, 2003 and 2002, respectively, based on the geographic locations
of customers.
Three Months Ended March 31,
---------------------------------------------
(Dollars in millions) 2003 2002
------------------- -----------------
United States $ 208.6 196.7
Canada 16.0 10.0
Europe 15.4 12.2
Mexico 8.0 6.0
Japan 2.8 2.4
Other 0.6 0.6
------------------- -----------------
Totals $ 251.4 227.9
=================== =================
The Company maintains property and equipment in the United States, Europe,
Canada and Japan. The following geographic area data represent net property and
equipment balances by region:
At March 31, At December 31,
(Dollars in millions) 2003 2002
------------------- -------------------
United States $ 96.5 97.0
Europe 21.5 22.1
Japan 2.0 1.6
Canada 0.1 0.1
------------------- --------------------
Totals $ 120.1 120.8
=================== ====================
Major Customers
For the three months ended March 31, 2003, the Company had two major
customers which accounted for approximately 29.9%, or $75.3 million, of total
revenues. For the three months ended March 31, 2002, TSYS had two major
customers that accounted for 34.0%, or $77.5 million, of total revenues.
Revenues from major customers for the periods reported are attributable to the
domestic-based processing services segments.
Three Months Ended March 31,
-----------------------------------------------------------------------
2003 2002
------------------------------------- --------------------------------
Revenue % of Total % of Total
(Dollars in millions) Dollars Revenues Dollars Revenues
------------------------------------- ------------------------------
Customer One $ 46.8 18.6 % $ 42.8 18.8%
Customer Two 28.5 11.3 34.7 15.2
------------------------------- -------------------------------
Totals $ 75.3 29.9 % $ 77.5 34.0%
=============================== ===============================
- 10 -
Notes to Unaudited Consolidated Financial Statements (continued)
Note 5 - Stock-Based Compensation
The Company maintains stock-based compensation plans for purposes of
incenting and retaining employees. The Company accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees," and related Interpretations.
Under APB 25, TSYS does not recognize compensation expense for a stock option
grant if the exercise price is equal to or greater than the fair market value of
the Company's common stock on the grant date. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of FASB No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation granted in the form of TSYS
and Synovus stock options.
March 31, 2003 March 31, 2002
-------------------------- -----------------------------
Net income, as reported $ 31,735,992 $ 27,381,537
Stock-based employee compensation expense
determined under the fair value based
method for all awards, net of related
income tax effects 1,220,870 1,476,733
-------------------------- -----------------------------
Net income, as adjusted $ 30,515,122 $ 25,904,804
========================== =============================
Earnings per share:
Basic - as reported $ 0.16 $ 0.14
========================== =============================
Basic - as adjusted $ 0.15 $ 0.13
========================== =============================
Diluted - as reported $ 0.16 $ 0.14
========================== =============================
Diluted - as adjusted $ 0.15 $ 0.13
========================== =============================
The per share weighted average fair value of TSYS stock options granted
during 2002 was $11.47. The fair value of these options were estimated at the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for 2002: risk-free interest rate of 2.93%;
expected volatility of 66.0%; expected life of 5.0 years; and dividend yield of
0.4%.
The per share weighted average fair value of Synovus stock options granted
to TSYS employees during 2002 was $9.69. The fair value of these options were
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for 2002: risk-free interest rate of
5.4%; expected volatility of 30%; expected life of 9.0 years; and dividend yield
of 2.4%.
Note 6 - Supplementary Cash Flow Information
Cash flows used in additions to computer software for the three months
ended March 31, 2003 and 2002 are summarized as follows:
March 31, 2003 March 31, 2002
------------------------- -----------------------------
Purchased programs $ 11,502,187 $ 5,780,257
Developed software 3,953,533 10,087,760
------------------------- -----------------------------
Total $ 15,455,720 $ 15,868,017
========================= =============================
- 11 -
Notes to Unaudited Consolidated Financial Statements (continued)
Cash flows used in additions to contract acquisition costs for the three
months ended March 31, 2003 and 2002 are summarized as follows:
March 31, 2003 March 31, 2002
------------------------- -----------------------------
Conversion costs $ 5,765,482 $ 2,676,780
Payments for processing rights 3,000,000 6,500,000
------------------------- -----------------------------
Total $ 8,765,482 $ 9,176,780
========================= =============================
Note 7 -Recent Accounting Pronouncements
In June 2001, the FASB issued Statement No. 143 (SFAS 143), "Accounting for
Asset Retirement Obligations." SFAS 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development, and/or
normal use of the assets.
The Company also records a corresponding asset that is depreciated over the
life of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to reflect
the passage of time and changes in the estimated future cash flows underlying
the obligation. The Company adopted SFAS 143 on January 1, 2003. The adoption of
SFAS 143 did not have a material effect on the Company's financial position,
results of operations or cash flows.
In April 2002, the FASB issued Statement No. 145 (SFAS 145), "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS 145 also amends SFAS No. 13
to require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 are applied in fiscal
years beginning after May 15, 2002. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002.
The adoption of SFAS 145 did not have a material effect on the Company's
financial position, results of operations or cash flows.
In June 2002, the FASB issued Statement No. 146 (SFAS 146),"Accounting for
Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity." The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
adoption of SFAS 146 did not have a material effect on the Company's financial
position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by guarantor in its
interim and annual
- 12 -
Notes to Unaudited Consolidated Financial Statements (continued)
financial statements about its obligations under guarantees issued.
Interpretation No. 45 also clarifies that a guarantor is required to recognize,
at inception of a guarantee, a liability for the fair value of the obligation
undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and did not have a material effect on the Company's financial
statements. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company has one
lease guarantee.
To assist Vital Processing Services L.L.C. (Vital) in leasing its corporate
facility, the Company and Visa U.S.A. (Visa) are guarantors, jointly and
severally, for the lease payments on Vital's Tempe facility. The lease on the
facility expires in July 2007. The total future minimum lease payments remaining
at March 31, 2003 is $6.3 million. If Vital fails to perform its obligations
with regards to the lease, TSYS and Visa will be required to perform in the same
manner and to same extent as is required by Vital.
At the November 21, 2002 Emerging Issues Task Force (EITF) meeting, the
Task Force ratified as a consensus the tentative conclusions it reached at the
October 25, 2002 EITF meeting regarding Emerging Issues Task Force 00-21 (EITF
00-21), "Accounting for Revenue Arrangements with Multiple Deliverables." EITF
00-21 addresses certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities. Those
activities may involve the delivery or performance of multiple products,
services, and/or rights to use assets, and performance may occur at different
points in time or over different periods of time. The arrangements are often
accompanied by initial installation, initiation, or activation services and
generally involve either a fixed fee or a fixed fee coupled with a continuing
payment stream. The continuing payment stream generally corresponds to the
continuing performance and may be fixed, variable based on future performance,
or composed of a combination of fixed and variable payments. EITF 00-21
addresses how to account for those arrangements. EITF 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. Entities may also elect to report the change in accounting as a cumulative
effect adjustment, in which case disclosure should be made in periods subsequent
to the date of initial application of the amount of recognized revenue that was
previously included in the cumulative effect adjustment. Management has not yet
determined the effect of EITF 00-21 on TSYS' financial position, results of
operations and cash flows.
In December 2002, the FASB issued Statement No. 148 (SFAS 148), "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS 148 amends FASB Statement No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included in
the notes to the consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to
- 13 -
Notes to Unaudited Consolidated Financial Statements (continued)
variable interests in variable interest entities obtained after January 31,
2003. For enterprises such as the Company with a variable interest in a variable
interest entity created before February 1, 2003, the Interpretation is applied
to the enterprise in the first fiscal year or interim period after June 15,
2003. The Interpretation requires certain disclosures in financial statements
issued after January 31, 2003 if it is reasonably possible that the Company will
consolidate or disclose information about variable interest entities when the
Interpretation becomes effective.
In 2002, the Company renewed its operating lease agreement with a special
purpose entity (SPE) for the Company's corporate campus. If the synthetic lease
is not restructured, Interpretation No. 46 will require TSYS to consolidate the
SPE effective with the reporting period beginning July 1, 2003. The estimated
fair value of the campus buildings and real property at January 1, 2003 was
approximately $93.0 million. Consolidation would also require TSYS to
consolidate the SPE's results of operations, including depreciation and interest
expense. The Company can withdraw from the lease agreement by providing a 60-day
written notice.
On April 30, 2003, the Company provided written notice that it intended to
withdraw from the lease agreement for the Company's corporate campus. The
Company has decided to purchase the corporate campus with a combination of cash
and debt financing through Synovus. The purchase is expected to take place at
the end of the second quarter of 2003.
Note 8 - Subsequent Event: Enhancement Services Corporation Acquisition
On April 28, 2003, TSYS announced the acquisition of Enhancement Services
Corporation (ESC) for $36.0 million in cash. The Company is in the process of
completing the purchase price allocation and has preliminarily allocated
approximately $24.5 million to goodwill, approximately $8.2 million to
intangibles and the remaining amount to the net assets acquired. ESC provides
targeted loyalty consulting and travel, as well as gift card and merchandise
reward programs to more than 40 national and regional financial institutions in
the United States. The Company believes the acquisition of ESC enhances TSYS
processing services by adding distinct value differentiation for TSYS and its
clients.
- 14 -
TOTAL SYSTEM SERVICES, INC.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Review
This Financial Review provides a discussion of critical accounting policies,
related party transactions, and off-balance sheet arrangements. This Financial
Review also discusses the results of operations, financial condition, liquidity
and capital resources of TSYS and outlines the factors that have affected its
recent earnings, as well as those factors that may affect its future earnings.
Critical Accounting Policies
TSYS' (The Company's) financial position, results of operations and cash flows
are impacted by the accounting policies the Company has adopted. In order to get
a full understanding of the Company's financial statements, one must have a
clear understanding of the accounting policies employed.
Risks and Uncertainties and Use of Estimates: Factors that could affect the
Company's future operating results and cause actual results to vary materially
from expectations include, but are not limited to, lower than anticipated growth
from existing customers, an inability to attract new customers and grow
internationally, loss of a major customer, an inability to grow through
acquisitions or successfully integrate acquisitions, an inability to control
expenses, technology changes, financial services consolidation, change in
regulatory mandates, a decline in the use of cards as a payment mechanism, a
decline in the financial stability of the Company's clients and uncertain
economic conditions. Negative developments in these or other risk factors could
have a material adverse effect on the Company's financial position, results of
operations and cash flows.
The Company has prepared the accompanying consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America. In preparing financial statements, it is necessary for management to
make assumptions and estimates affecting the amounts reported in the
consolidated financial statements and related notes. These estimates and
assumptions are developed based upon all information available. Actual results
can differ from estimated amounts.
A summary of the Company's critical accounting policies follows:
Accounts Receivable: Accounts receivable balances are stated net of allowances
for doubtful accounts and billing adjustments of $7.6 million and $8.0 million
at March 31, 2003 and December 31, 2002, respectively. The allowance represents
5.7% and 6.2% of total accounts receivable at March 31, 2003 and December 31,
2002, respectively. TSYS' client base mainly consists of financial institutions
and other card issuers such as retailers. A substantial amount of the Company's
account receivable balances are current, and the average number of days sales
outstanding in accounts receivable at March 31, 2003 and December 31, 2002 was
48 days and 49 days, respectively. Because TSYS invoices clients for services
monthly in arrears, accounts receivable balances includes services for one month
of billings not yet invoiced.
TSYS records allowances for doubtful accounts when it is probable that the
accounts receivable balance will not be collected. When estimating the
allowances for doubtful accounts, the Company takes into consideration such
factors as its day-to-day knowledge of the financial position of specific
clients, the industry and size of its clients, the overall composition of its
accounts receivable aging, prior
- 15 -
Critical Accounting Policies (continued)
history with specific customers of accounts receivable write-offs and prior
history of allowances in proportion to the overall receivable balance. This
analysis includes an ongoing and continuous communication with its largest
clients and those clients with past due balances. A financial decline of any one
of the Company's large clients could have an adverse and material effect on
collectibility of receivables and thus the adequacy of the allowance for
doubtful accounts.
Increases in the allowance for doubtful accounts are recorded as charges to
bad debt expense and are reflected in other operating expenses in the Company's
consolidated statements of income. Write-offs of uncollectible accounts are
charged against the allowance for doubtful accounts.
TSYS records allowances for billing adjustments for actual and potential
billing discrepancies. When estimating the allowance for billing adjustments,
the Company considers its overall history of billing adjustments, as well as its
history with specific clients and known disputes. Increases in the allowance for
billing adjustments are recorded as a reduction of revenues in the Company's
consolidated statements of income and actual adjustments to invoices are charged
against the allowance for billing adjustments.
Revenue Recognition: The Company's electronic payment processing revenues are
derived from long-term processing contracts with financial and nonfinancial
institutions and are recognized as the services are performed. Electronic
payment processing revenues are generated primarily from charges based on the
number of accounts on file, transactions and authorizations processed,
statements mailed, and other processing services for cardholder accounts on
file. Most of these contracts have prescribed annual revenue minimums. The terms
of processing contracts generally range from three to ten years in length.
On March 3, 2003, the Company announced that Bank One selected TSYS to
upgrade its credit card processing. Under the long term software licensing and
services agreement, TSYS will provide bankcard processing services to Bank One's
credit card accounts for at least two years starting in mid 2004 (excluding
statement and card production services), and then license a modified version of
its TS2 consumer and commercial software to Bank One under a perpetual license
with a six year payment term. The Company uses the percentage-of-completion
accounting method for its agreement with Bank One. TSYS began recognizing
revenue in March 2003 and has recorded the amounts as revenues in electronic
payment processing services and as a reduction of liabilities in billings in
excess of costs on uncompleted contracts.
The Company's other service revenues are derived from recovery collections
work, bankruptcy process management, legal account management, skip tracing,
commercial printing activities and customer relationship management services,
such as call center activities for card activation and balance transfer
requests. The contract terms for these services are generally shorter in nature.
Revenue is recognized on these other services either on a per unit or a fixed
price basis. The Company uses the percentage of completion method of accounting
for its fixed price contracts.
Contract Acquisition Costs: The Company capitalizes contract acquisition costs
related to signing or renewing long-term contracts. These costs, primarily
consisting of cash payments for rights to provide processing services and
internal conversion and software development costs, are amortized using the
straight-line method over the contract term beginning when the client's
cardholder accounts are
- 16 -
Critical Accounting Policies (continued)
converted and producing revenues. All costs incurred prior to a signed agreement
are expensed as incurred.
The amortization of contract acquisition costs associated with cash
payments is recorded net of revenues in the Company's consolidated statements of
income. The amortization of contract acquisition costs associated with
conversion activity is recorded as other operating expenses in the Company's
consolidated statements of income. The Company evaluates the carrying value of
contract acquisition costs for impairment for each customer on the basis of
whether these costs are fully recoverable from expected undiscounted net
operating cash flows of the related contract. The determination of expected
undiscounted net operating cash flows requires management to make estimates.
These costs may become impaired with the loss of a contract, the financial
decline of a client, termination of conversion efforts after a contract is
signed, diminished prospects for current clients or if the Company's estimates
of future cash flows differ from actual results.
Software Development Costs: The Company develops software that is used in
providing electronic payment processing and other services to clients. Software
development costs are capitalized once technological feasibility of the software
product has been established. Costs incurred prior to establishing technological
feasibility are expensed as incurred. Technological feasibility is established
when the Company has completed a detailed program design and has determined that
a product can be produced to meet its design specifications, including
functions, features and technical performance requirements. Capitalization of
costs ceases when the product is available to clients for general use. The
Company evaluates the unamortized capitalized costs of software development as
compared to the net realizable value of the software product which is determined
by future undiscounted net cash flows. The amount by which the unamortized
software development costs exceed the net realizable value is written off in the
period that such determination is made. Software development costs are amortized
using the greater of (1) the straight-line method over its estimated useful
life, which ranges from three to ten years or (2) the ratio of current revenues
to total anticipated revenue over its useful life.
The Company also develops software that is used internally. Software
development costs that are modifications to existing internal-use software that
result in additional functionality are capitalized based upon Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Internal-use software development costs are
capitalized once (a) preliminary project stage is completed, (b) management
authorizes and commits to funding a computer software project, and (c) it is
probable that the project will be completed and the software will be used to
perform the function intended. Costs incurred prior to meeting the
qualifications are expensed as incurred. Capitalization of costs ceases when the
project is substantially complete and ready for its intended use. Internal-use
software development costs are amortized using an estimated useful life of three
to seven years. Software development costs may become impaired in situations
where development efforts are abandoned due to the viability of the planned
project becoming doubtful or due to technological obsolescence of the planned
software product.
Transaction Processing Provisions: The Company has recorded estimates to accrue
for contract contingencies (performance penalties) and processing errors. A
significant number of the Company's contracts with large clients contain service
level agreements which can result in TSYS incurring performance penalties if
contractually required service levels are not met. When providing these
- 17 -
Critical Accounting Policies (continued)
accruals, the Company takes into consideration such factors as the prior history
of performance penalties and processing errors incurred, actual contractual
penalties inherent in the Company's contracts, progress towards milestones and
known processing errors not covered by insurance.
These accruals are included in other current liabilities in the
accompanying consolidated balance sheets. Increases and decreases in transaction
processing provisions are charged to other operating expenses in the Company's
consolidated statements of income and payments or credits for performance
penalties and processing errors are charged against the accrual.
Impairment of Long-lived Assets and Intangibles: The Company reviews long-lived
assets, such as property and equipment and intangibles subject to amortization,
such as contract acquisition costs and computer software, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Assets to be disposed of are
separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and would no longer be
depreciated. The assets and liabilities of a disposed group classified as held
for sale are presented separately in the appropriate asset and liability
sections of the balance sheet.
Related Party Transactions
The Company provides electronic payment processing services and other
services for its parent company, Synovus Financial Corp. (Synovus), and its
affiliates, and for Vital Processing Services L.L.C. (Vital). The services are
performed under contracts that are similar to its contracts with other
customers. The Company believes the terms and conditions of transactions between
the Company and these related parties are comparable to those which could have
been obtained in transactions with unaffiliated parties. The Company's margins
with respect to related party transactions are comparable to margins recognized
in transactions with unrelated third parties. The amounts related to these
transactions are disclosed on the face of TSYS' consolidated financial
statements.
Off-Balance Sheet Arrangements
Operating Leases: As a method of funding its operations, TSYS employs
noncancelable operating leases for computer equipment, software and facilities.
These leases allow the Company to provide the latest technology while avoiding
the risk of ownership because of potential rapid technological obsolescence.
Neither the assets nor obligations related to these leases are included on the
balance sheet. One of the Company's most significant leases is its synthetic
lease for its corporate campus.
Synthetic Lease: In 1997, the Company entered into an operating lease agreement
with a special purpose entity (SPE) for the Company's corporate campus. The
business purpose of the SPE was to provide a means of financing the Company's
corporate campus. The assets and liabilities of the SPE consists solely of the
cost of the building and the loans from a consortium of banks. The cost of the
building and the outstanding principal balance of the debt included on the
financial statements of the SPE both approximate $93.0 million. The lease, which
is guaranteed by Synovus, provides for substantial residual value guarantees.
The amount of the Company's residual value guarantee relative to the assets
under this
- 18 -
Off-Balance Sheet Arrangements (continued)
lease is approximately $81.4 million. In accordance with current accounting
principles, no asset or obligation is recorded on the Company's consolidated
balance sheets.
The terms of this lease financing arrangement require, among other things,
that the Company maintain certain minimum financial ratios and provide certain
information to the lessor. TSYS is also subject to interest rate risk associated
with the lease on its campus facilities because of the short-term variable rate
nature of the SPE's debt. In the event that LIBOR rates increase, operating
expenses could increase proportionately.
In 2002, the Company renewed its operating lease agreement with the SPE for
the Company's corporate campus. If the synthetic lease is not restructured, FASB
Interpretation No. 46 will require TSYS to consolidate the SPE effective with
the reporting period beginning July 1, 2003. The estimated fair value of the
campus buildings and real property at January 1, 2003 was approximately $93.0
million. Consolidation would also require TSYS to consolidate the SPE's results
of operations, including depreciation and interest expense. The Company can
withdraw from the lease agreement by providing a 60-day written notice.
On April 30, 2003, the Company provided written notice that it intended to
terminate the lease agreement for the Company's corporate campus. The Company
has decided to purchase the corporate campus with a combination of cash and debt
financing through Synovus. The purchase is expected to take place at the end of
the second quarter of 2003.
Results of Operations
The following table sets forth certain revenue and expense items as a
percentage of total revenues and the percentage increases or decreases in those
items for the three months ended March 31, 2003 and 2002:
Percentage of Percentage Change
Total Revenues in Dollar Amounts
-----------------------------------------------------
2003 2002 2003 vs. 2002
------------- ---------- ---------------------
Revenues:
Electronic payment processing services 66.7 % 62.8 % 17.2 %
Other services 10.0 12.1 (9.4)
---------- --------
Revenues before reimbursable items 76.7 74.9 12.9
Reimbursable items 23.3 25.1 2.4
------------- ----------
Total revenues 100.0 100.0 10.3
------------- ----------
Expenses:
Salaries and other personnel expense 30.3 30.2 10.7
Net occupancy and equipment expense 20.5 19.4 16.7
Other operating expenses 8.8 9.6 0.6
------------- ----------
Expenses before reimbursable items 59.6 59.2 11.0
Reimbursable items 23.3 25.1 2.4
------------- ----------
Total expenses 82.9 84.3 8.5
------------- ----------
Operating income 17.1 15.7 20.0
Nonoperating income 0.0 0.1 nm
------------- ----------
- 19 -
Results of Operations (continued)
Income before income taxes and equity in
income of joint ventures 17.1 15.8 19.4
Income taxes 6.2 5.8 17.0
Equity in income of joint ventures 1.7 2.0 (6.4)
------------- ----------
Net income 12.6 % 12.0 % 15.9 %
============= ==========
nm = not meaningful
Revenues
Total revenues increased $23.4 million, or 10.3%, during the three months
ended March 31, 2003, compared to the same period in 2002. Excluding
reimbursable items, revenues increased $22.1 million, or 12.9%, during the three
months ended March 31, 2003, compared to the same periods in 2002. TSYS'
revenues are derived from providing electronic payment processing and related
services to financial and nonfinancial institutions, generally under long-term
processing contracts. TSYS' services are provided through the Company's
cardholder systems, TS2 and TS1, to financial institutions and other
organizations throughout the United States, Mexico, Canada, Honduras, the
Caribbean and Europe. The Company currently offers merchant services to
financial institutions and other organizations in Japan through its majority
owned subsidiary, GP Net, and in the United States through its joint venture,
Vital Processing Services L.L.C. (Vital).
Electronic Payment Processing Services
Revenues from electronic payment processing services increased $24.7
million, or 17.2%, for the three months ended March 31, 2003, compared to the
same period in 2002. Electronic payment processing revenues are generated
primarily from charges based on the number of accounts on file, transactions and
authorizations processed, statements mailed, credit bureau reports, cards
embossed and mailed, and other processing services for cardholder accounts on
file. Cardholder accounts on file include active and inactive consumer credit,
retail, debit, stored value, student loan and commercial card accounts. Due to
the number of cardholder accounts processed by TSYS and the expanding use of
cards as well as increases in the scope of services offered to clients, revenues
relating to electronic payment processing services have continued to grow.
Due to the seasonal nature of credit card transactions, TSYS' revenues and
results of operations have generally increased in the fourth quarter of each
year because of increased transaction and authorization volumes during the
traditional holiday shopping season. Furthermore, growth in card portfolios of
existing clients, the conversion of cardholder accounts of new clients to the
Company's processing platforms, and the loss of cardholder accounts impact the
results of operations from period to period. Another factor, among others, which
may affect TSYS' revenues and results of operations from time to time is the
sale by a client of its business, its card portfolio or a segment of its
accounts to a party which processes cardholder accounts internally or uses
another third-party processor.
Processing contracts with large clients, representing a significant portion
of the Company's total revenues, generally provide for discounts on certain
services based on the size and activity of clients' portfolios. Therefore,
electronic payment processing revenues and the related margins are influenced by
the client mix relative to the size of client card portfolios, as well as the
number and activity of individual cardholder accounts processed for each client.
Consolidation among financial institutions has resulted in an increasingly
concentrated client base, which results in a changing client mix toward larger
- 20 -
Results of Operations (continued)
clients. Consolidation in either the financial services or retail industries, a
change in the economic environment in the retail sector, or a change in the mix
of payments between cash and cards could favorably or unfavorably impact TSYS'
financial condition, results of operations and cash flows in the future.
The Company provides services to its clients including processing consumer,
retail and commercial cards, as well as student loan processing. Consumer cards
include Visa and MasterCard credit and debit cards as well as American Express
and stored value cards. Integrated payment accounts on file consist mainly of
student loan processing accounts. Retail cards include private label and gift
cards. Commercial cards include purchasing cards, corporate cards and fleet
cards for employees. The following table summarizes TSYS' accounts on file (AOF)
by portfolio type:
AOF by Type March 31, 2003 March 31, 2002
----------------------------------- ---------------------------- ------------------------
(in millions) AOF % AOF % % Change
------------- -------------- ------------ ----------- -----------------
Consumer 152.6 60.0 126.8 55.3 20.4
Integrated Payments 6.2 2.5 - - na
Retail 74.7 29.4 83.9 36.6 (10.9)
Commercial 20.7 8.1 18.5 8.1 11.7
----------------------------------- ------------- -------------- ------------ -----------
Total 254.2 100.0 229.2 100.0 10.9
============= ============== ============ ===========
Average cardholder accounts on file for the three months ended March 31,
2003 were 252.2 million, an increase of approximately 12.4% over the average of
224.3 million for the same period in 2002. Cardholder accounts on file at March
31, 2003 were 254.2 million, a 10.9% increase compared to the 229.2 million
accounts on file at March 31, 2002. The change in cardholder accounts on file
from March 2002 to March 2003 included the deconversion and purging of 9.3
million accounts, the addition of approximately 20.4 million accounts
attributable to the internal growth of existing clients, and approximately 13.9
million accounts for new clients.
TSYS expects to continue expanding its market share in the consumer, retail
and commercial card arenas. The Company's future growth is dependent upon new
clients, international expansion and continued internal growth of clients'
portfolios.
In April 2002, the Company announced that it had entered into a five-year
agreement with Accenture valued in excess of $120 million to provide processing
services for the U.S. Department of Education. TSYS began processing all student
loan originations for the Department of Education on April 26, 2002, and was
processing 6.1 million accounts at March 31, 2003. The agreement also involves
converting all existing student accounts to TSYS' new stand-alone platform
during several phases. The conversion phases are scheduled to be completed in
the third quarter of 2003, and TSYS estimates it will be processing a total of
12 million student loan accounts after completion of these conversions.
TSYS is a major third-party processor of retail cards. Traditional retail
card operations are increasing the activity of their card portfolios by
converting inactive accounts to Visa/MasterCard consumer cards. TSYS is able to
provide its extensive electronic payment processing tools and techniques, as
well as value-added functionality, to traditional retail card operations
allowing better
- 21 -
Results of Operations (continued)
segmentation and potentially increased profitability for customers. TSYS does
not receive as much revenue from retail cards, on a per account basis, as it
does for consumer cards because consumer cards traditionally generate more
transactions. Retail cards are generally limited to a particular location or
retail chain. Consumer cards are widely accepted at numerous retail outlets.
TSYS' largest retail client has converted approximately 3.5 million
accounts of its portfolio from traditional retail accounts to consumer accounts
since March 2002. Another retail client has purged approximately 5.4 million
inactive retail accounts on file.
In March, Sears announced that it is evaluating strategic alternatives for
the company's private label and MasterCard portfolio. TSYS and Sears are parties
to a 10-year agreement, which was renewed in January of 2000, under which TSYS
provides transaction processing for more than 75 million Sears accounts. If
Sears does sell its portfolio, TSYS has significant termination provisions
embedded within the processing agreement in the event of an early termination
without cause. Sears represents less than 10% of TSYS revenues.
TSYS has a dominant market share position in the domestic Visa and
MasterCard commercial card processing arena. Future growth in this area is
dependent upon increased card activity with more purchasing by businesses being
transacted electronically and additional firms realizing the benefits of
converting their paper-based purchasing systems to electronic transactions using
commercial cards.
TSYS provides processing services to its clients worldwide. TSYS plans to
continue to expand its service offerings to other countries in the future. The
following table summarizes TSYS' AOF by area based on the geographic domicile of
processing clients:
AOF by Area March 31, 2003 March 31, 2002
---------------------------------- ----------------------------------------------------------
(in millions) AOF % AOF % % Change
------------- -------------- ------------ ----------- ---------
Domestic 216.8 85.3 201.1 87.8 7.8
Foreign 37.4 14.7 28.1 12.2 33.4
---------------------------------- ----------------------------------------------------------
Total 254.2 100.0 229.2 100.0 10.9
==========================================================
The Company's electronic payment processing service revenues are also
impacted by the use of optional value added products and services of TSYS'
processing systems. Value added products and services are optional features each
client can choose to subscribe to in order to potentially increase the financial
performance of its portfolio. Value added products and services include: risk
management tools and techniques, such as credit evaluation, fraud detection and
prevention, and behavior analysis tools; and revenue enhancement tools, such as
loyalty programs and bonus rewards. For the three months ended March 31, 2003
and 2002, value added products and services represented 14.1% and 11.4%, or
$35.4 million and $26.0 million, of total revenues, respectively. Revenues from
value added products and services, which includes some reimbursable items paid
to third-party vendors, increased 36.5%, or $9.4 million, for the three months
ended March 31, 2003, compared to the same period in 2002.
On March 3, 2003, the Company announced that Bank One selected TSYS to
upgrade its credit card processing. Under the long term software licensing and
services agreement, TSYS will provide electronic payment processing services to
Bank One's credit card accounts for at least two years starting
- 22 -
Results of Operations (continued)
in mid 2004 (excluding statement and card production services), and then license
a modified version of its TS2 consumer and commercial software to Bank One under
a perpetual license with a six year payment term. The Company uses the
percentage of completion accounting method for its agreement with Bank One and
recognizes revenues in proportion to costs incurred. The impact upon 2003
earnings will be slightly positive. The 2004 earnings per share (EPS)
contribution from the Bank One agreement is expected to range from $0.03 to
$0.04. Beginning in 2005 and continuing thereafter through the payment term of
the license, the EPS contribution of the Bank One agreement is expected to
exceed $0.04 on an annual basis.
Other Services
Revenues from other services consist primarily of revenues generated by
TSYS' wholly owned subsidiaries. Revenues from other services decreased $2.6
million, or 9.4%, in the first quarter of 2003, compared to the first quarter of
2002. The decline in other services revenues related to a decline in call center
and business process management revenues related to decreased business from a
client in the subprime credit business and the loss of business of a major
airline client.
On April 28, 2003, TSYS announced the acquisition of Enhancement Services
Corporation (ESC) for $36.0 million in cash. ESC provides targeted loyalty
consulting and travel, as well as gift card and merchandise reward programs to
more than 40 national and regional financial institutions in the United States.
The Company believes the acquisition of ESC enhances TSYS processing services by
adding distinct value differentiation for TSYS and its clients. ESC's revenues
will be included in other services.
Major Customers
A significant amount of the Company's revenues is derived from long-term
contracts with large clients, including certain major customers. For the three
months ended March 31, 2003, the Company had two major customers. The two major
customers for the quarter ended March 31, 2003 accounted for approximately
29.9%, or $75.3 million, of total revenues. For the three months ended March 31,
2002, TSYS had two major customers that accounted for 34.0%, or $77.5 million,
of total revenues. The loss of one of the Company's major customers, or other
significant clients, could have a material adverse effect on the Company's
financial position, results of operations and cash flows.
Reimbursable Items
Reimbursable items increased $1.4 million, or 2.4%, for the three months
ended March 31, 2003, as compared to the same period last year. The majority of
reimbursable items relates to the Company's domestic based clients.
Operating Expenses
Total expenses increased 8.5% for the three months ended March 31, 2003,
compared to the same period in 2002. Excluding reimbursable items, total
expenses increased 11.0% for the three months ended March 31, 2003, compared to
the same period in 2002. The increases in operating expenses are attributable to
changes in each of the expense categories as described below.
Salaries and other personnel expenses increased $7.4 million, or 10.7%, for
the three months ended March 31, 2003, compared to the same period in 2002. The
change in employment expenses is associated with the growth in the number of
employees, normal salary increases and related benefits. The average number of
employees in the first quarter of 2003 increased to 5,305, which approximates
- 23 -
Results of Operations (continued)
the 5,302 in the same period of 2002. At April 30, 2003 excluding ESC, TSYS had
5,208 full-time and 220 part-time employees.
Net occupancy and equipment expense increased $7.4 million, or 16.7%, for
the three months ended March 31, 2003 over the same period in 2002. Due to
rapidly changing technology in computer equipment, TSYS' equipment needs are
achieved to a large extent through operating leases. Computer equipment and
software rentals, which represent the largest component of net occupancy and
equipment expense, increased approximately $1.6 million in the first quarter of
2003, compared to the same period of 2002. Depreciation and software
amortization increased $4.8 million during the three months ended March 31,
2003, compared to the same period in 2002. The increase in depreciation and
amortization is the result of the amortization of additional software licenses
acquired in 2002, as well as, the amortization of developed software placed in
service after March 31, 2002.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For enterprises such as the Company with a
variable interest in a variable interest entity created before February 1, 2003,
the Interpretation is applied to the enterprise no later than the end of the
first annual reporting period beginning after June 15, 2003. The Interpretation
requires certain disclosures in financial statements issued after January 31,
2003 if it is reasonably possible that the Company will consolidate or disclose
information about variable interest entities when the Interpretation becomes
effective.
In 2002, the Company renewed its operating lease agreement with a special
purpose entity (SPE) for the Company's corporate campus. If the synthetic lease
is not restructured, Interpretation No. 46 will require TSYS to consolidate the
SPE effective with the reporting period beginning July 1, 2003. The estimated
fair value of the campus buildings and real property at January 1, 2003 was
approximately $93.0 million. Consolidation would also require TSYS to
consolidate the SPE's results of operations, including depreciation and interest
expense. The Company can withdraw from the lease agreement by providing a 60-day
written notice.
On April 30, 2003, the Company provided written notice that it intended to
terminate the lease agreement for the Company's corporate campus. The Company
has decided to purchase the corporate campus with a combination of cash and debt
financing through Synovus. The purchase is expected to take place at the end of
the second quarter of 2003. As a result of the purchase, net occupancy and
equipment expense will increase approximately $2.6 million annually for
depreciation of the building and related equipment.
Other operating expenses for the first quarter of 2003 increased $137,000
as compared to the same period in 2002. Other operating expenses include, among
other things, charges for processing errors, contractual commitments and bad
debt expense. As described in the Critical Accounting Policies section,
management's evaluation of the adequacy of its transaction processing reserves
and allowance for doubtful accounts is based on a formal analysis which assesses
the probability of losses related to contractual contingencies, processing
errors and uncollectible accounts. Increases and decreases in
- 24 -
Results of Operations (continued)
transaction processing provisions and charges for bad debt expense are reflected
in other operating expenses.
Operating Income
Operating income increased 20.0% for the three months ended March 31, 2003,
over the same period in 2002. The increase in operating income was the result of
the Company's commitment to contain the growth in operating expenses below the
growth rate in revenues. The Company's operating profit margin for the first
quarter of 2003 was 17.1%, compared to 15.7% for the same period last year.
Excluding reimbursable items, the Company's operating profit margin for the
three months ended March 31, 2003 was 22.4%, compared to 21.1% for the three
months ended March 31, 2002. The Company's focus on expense control was the main
reason for the improved margin.
Nonoperating Income
Interest income, net, includes interest income of $651,000 and $12,000 of
interest expense for the first quarter of 2003. During the first quarter of
2002, interest income, net, included interest income of $381,000 and $13,000 of
interest expense. The increase in interest income for the three months ending
March 31, 2003, as compared to the same period in 2002, was primarily the result
of higher cash balances available for investment.
In July 2002, the Company restructured a portion of its permanent financing
of its UK operation as an intercompany loan. The financing requires the unit to
repay the financing in US dollars. The functional currency of the European
operations is the British Pound Sterling. As the Company translates the European
operations statements into US dollars, the translated balance of the financing
(liability) is adjusted upwards or downwards to match the US-dollar obligation
(receivable) on the Company's financial statement. The upwards or downwards
adjustment is recorded as a gain or loss on foreign currency translation. As a
result of the restructuring, the Company recorded a foreign currency translation
loss on the Company's financing with its European operations during the first
quarter of 2003. The Company also records foreign currency translation
adjustments associated with other balance sheet accounts. The majority of the
translation loss of $626,000 for the first quarter of 2003 relates to the
intercompany loan. The balance of the financing at March 31, 2003 was
approximately $8.4 million.
As a result of the restructuring of a portion of its UK investment, the
Company has a greater exposure to currency risk. The Company is exploring
potential hedging instruments to safeguard it from significant currency
translation risks.
Income Taxes
TSYS' effective income tax rate for the three months ended March 31, 2003
was 32.8%, compared to 32.6% for the same period in 2002. The calculation of the
effective tax rate includes minority interest in consolidated subsidiary's net
income and equity earnings of joint ventures in pretax income. The Company
expects its effective income tax rate for 2003 to be approximately 33-34%.
Equity in Income of Joint Ventures
TSYS' share of income from its equity in joint ventures was $4.2 million
and $4.5 million for the first quarters of 2003 and 2002, respectively. The
decrease for the quarter is attributable mainly to the decrease in Vital's
operating results as a result of pricing compression.
- 25 -
Results of Operations (continued)
Vital Processing Services L.L.C.
Vital, a limited liability company, is a merchant processing joint venture
of TSYS and Visa U.S.A. ("VISA"). The Company is a leader in providing
integrated end-to-end electronic transaction processing services primarily to
large financial institutions and other merchant acquirers. Vital processes all
payment forms including credit, debit, electronic benefit transfer and check
truncation for merchants of all sizes across a wide array of retail market
segments. The Company's unbundled products and services include: authorization
and capture of electronic transactions; clearing and settlement of electronic
transactions; information reporting services related to electronic transactions;
merchant billing services; and point of sale terminal sales and service. Vital's
products and services are marketed to merchant acquirers through a direct sales
force, which concentrates on developing long-term relationships with existing
and prospective clients
The Company considers Vital to be an integral part of its overall
processing operations and an important part of its overall market strategy.
Prior to forming the joint venture, TSYS performed back-end merchant processing
services for its clients. The revenues and expenses associated with merchant
processing were included in operating profits. In the ordinary course of
business, TSYS, which still owns the merchant processing software, provides
back-end processing services to Vital. For the three months ended March 31, 2003
and 2002, TSYS generated $5.8 million and $5.4 million of revenue from Vital,
respectively. During the three months ended March 31, 2003, the Company's equity
in income of joint ventures related to Vital was $3.9 million, a 6.7% decrease,
or $285,000, compared to $4.2 million for the same period last year.
The following is a summary of Vital's consolidated statements of income for
the three months ended March 31, 2003 and 2002:
2003 2002
--------------- -------------
Revenues $ 62,619 59,675
Operating income 8,498 8,723
Net income 8,636 8,886
Vital provides products and services through its merchant services
offerings. Vital's revenues are primarily generated from charges based on: the
number of transactions processed; the number of merchant accounts on its
systems; the number of reports provided (electronic and paper) to acquirers and
merchants; and the sale and service of point of sale terminal equipment.
Revenues generated by these activities depend upon a number of factors, such as
demand for and price of Vital's services, the technological competitiveness of
its product offerings, Vital's reputation for providing timely and reliable
service, competition within the industry, and general economic conditions.
Processing contracts with large clients, representing a significant portion
of Vital's total revenues, generally provide for discounts on certain services
based on the volume of transactions processed by the client. Transaction volumes
are influenced by both the number and type of merchants. The growth or loss of
merchants impacts the results of operations from period to period. Vital's
operating results may also be significantly impacted by a customer selling all
or a portion of its merchant acquiring business. Consolidation among financial
institutions has resulted in an increasingly concentrated client base, which
results in revenues being concentrated in a smaller number of clients.
- 26 -
Results of Operations (continued)
Vital's revenues increased $2.9 million, or 4.9%, for the first three
months of 2003, compared to the first three months of 2002. The increase in 2003
over 2002 was primarily the result of increases in: the number of transactions
processed (net of price reductions to certain customers); debit network
transaction fees charged to customers and revenues associated with the Company's
terminal deployment business.
Vital's major expense items include salaries and other personnel expense
and equipment expense. Salaries and other personnel expense, a significant
portion of Vital's operating expenses, consists of the cost of personnel who
develop and maintain processing applications, operate computer networks and
provide customer support; wages and related expenses paid to sales personnel;
non-revenue producing customer support functions and administrative employees
and management.
Other expenses consist primarily of the cost of network telecommunications
capability; transaction processing systems including depreciation and
amortization, maintenance and other system costs; third party service providers
including TSYS and VISA; and terminal equipment cost of sales.
Vital's cost of services increased $2.8 million, or 9.0% in 2003, compared
to 2002. The increase was primarily a result of increases in: the cost of fees
charged by debit network providers; the cost of telecommunication and other
third party service providers as a result of increased transaction volumes and
terminal equipment cost of sales as a result of increased terminal sales.
Vital has agreements with both TSYS and VISA to provide key services
related to its business. Vital is dependent on both TSYS and VISA to perform on
their obligations under these agreements. Vital's results of operation could be
significantly impacted by material changes in the terms and conditions of the
agreements with TSYS and VISA, changes in performance standards and the
financial condition of both TSYS and VISA.
Vital, as a limited liability company, is treated similar to a partnership
for income tax purposes. As a result, no provision for current or deferred
income taxes has been made in Vital's financial statements. Vital's taxable
income or loss is reportable on the tax returns of its owners based on their
proportionate interest in Vital.
TSYS de Mexico
In 1993, the Company reached an agreement to form a joint venture with a
number of Mexican banks and recorded, and continues to record, its 49% ownership
in the joint venture using the equity method of accounting. The operation, Total
System Services de Mexico, S.A. de C.V. (TSYS de Mexico), provided credit card
related processing for the joint venture member banks and others. Recently,
several joint venture participants have been acquired and have discontinued
processing services with TSYS de Mexico. This consolidation has resulted in TSYS
de Mexico having joint venture participants that are not also processing clients
of the joint venture. In order to address this issue, during 2001, TSYS and its
TSYS de Mexico joint venture participants agreed to separate the electronic
payment processing services that TSYS de Mexico previously outsourced to TSYS
from the primary services provided directly by the joint venture to its clients.
The joint venture will continue to print statements and provide card-issuing
support services to the joint venture clients. As a result, new processing
agreements were negotiated between the Mexican bank clients of the joint venture
and TSYS.
- 27 -
Results of Operations (continued)
The joint venture will continue to share the profits among the joint
venture participants from the services which the joint venture continues to
provide. TSYS' ownership percentage continues to be 49% of the joint venture,
and TSYS uses the equity method of accounting because it does not control the
operations of the joint venture. The net effect of the restructuring has been
minimal and is resulting in a decrease in equity in income of joint ventures
while TSYS' electronic payment processing revenues and operating expenses
increase. During the three months ended March 31, 2003, the Company's equity in
income of joint ventures related to TSYS de Mexico was $246,000, a 0.8%
decrease, or $1,000, compared to $247,000 for the same period last year.
Electronic payment processing revenues from clients based in Mexico was $8.0
million for the first quarter ended March 31, 2003, a 32.6% increase over the
$6.0 million for the first quarter ended March 31, 2002. The increase in
revenues is attributable to increased account on file growth of approximately
27.9%.
The Company was notified by its largest client in Mexico that it intends to
utilize its internal global platform and did not renew its processing agreement
with TSYS when it expired in the first quarter of 2003. However, the client has
indicated that the deconversion may be delayed until the third quarter of 2003.
This client in Mexico represents approximately 56% of TSYS' revenues from
Mexico. As a result, management expects that electronic payment processing
revenues for 2003 from Mexico will decrease when compared to electronic payment
processing revenues from Mexico for 2002.
As a result of the restructuring of its joint venture agreement, TSYS
agreed to pay TSYS de Mexico a processing support fee for certain client
relationship and network services that TSYS de Mexico has assumed from TSYS.
TSYS paid TSYS de Mexico a processing support fee of $196,000 and $222,000 for
the three months ended March 31, 2003 and 2002, respectively.
Net Income
Net income for the three months ended March 31, 2003 increased 15.9% to
$31.7 million, or basic and diluted earnings per share of $0.16, compared to
$27.4 million, or basic and diluted earnings per share of $0.14, for the same
period in 2002. The Company's net profit margin for the first quarter of 2003
was 12.6%, compared to 12.0% for the same period last year. Excluding
reimbursable items, the Company's net profit margin for the first quarter of
2003 was 16.5%, compared to 16.0% for the three months ended March 31, 2002.
Projected Outlook for 2003
TSYS expects its 2003 net income to exceed its 2002 net income by 12-15%.
The assumptions underlying 2003's net income forecast are an increase in
revenues (excluding reimbursables) between 9-10%, an internal growth rate of
accounts on file of existing clients of approximately 11% and a continued focus
on expense management.
Liquidity and Capital Resources
The Consolidated Statements of Cash Flows detail the Company's cash flows
from operating, investing and financing activities. TSYS' primary method of
funding its operations and growth has been cash generated from current
operations and the occasional use of borrowed funds to supplement financing of
capital expenditures.
- 28 -
Liquidity and Capital Resources (continued)
Cash Flows From Operating Activities
TSYS' main source of funds is derived from operating activities,
specifically net income. During the three months ended March 31, 2003, the
Company generated $60.8 million in cash from operating activities compared to
$49.4 million for the same period last year.
During the quarter, the Company made a cash payment for employee benefits
accrued in 2002. Historically, these employee benefit payments were made in the
first quarter of each year for the amounts accrued for in the preceding year. In
2002, the payment was not made until April 2002.
On March 3, 2003, the Company announced that Bank One selected TSYS to
upgrade its credit card processing. As part of that agreement, the Company
received a $30 million payment from Bank One, which is included in Billings in
Excess of Costs on Uncompleted Contracts on the balance sheet, and is
recognizing this payment in revenues in proportion to the costs incurred.
Cash Flows From Investing Activities
The major uses of cash generated from operations have been the internal
development and purchase of computer software, the addition of property and
equipment, primarily computer equipment, and investments in contract acquisition
costs associated with obtaining and servicing new or existing clients, and
business acquisitions. The Company used $29.3 million in cash for investing
activities for the three months ended March 31, 2003, compared to $25.0 million
for the three months ended March 31, 2002.
Property and Equipment
Capital expenditures for property and equipment for the first three months
of 2003 were $5.1 million, compared to $2.8 million during the same period last
year.
Computer Software
The Company added $15.5 million and $15.9 million in additions to computer
software. The additions for both periods include purchased computer software and
developed computer software as further described below.
Purchased Computer Software
Expenditures for purchased computer software were $11.5 million for the
three months ended March 31, 2003, compared to $5.8 million for the same period
in 2002. These additions relate to site licenses for mainframe processing
systems.
Software Development Costs
Additions to capitalized software development costs, including enhancements
to and development of TS2 processing systems, were $4.0 million for the three
month period ending March 31, 2003, compared to $10.1 million for the same
period in 2002.
Due to the complexity of the differences between the English language and
Asian languages, computer systems require two bytes to store an Asian character
compared to one byte in the English language. With the opening of a branch
office in Japan to facilitate its marketing of card processing services, TSYS
began modifying its current TS2 system to be able to accommodate language and
currency differences with Asia, commonly referred to as the "double byte
project." During the three months ended March 31, 2003, the Company capitalized
$400,000. The Company has capitalized a total
- 29 -
Liquidity and Capital Resources (continued)
of $9.9 million since the project began. The Company completed the core
double-byte architecture during the second quarter of 2002. The Company is
currently in the testing phase with the double-byte project.
The Company developed a new commercial card system, which was built upon
the architectural design of TS2. The new system provides enhanced reporting
multi-languages/currencies, and global commercial card processing for
multinational corporations on a single platform. The Company capitalized a total
of $36.9 million. The Company placed the new system in service in late 2002.
The Company is developing its Integrated Payments Platform supporting the
online and offline debit and stored value markets, giving clients access to all
national and regional networks, EBT programs, ATM driving and switching services
for online debit processing. The Company capitalized approximately $243,000 for
the three months ended March 31, 2003 on these additional systems. The Company
has capitalized a total of $7.1 million since the project began. The Company
expects to complete the system in phases. Phase 1 is expected to be completed by
the end of the second quarter of 2003.
The Company continues to develop TSYS ProphIT(SM), a Web-based process
management system that provides direct access to account information and other
system interfaces to help streamline an organization's business processes. TSYS
ProphIT is being offered to TSYS' existing clients. Continued development of
TSYS ProphIT will add increased and enhanced functionality to the core platform.
The Company capitalized approximately $3.3 million for the three months ended
March 31, 2003 on TSYS ProphIT. The Company has capitalized a total of $18.6
million since the project began. The development of TSYS ProphIT will be
completed as the software is enhanced for additional features.
Contract Acquisition Costs
TSYS makes cash payments for processing rights, third-party development
costs and other direct salary related costs in connection with converting new
customers to the Company's processing systems. The Company's investments in
contract acquisition costs were $8.8 million for the three months ended March
31, 2003, and $9.2 million for the months ended March 31, 2002. Cash payments
for processing rights were $3.0 million and $6.5 million for the three months
ended March 31, 2003 and 2002, respectively. Conversion cost additions were $5.8
million and $2.7 million for the three months ended March 31, 2003 and 2002,
respectively.
Cash Flows From Financing Activities
The Company's main use of cash in financing activities is the payment of
dividends. The Company has paid a dividend for 54 consecutive quarters.
Dividends on common stock of $3.4 million were paid in the first quarter of
2003. On April 17, 2003, the Company announced a 14.3% increase in its quarterly
dividend from $0.0175 to $0.0200 per share. On April 18, 2002, the Company
announced a 16.7% increase in its quarterly dividend from $0.0150 to $0.0175 per
share.
- 30 -
Liquidity and Capital Resources (continued)
Additional Cash Flow Information
Off-Balance Sheet Financing
In 1997, the Company entered into an operating lease agreement relating to
the corporate campus. The lease provides for a substantial residual value
guarantee, up to $81.4 million, and includes purchase options at the original
cost of the property. Real estate taxes, insurance, maintenance and operating
expenses applicable to the leased property are obligations of the Company.
In 2002, the Company renewed its operating lease agreement with a special
purpose entity (SPE) for the Company's corporate campus. The terms of this lease
financing arrangement require, among other things, that the Company maintain
certain minimum financial ratios and provide certain information to the lessor.
TSYS is also subject to interest rate risk associated with the lease on its
campus facilities because of the short-term variable rate nature of the SPE's
debt. The payments under the operating lease arrangement, which can be locked in
for six month intervals, are tied to the London Interbank Offered Rate (LIBOR)
plus a margin ranging from 95 basis points to 185 basis points. In the event
that LIBOR rates increase, operating expenses could increase proportionately.
If the synthetic lease is not restructured, Interpretation No. 46 will
require TSYS to consolidate the SPE effective with the reporting period
beginning July 1, 2003. The estimated fair value of the campus buildings and
real property at January 1, 2003 was approximately $93.0 million. Consolidation
would also require TSYS to consolidate the SPE's results of operations,
including depreciation and interest expense. The Company can withdraw from the
lease agreement by providing a 60-day written notice.
On April 30, 2003, the Company provided written notice that it intended to
terminate the lease agreement for the Company's corporate campus. The Company
has decided to purchase the corporate campus with a combination of cash and debt
financing through Synovus. The purchase is expected to take place at the end of
the second quarter of 2003.
Significant Noncash Transaction
Effective January 1, 2002, TSYS acquired TDM in exchange for 2,175,000
newly issued shares of TSYS common stock with a market value of $43.5 million.
TDM now operates as a wholly owned subsidiary of TSYS. This transaction
increased Synovus' ownership of TSYS to 81.1% in 2002.
On October 15, 2002 the board of directors of TSYS approved the purchase of
ProCard, Inc. (ProCard) from Synovus for $30.0 million in cash. On November 1,
2002, TSYS completed the acquisition. ProCard is a leading provider of software
and Internet tools designed to assist organizations with the management of
purchasing, travel and fleet card programs. ProCard's software solutions have
been integrated into TSYS' processing solutions and offer TSYS the opportunity
to further expand its services to ProCard's clients.
Because the acquisition of ProCard was a transaction between entities under
common control, the Company is reflecting the acquisition at historical cost in
accordance with SFAS 141. In accordance with the provisions of SFAS 141, TSYS
restated its financial statements for the periods that Synovus controlled both
ProCard and TSYS.
- 31 -
Liquidity and Capital Resources (continued)
Subsequent Event
On April 15, 2003, TSYS announced that its board had approved a stock
repurchase plan to purchase up to 2 million shares, which represents slightly
more than five percent of the shares of TSYS stock held by shareholders other
than Synovus. The shares may be purchased from time to time over the next two
years at prices considered attractive to management. Repurchased shares will be
used for general corporate purposes. Through May 13, 2003, the Company purchased
428,000 shares at an average cost of $18.29 per share.
On April 28, 2003, TSYS announced the acquisition of ESC for $36.0 million
in cash. The Company is in the process of completing the purchase price
allocation and has preliminarily allocated approximately $24.5 million to
goodwill, approximately $8.2 million to intangibles and the remaining amount to
the net assets acquired. ESC provides targeted loyalty consulting and travel, as
well as gift card and merchandise reward programs to more than 40 national and
regional financial institutions in the United States. The Company believes the
acquisition of ESC enhances TSYS processing services by adding distinct value
differentiation for TSYS and its clients.
Foreign Exchange
TSYS operates internationally and is subject to potentially adverse
movements in foreign currency exchange rates. Since December 2000, TSYS has not
entered into foreign exchange forward contracts to reduce its exposure to
foreign currency rate changes.
In July 2002, the Company restructured a portion of its permanent financing
of its UK operation as an intercompany loan. The financing requires the unit to
repay the financing in US dollars. The functional currency of the European
operations is the British Pound Sterling. As the Company translates the European
operations statements into US dollars, the translated balance of the financing
(liability) is adjusted upwards or downwards to match the US-dollar obligation
(receivable) on the Company's financial statement. The upwards or downwards
adjustment is recorded as a gain or loss on foreign currency translation. As a
result of the restructuring, the Company recorded a foreign currency translation
loss on the Company's financing with its European operations during the first
quarter of 2003. The Company also records foreign currency translation
adjustments associated with other balance sheet accounts. The majority of the
translation loss of $626,000 for the first quarter of 2003 relates to the
intercompany loan. The balance of the financing at March 31, 2003 was
approximately $8.4 million.
As a result of the restructuring of a portion of its UK investment, the
Company has a greater exposure to currency risk. The Company is exploring
potential hedging instruments to safeguard it from significant currency
translation risks.
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
- 32 -
Liquidity and Capital Resources (continued)
securities such as industrial revenue bonds. However, there can be no assurance
that funds will 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 2.4:1. At March 31, 2003, TSYS had working capital of
$174.4 million compared to $152.0 million at December 31, 2002.
Recent Accounting Pronouncements
In June 2001, the FASB issued Statement No. 143 (SFAS 143), "Accounting for
Asset Retirement Obligations." SFAS 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development, and/or
normal use of the assets.
The Company also records a corresponding asset that is depreciated over the
life of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to reflect
the passage of time and changes in the estimated future cash flows underlying
the obligation. The Company adopted SFAS 143 on January 1, 2003. The adoption of
SFAS 143 did not have a material effect on the Company's financial position,
results of operations or cash flows.
In April 2002, the FASB issued Statement No. 145 (SFAS 145), "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS 145 also amends SFAS No. 13
to require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 are applied in fiscal
years beginning after May 15, 2002. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002.
The adoption of SFAS 145 did not have a material effect on the Company's
financial position, results of operations or cash flows.
In June 2002, the FASB issued Statement No. 146 (SFAS 146),"Accounting for
Costs Associated with Exit or Disposal Activities." SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity." The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
adoption of SFAS 146 did not have a material effect on the Company's financial
position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. Interpretation No. 45 also clarifies
- 33 -
Recent Accounting Pronouncements (continued)
that a guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002 and did not have a
material effect on the Company's financial statements. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The Company has one lease guarantee.
To assist Vital Processing Services L.L.C. (Vital) in leasing its corporate
facility, the Company and Visa U.S.A. (Visa) are guarantors, jointly and
severally, for the lease payments on Vital's Tempe facility. The lease on the
facility expires in July 2007. The total future minimum lease payments remaining
at March 31, 2003 is $6.3 million. If Vital fails to perform its obligations
with regards to the lease, TSYS and Visa will be required to perform in the same
manner and to same extent as is required by Vital.
At the November 21, 2002 Emerging Issues Task Force (EITF) meeting, the
Task Force ratified as a consensus the tentative conclusions it reached at the
October 25, 2002 EITF meeting regarding Emerging Issues Task Force 00-21 (EITF
00-21), "Accounting for Revenue Arrangements with Multiple Deliverables." EITF
00-21 addresses certain aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities. Those
activities may involve the delivery or performance of multiple products,
services, and/or rights to use assets, and performance may occur at different
points in time or over different periods of time. The arrangements are often
accompanied by initial installation, initiation, or activation services and
generally involve either a fixed fee or a fixed fee coupled with a continuing
payment stream. The continuing payment stream generally corresponds to the
continuing performance and may be fixed, variable based on future performance,
or composed of a combination of fixed and variable payments. EITF 00-21
addresses how to account for those arrangements. EITF 00-21 is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. Entities may also elect to report the change in accounting as a cumulative
effect adjustment, in which case disclosure should be made in periods subsequent
to the date of initial application of the amount of recognized revenue that was
previously included in the cumulative effect adjustment. Management has not yet
determined the effect of EITF 00-21 on TSYS' financial position, results of
operations and cash flows.
In December 2002, the FASB issued Statement No. 148 (SFAS 148), "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS 148 amends FASB Statement No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002 and are included in
the notes to the consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For enterprises such as the
- 34 -
Recent Accounting Pronouncements (continued)
Company with a variable interest in a variable interest entity created before
February 1, 2003, the Interpretation is applied to the enterprise in the first
fiscal year or interim period after June 15, 2003. The Interpretation requires
certain disclosures in financial statements issued after January 31, 2003 if it
is reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective.
In 2002, the Company renewed its operating lease agreement with a special
purpose entity (SPE) for the Company's corporate campus. If the synthetic lease
is not restructured, Interpretation No. 46 will require TSYS to consolidate the
SPE effective with the reporting period beginning July 1, 2003. The estimated
fair value of the campus buildings and real property at January 1, 2003 was
approximately $93.0 million. Consolidation would also require TSYS to
consolidate the SPE's results of operations, including depreciation and interest
expense. The Company can withdraw from the lease agreement by providing a 60-day
written notice.
On April 30, 2003, the Company provided written notice that it intended to
terminate the lease agreement for the Company's corporate campus. The Company
has decided to purchase the corporate campus with a combination of cash and debt
financing through Synovus. The purchase is expected to take place at the end of
the second quarter of 2003.
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, statements regarding TSYS' belief with respect
to the impact of recent accounting pronouncements on TSYS, belief with respect
to potential clients evaluating outsourcing arrangements, expected expansion of
its position in the consumer card, retail card and commercial card arenas,
expectations with respect to its obligations to perform back-up servicing for
Providian being "triggered," expected growth in net income for the year 2003,
expected completion dates for new processing systems and the assumptions
underlying such statements, including, with respect to TSYS' expected increase
in net income for 2003; an increase in revenues (excluding reimbursables)
between 9-10%; an internal growth rate of accounts of existing clients of
approximately 11%; and continued focus on expense management. In addition,
certain statements in future filings by TSYS with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of TSYS which are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenue, income or loss, earnings or loss per share, the payment or nonpayment
of dividends, capital structure and other financial items; (ii) statements of
plans and objectives of TSYS or its management or Board of Directors, including
those relating to products or services; (iii) statements of future economic
performance; and (iv) statements of assumptions underlying such statements.
Words such as "believes," "anticipates," "expects," "intends," "targeted," and
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.
Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
contemplated by such forward-looking statements. A number of important factors
could cause actual results to differ materially from those contemplated by the
forward-looking statements in
- 35 -
Forward-Looking Statements (continued)
this filing. Many of these factors are beyond TSYS' ability to control or
predict. The factors include, but are not limited to: (i) adverse developments
with respect to TSYS' sub-prime clients; (ii) lower than anticipated internal
growth rates for TSYS' existing customers; (iii) TSYS' inability to control
expenses and increase market share; (iv) TSYS' inability to successfully bring
new products to market, including, but not limited to stored value products,
e-commerce products, loan processing products and other processing services; (v)
the inability of TSYS to grow its business through acquisitions; (vi) TSYS'
inability to increase the revenues derived from international sources; (vii)
adverse developments with respect to entering into contracts with new clients
and retaining current clients; (viii) the merger of TSYS clients with entities
that are not TSYS clients or the sale of portfolios by TSYS clients to entities
that are not TSYS clients; (ix) TSYS' inability to anticipate and respond to
technological changes, particularly with respect to e-commerce; (x) adverse
developments with respect to the successful conversion of clients; (xi) the
absence of significant changes in foreign exchange spreads between the United
States and the countries TSYS transacts business in, to include Mexico, United
Kingdom, Japan, Canada and the European Union; (xii) changes in consumer
spending, borrowing and saving habits, including a shift from credit to debit
cards; (xiii) changes in laws, regulations, credit card association rules or
other industry standards affecting TSYS' business which require significant
product redevelopment efforts; (xiv) the effect of changes in accounting
policies and practices as may be adopted by the Financial Accounting Standards
Board or the Securities and Exchange Commission; (xv) the costs and effects of
litigation; (xvi) adverse developments with respect to the credit card industry
in general; (xvii) TSYS' inability to successfully manage any impact from
slowing economic conditions or consumer spending; (xviii) the occurrence of
catastrophic events that would impact TSYS' or its major customers' operating
facilities, communications systems and technology, or that has a material
negative impact on current economic conditions or levels of consumer spending;
(xix) successfully managing the potential both for patent protection and patent
liability in the context of rapidly developing legal framework for expansive
software patent protection; (xx) hostilities in the Middle East or elsewhere;
(xxi) Vital's earnings are lower than anticipated; and (xxii) overall market
conditions.
Such forward-looking statements speak only as of the date on which such
statements are made, and TSYS undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
- 36 -
TOTAL SYSTEM SERVICES, INC.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
TSYS is exposed to foreign exchange risk because it has assets,
liabilities, revenues and expenses denominated in foreign currencies including
the Euro, British Pound, Mexican Peso, Canadian Dollar and Japanese Yen. These
currencies are translated into U.S. dollars at current exchange rates, except
for revenues, costs and expenses, and net income, which are translated at the
average exchange rates for each reporting period. Net exchange gains or losses
resulting from the translation of assets and liabilities of TSYS' foreign
operations, net of tax, are accumulated in a separate section of shareholders'
equity titled accumulated other comprehensive income or loss. The amount of
other comprehensive loss for the three months ended March 31, 2003 was $1.2
million, compared to $1.0 million for the three months ended March 31, 2002.
Currently, TSYS does not use financial instruments to hedge its exposure to
exchange rate changes.
The carrying value of the net assets of its foreign operations in Europe,
Mexico, Canada and Japan was approximately (in U.S. dollars) $71.5 million, $3.6
million, $50,000 and $9.3 million, respectively, at March 31, 2003.
In July 2002, the Company restructured a portion of its permanent financing
of its UK operation as an intercompany loan. The financing requires the unit to
repay the financing in US dollars. The functional currency of the European
operations is the British Pound Sterling. As the Company translates the European
operations statements into US dollars, the translated balance of the financing
(liability) is adjusted upwards or downwards to match the US-dollar obligation
(receivable) on the Company's financial statement. The upwards or downwards
adjustment is recorded as a gain or loss on foreign currency translation. As a
result of the restructuring, the Company recorded a foreign currency translation
loss on the Company's financing with its European operations during the first
quarter of 2003. The Company also records foreign currency translation
adjustments associated with other balance sheet accounts. The majority of the
translation loss of $626,000 for the first quarter of 2003 relates to the
intercompany loan. The balance of the financing at March 31, 2003 was
approximately $8.4 million.
Currently, there are no regularly scheduled payments under the financing
arrangement, although the balance is expected to be repaid over time. The
following represents the potential effect on income before income taxes of
hypothetical shifts in the foreign currency exchange rate between the British
Pound Sterling and the U.S. dollar of plus or minus 100 basis points, 500 basis
points and 1,000 points based on the intercompany loan balance at March 31,
2003.
--------------------------------------------------------------------------------
Effect of Basis Point Change
--------------------------------------------------------------------------------
Increase in basis point of Decrease in basis point of
-------------- ------------- -------------- ----------- ------------ -----------
100 500 1,000 100 500 1,000
-------------- ------------- -------------- ----------- ------------ -----------
Effect on income before income taxes $ (84,000) (418,000) (836,000) 84,000 418,000 836,000
-------------- ------------- -------------- ----------- ------------ -----------
The foreign currency risks associated with other balance sheet accounts is
not significant.
- 37 -
TOTAL SYSTEM SERVICES, INC.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk (continued)
Interest Rate Risk
TSYS is also exposed to interest rate risk associated with the investing of
available cash and the lease on its campus facilities. TSYS invests available
cash in conservative short-term instruments and is primarily subject to changes
in the short-term interest rates.
The payments under the operating lease arrangement of the campus facilities
are tied to the London Interbank Offered Rate. TSYS locks into interest rates
for six-month intervals. The extent that rates change in a six-month period
represents TSYS' exposure.
In 2002, the Company renewed its operating lease agreement with a special
purpose entity (SPE) for the Company's corporate campus. If the synthetic lease
is not restructured, Interpretation No. 46 will require TSYS to consolidate the
SPE effective with the reporting period beginning July 1, 2003. The estimated
fair value of the campus buildings and real property at January 1, 2003 was
approximately $93.0 million. Consolidation would also require TSYS to
consolidate the SPE's results of operations, including depreciation and interest
expense. The Company can withdraw from the lease agreement by providing a 60-day
written notice.
On April 30, 2003, the Company provided written notice that it intended to
terminate the lease agreement for the Company's corporate campus. The Company
has decided to purchase the corporate campus with a combination of cash and debt
financing through Synovus. The purchase is expected to take place at the end of
the second quarter of 2003.
Concentration of Credit Risk
TSYS works to maintain a large and diverse client base across various
industries to minimize the credit risk of any one client to TSYS' accounts
receivable amounts. In addition, TSYS performs ongoing credit evaluations of its
certain clients' and certain suppliers' financial condition. TSYS does, however,
have two major customers that account for a large portion of its revenues, which
subject it to credit risk.
- 38 -
TOTAL SYSTEM SERVICES, INC.
Item 4 - Management's Analysis of Disclosure Controls and Procedures
As required by SEC rules, we have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures within 90 days of the
filing date of this quarterly report. This evaluation was carried out under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer. Based on this
evaluation, these officers have concluded that the design and operation of our
disclosure controls and procedures are effective. There were no significant
changes to our internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation.
- 39 -
TOTAL SYSTEM SERVICES, INC.
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit Number Description
--------------------- ----------------------------------------------
99.1 Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
b) Forms 8-K filed since the previous Form 10-K filing.
1. The report dated March 3, 2003 included the following important
event:
On March 3, 2003, Total System Services, Inc. ("Registrant")
issued a press release with respect to its execution of a
processing/license agreement with Bank One Corporation.
2. The report dated March 4, 2003 included the following important
event:
On March 4, 2003, Total System Services, Inc. issued a press
release with respect to the projected earnings per share
impact of its recently announced processing services and
software agreement with Bank One Corporation and with
respect to its reaffirmation of its net income projection
for 2003.
3. The report dated April 15, 2003 included the following important
event:
On April 15, 2003, Total System Services, Inc.
("Registrant") issued a press release and held an investor
call and webcast to disclose financial results for the first
quarter 2003 earnings.
- 40 -
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 14, 2003 by: /s/ Richard W. Ussery
---------------------------
Richard W. Ussery
Chairman of the Board
and Chief Executive Officer
Date: May 14, 2003 by: /s/ James B. Lipham
---------------------------
James B. Lipham
Chief Financial Officer
- 41 -
TOTAL SYSTEM SERVICES, INC.
Chief Executive Officer Certification
I, Richard W. Ussery, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Total System
Services, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Richard W. Ussery
Richard W. Ussery
Chief Executive Officer
- 42 -
TOTAL SYSTEM SERVICES, INC.
Chief Financial Officer Certification
I, James B. Lipham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Total System
Services, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ James B. Lipham
-------------------------
James B. Lipham
Chief Financial Officer
- 43 -
TOTAL SYSTEM SERVICES, INC.
Exhibit Index
Exhibit Number Description
-------------------- --------------------------------------------------
99.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
- 44 -