UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: March 31, 2009

OR

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

For the transition period from            To

Total System Services, Inc.

www.tsys.com

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

One TSYS Way, Post Office Box 1755, Columbus, Georgia 31902
(Address of principal executive offices) (Zip Code)

(706) 649-2310
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No o

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

CLASS Common Stock, $0.10 par value		OUTSTANDING AS OF: May 7, 2009 197,160,976 shares

 

 

TOTAL SYSTEM SERVICES, INC.
INDEX

		Page
		Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) — March 31, 2009 and December 31, 2008			3
Condensed Consolidated Statements of Income (unaudited) — Three months ended March 31, 2009 and 2008			4
Condensed Consolidated Statements of Cash Flows (unaudited) — Three months ended March 31, 2009 and 2008			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			35
Part II. Other Information
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 6. Exhibits			36
Signatures			37
Exhibit Index			38
EX-31.1
EX-31.2
EX-32

TOTAL SYSTEM SERVICES, INC.

(in thousands, except per share data)		March 31, 2009				December 31, 2008
Assets
Current assets:
Cash and cash equivalents		$	271,043				211,365
Restricted cash			32,892				31,128
Accounts receivable, net of allowance for doubtful accounts and billing adjustments of $6.6 million and $8.0 million at 2009 and 2008, respectively			240,421				246,767
Deferred income tax assets			14,777				29,615
Prepaid expenses and other current assets			90,826				88,612
Current assets of discontinued operations			28,985				24,570
Total current assets			678,944				632,057
Property and equipment, net of accumulated depreciation and amortization of $286.2 million and $285.9 million at 2009 and 2008, respectively			273,028				279,653
Computer software, net of accumulated amortization of $436.4 million and $423.7 million at 2009 and 2008, respectively			198,504				202,038
Contract acquisition costs, net			129,912				131,568
Goodwill			165,413				165,995
Equity investments			75,027				74,012
Other intangible assets, net of accumulated amortization of $16.4 million and $15.6 million at 2009 and 2008, respectively			16,491				17,452
Other assets			45,136				40,768
Long-term assets of discontinued operations			6,697				7,245
Total assets		$	1,589,152				1,550,788
Liabilities
Current liabilities:
Current portion of long-term debt		$	8,619				8,575
Current portion of obligations under capital leases			6,954				6,344
Accrued salaries and employee benefits			20,861				46,696
Accounts payable (includes $12 payable to related parties at 2008)			29,177				32,440
Other current liabilities			170,711				131,515
Current liabilities of discontinued operations			18,911				10,998
Total current liabilities			255,233				236,568
Long-term debt, excluding current portion			195,920				196,295
Deferred income tax liabilities			49,674				60,578
Obligations under capital leases, excluding current portion			15,186				13,576
Other long-term liabilities			40,004				40,709
Long-term liabilities of discontinued operations			1,600				2,212
Total liabilities			557,617				549,938
Equity
Shareholders’ equity:
Common stock — $0.10 par value. Authorized 600,000 shares; 200,813 and 200,356 issued at 2009 and 2008, respectively; 197,161 and 196,704 outstanding at 2009 and 2008, respectively			20,080				20,036
Additional paid-in capital			129,074				126,889
Accumulated other comprehensive income, net			(10,383	)			(6,627	)
Treasury stock, at cost (shares of 3,678 and 3,652 at 2009 and 2008, respectively)			(69,970	)			(69,641	)
Retained earnings			953,005				920,292
Total shareholders’ equity			1,021,806				990,949
Noncontrolling interests in consolidated subsidiaries			9,729				9,901
Total equity			1,031,535				1,000,850
Total liabilities and equity		$	1,589,152				1,550,788

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

TOTAL SYSTEM SERVICES, INC.

		Three months ended March 31,
(in thousands, except per share data)		2009				2008
Revenues:
Electronic payment processing services		$	232,119				245,669
Merchant acquiring services			65,477				61,714
Other services			47,850				45,747
Revenues before reimbursable items			345,446				353,130
Reimbursable items			63,487				66,696
Total revenues			408,933				419,826
Expenses:
Salaries and other personnel expense			144,342				145,225
Net technology and facilities expense			73,986				72,255
Spin related expenses			¾				6,895
Other operating expenses			49,004				42,659
Expenses before reimbursable items			267,332				267,034
Reimbursable items			63,487				66,696
Total expenses			330,819				333,730
Operating income			78,114				86,096
Nonoperating (expense) income			(1,458	)			1,280
Income from continuing operations before income taxes and equity in income of equity investments			76,656				87,376
Income taxes			27,415				32,907
Income from continuing operations before equity in income of equity investments			49,241				54,469
Equity in income of equity investments, net of tax			1,043				2,162
Income from continuing operations, net of tax			50,284				56,631
(Loss) income from discontinued operations, net of tax			(3,343	)			233
Net income			46,941				56,864
Net income attributable to noncontrolling interests			(415	)			(250	)
Net income attributable to TSYS		$	46,526				56,614
Basic earnings per share:
Income from continuing operations		$	0.26				0.29
(Loss) income from discontinued operations			(0.02	)			0.00
Net income		$	0.24				0.29
Diluted earnings per share:
Income from continuing operations		$	0.26				0.29
(Loss) income from discontinued operations			(0.02	)			0.00
Net income		$	0.24				0.29
Weighted average common shares outstanding			195,461				196,745
Increase due to assumed issuance of shares related to common equivalent shares			355				561
Weighted average common and common equivalent shares outstanding			195,816				197,306
Amounts attributable to TSYS common shareholders:
Income from continuing operations		$	49,869				56,381
(Loss) income from discontinued operations			(3,343	)			233
Net income		$	46,526				56,614

     See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

TOTAL SYSTEM SERVICES, INC.

		Three months ended March 31,
(in thousands)		2009				2008
Cash flows from operating activities:
Net income attributable to TSYS		$	46,526				56,614
Adjustments to reconcile net income attributable to TSYS to net cash provided by operating activities:
Net income attributable to the noncontrolling interests in consolidated subsidiaries’ net income, net of tax			415				250
Net loss (gain) on foreign currency			883				(1,943	)
Equity in income of equity investments, net of tax			(1,043	)			(2,162	)
Depreciation and amortization			39,850				39,229
Amortization of debt issuance costs			38				38
Share-based compensation			5,297				7,895
Excess tax benefit from share-based payment arrangements			—				(67	)
(Recoveries of) provisions for bad debt expenses and billing adjustments			(394	)			2,101
Charges for transaction processing provisions			1,537				265
Deferred income tax benefit			(2,329	)			(6,875	)
Loss on disposal of equipment, net			7				161
(Increase) decrease in:
Accounts receivable			1,166				(6,140	)
Prepaid expenses, other current assets and other long-term assets			(1,743	)			2,492
Increase (decrease) in:
Accounts payable			(3,779	)			3,426
Accrued salaries and employee benefits			(25,567	)			(34,401	)
Other current liabilities and other long-term liabilities			37,806				39,116
Net cash provided by operating activities			98,670				99,999
Cash flows from investing activities:
Purchases of property and equipment, net			(2,181	)			(14,350	)
Additions to licensed computer software from vendors			(5,932	)			(2,351	)
Additions to internally developed computer software			(5,828	)			(2,413	)
Cash used in acquisitions			(205	)			—
Additions to contract acquisition costs			(10,992	)			(17,168	)
Net cash used in investing activities			(25,138	)			(36,282	)
Cash flows from financing activities:
Dividends paid on common stock			(13,779	)			(13,858	)
Repurchase of common stock			(329	)			(11,369	)
Excess tax benefit from share-based payment arrangements			—				67
Principal payments on long-term debt borrowings and capital lease obligations			(3,622	)			(4,976	)
Proceeds from borrowings			2,809				—
Proceeds from exercise of stock options			¾				59
Net cash used in financing activities			(14,921	)			(30,077	)
Effect of exchange rate changes on cash and cash equivalents			(1,084	)			(1,509	)
Net increase in cash and cash equivalents			57,527				32,131
Cash and cash equivalents at beginning of period			220,018				210,518
Cash and cash equivalents at end of period		$	277,545				242,649
Supplemental cash flow information:
Interest paid		$	998				3,340
Income taxes (refunds received) paid, net		$	(467	)			1,095

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

TOTAL SYSTEM SERVICES, INC.

Note 1 — Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements of Total System Services, Inc.^® (TSYS^® or the Company) include the accounts of TSYS and its wholly-owned subsidiaries as well as TSYS’ majority owned foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

     These financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. These estimates and assumptions are developed based upon all information available. Actual results could differ from estimated amounts. All adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of financial position and results of operations for the periods covered by this report have been included.

     The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s summary of significant accounting policies, consolidated financial statements and related notes appearing in the Company’s 2008 Annual Report previously filed on Form 10-K. Results of interim periods are not necessarily indicative of results to be expected for the year.

     As a result of the pending sale of TSYS Total Debt Management, Inc. (TDM) as discussed in Note 2, the Company’s financial statements reflect TDM as discontinued operations. The Company has segregated the net assets, net liabilities and operating results from continuing operations on the Unaudited Condensed Consolidated Balance Sheets and Unaudited Condensed Consolidated Statements of Income for all periods presented.

     Certain reclassifications have been made to the 2008 financial statements to conform to the presentation adopted in 2009.

Note 2 — Discontinued Operations

     The Company is in the process of selling TDM. The decision to sell the TDM business was the result of management’s decision to divest non-strategic businesses and focus resources on core products and services. TDM was part of the North America Services segment.

     In accordance with the provisions of Statement of Financial Accounting Standards No. 144 (SFAS No. 144), “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company determined that the TDM business became a discontinued operation in the first quarter of 2009.

     The following table presents the summarized results of discontinued operations for the three months ended March 31, 2009, as compared to 2008:

		Three months ended March 31,
(in millions)		2009				2008				Percent Change
Revenues before reimbursable items		$	7.4				6.9				6.4	%
Total revenues			66.8				41.9				59.4
Operating (loss) income			(5.3	)			0.3			nm
Income taxes			(1.9	)			0.1			nm
(Loss) income from discontinued operations, net of tax			(3.3	)			0.2			nm

     The Unaudited Condensed Consolidated Statements of Cash Flows will include TDM through the date of disposition.

     The following table presents the quarterly and year-to-date summary of 2008 consolidated financial results for TSYS with TDM classified as discontinued operations:

		Three Months Ended																Twelve Months Ended
		March 31,				June 30,				September 30,				December 31,				December 31,
(in thousands)		2008				2008				2008				2008				2008
Revenues before reimbursable items		$	353,130				363,055				372,703				367,866			$	1,456,754
Reimbursable items			66,696				66,575				66,742				64,879				264,892
Total revenues			419,826				429,630				439,445				432,745				1,721,646
Total expenses			333,730				332,782				344,155				342,304				1,352,971
Operating income			86,096				96,848				95,290				90,441				368,675
Nonoperating income			1,280				(429	)			(82	)			5,003				5,772
Income before income taxes			87,376				96,419				95,208				95,444				374,447
Income taxes			32,907				33,981				34,091				30,227				131,206
Income before equity income			54,469				62,438				61,117				65,217				243,241
Equity income			2,162				1,109				3,062				1,064				7,397
Income from continuing operations, net of tax			56,631				63,547				64,179				66,281				250,638
(Loss) income from discontinued operations, net of tax			233				234				269				302				1,038
Net income			56,864				63,781				64,448				66,583				251,676
Noncontrolling interests			(250	)			(697	)			(374	)			(255	)			(1,576	)
Net income attributable to TSYS common shareholders		$	56,614				63,084				64,074				66,328			$	250,100

Note 3 — Fair Value Measurement

     In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157 (SFAS No. 157), “Fair Value Measurements.” Although this statement does not require any new fair value measurements, in certain cases its application has changed previous practice in determining fair value. SFAS No. 157 became effective for the Company beginning January 1, 2008 as it relates to fair value measurements of financial assets and liabilities and certain non-financial assets and liabilities that are recognized at fair value in its financial statements on a recurring basis (at least annually). It became effective beginning January 1, 2009 for certain other non-financial assets and non-financial liabilities.

     SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It establishes a hierarchy for fair value measurements based upon the inputs to the valuation and the degree to which they are observable or not observable in the market. The three levels in the hierarchy are as follows:

	•		Level 1 — Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.
	•		Level 2 — Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.
	•		Level 3 — Inputs to the valuation that are unobservable inputs for the asset or liability.

     SFAS No. 157 assigns the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs.

     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS No. 159), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits the Company to choose to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159 on January 1, 2008, TSYS did not elect the fair value option for any financial instrument it did not currently report at fair value.

     Goodwill and certain intangible assets not subject to amortization are assessed annually for impairment in the second quarter of each year using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step test. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds its book value, goodwill is considered not impaired and the second step of the impairment test is unnecessary. If the book value of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the book value of that goodwill. If the book value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

     The estimate of fair value of the Company’s goodwill reporting units is determined using various valuation techniques including using the combination of the income approach and the market approach. The market approach, which contains Level 2 inputs, utilizes readily available market valuation multiples to estimate fair value. The income approach is a valuation technique that utilizes the discounted cash flow (DCF) method which includes Level 3 inputs. Under the DCF method, the fair value of the asset reflects the present value of the projected earnings that will be generated by each asset after taking into account the revenues and expenses associated with the asset, the relative risk that the cash flows will occur, the contribution of other assets, and an appropriate discount rate to reflect the value of the invested capital. Cash flows are estimated for future periods based upon historical data and projections by management.

Note 4 — Supplementary Balance Sheet Information

Cash and Cash Equivalents

     Cash and cash equivalent balances are summarized as follows:

(in thousands)		March 31, 2009				December 31, 2008
Cash and cash equivalents in domestic accounts		$	233,429				149,047
Cash and cash equivalents in foreign accounts			37,614				62,318
Total		$	271,043				211,365

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

Prepaid Expenses and Other Current Assets

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

(in thousands)		March 31, 2009				December 31, 2008
Income taxes receivable		$	21,774				23,752
Prepaid expenses			15,260				14,079
Supplies inventory			10,079				9,586
Other			43,713				41,195
Total		$	90,826				88,612

Contract Acquisition Costs, net

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

(in thousands)		March 31, 2009				December 31, 2008
Payments for processing rights, net of accumulated amortization of $134.1 million and $126.5 million at 2009 and 2008, respectively		$	67,631				73,201
Conversion costs, net of accumulated amortization of $60.0 million and $56.1 million at 2009 and 2008, respectively			62,281				58,367
Total		$	129,912				131,568

     Amortization related to payments for processing rights, which is recorded as a reduction of revenues, was $134.1 million and $114.5 million for the three months ended March 31, 2009 and 2008, respectively.

     Amortization expense related to conversion costs, which is recorded in other operating expenses, was $60.0 million and $48.7 million for the three months ended March 31, 2009 and 2008, respectively.

Other Current Liabilities

     Significant components of other current liabilities are summarized as follows:

(in thousands)		March 31, 2009				December 31, 2008
Client liabilities		$	37,294				35,423
Accrued income taxes			34,236				2,808
Deferred revenues			27,793				22,619
Accrued expenses			26,904				27,510
Dividends payable			13,813				13,780
Transaction processing provisions			6,134				5,417
Client postage deposits			3,819				3,772
Other			20,718				20,186
Total		$	170,711				131,515

Note 5 — Long-Term Debt

     Refer to Note 11 of the Company’s audited financial statements for the year ended December 31, 2008 which are included as Exhibit 13.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the SEC, for a discussion regarding long-term debt.

     On October 31, 2008, the Company’s International Services segment obtained a credit agreement from a third-party to borrow up to approximately ¥2.0 billion, or $21 million, in a Yen-denominated three year loan to finance activities in Japan. The rate is London Interbank Offered Rate (LIBOR) plus 80 basis points. In 2008, the Company initially made a draw down of ¥1.5 billion, or approximately $15.1 million. In January 2009, the Company made another draw down of ¥250 million, or approximately $2.8 million.

Note 6 — Equity and Noncontrolling Interests

     In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (SFAS No. 160), “Noncontrolling Interests in Consolidated Financial Statements” - an amendment of ARB No. 51. SFAS No. 160 changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as a component of consolidated shareholders’ equity, the elimination of “minority interest” accounting in results of operations and changes in the accounting for both increases and decreases in a parent’s controlling ownership interest.

     Below is a summary of the changes in the statement of equity as a result of the adoption of SFAS No. 160 through three months ended March 31, 2009:

TSYS Shareholders

Accumulated

Other

Additional

Comprehensive

Non-

(in thousands, except

Common Stock

paid-in

Income (Loss)

Treasury

Retained

controlling

Total

per share data)

Shares

Dollars

Capital

(OCI)

Stock

Earnings

Interests

Equity

Balance, December 31, 2008

200,356

$

20,036

126,889

(6,627

)

(69,641

)

920,292

9,901

$

1,000,850

Comprehensive income:

Net income

46,526

415

46,941

Other comprehensive income, net of tax:

		TSYS Shareholders
														Accumulated
														Other
										Additional				Comprehensive												Non-
(in thousands, except		Common Stock								paid-in				Income (Loss)				Treasury				Retained				controlling				Total
per share data)		Shares				Dollars				Capital				(OCI)				Stock				Earnings				Interests				Equity
Foreign currency translation															(3,777	)											(587	)			(4,364	)
Change in accumulated OCI related to postretirement healthcare plans															21												¾				21
Other comprehensive income															(3,756	)											(587	)			(4,343	)
Comprehensive income																															42,598
Common stock issued for nonvested awards			457				44				(44	)																			—
Share-based compensation											5,281																				5,281
Cash dividends and dividend equivalents declared ($0.07 per share)																							(13,813	)							(13,813	)
Purchase of treasury shares																			(329	)											(329	)
Tax shortfalls associated with share-based payment arrangements											(3,052	)																			(3,052	)
Balance, March 31, 2009			200,813			$	20,080				129,074				(10,383	)			(69,970	)			953,005				9,729			$	1,031,535

Note 7 — Comprehensive Income

     Comprehensive income is summarized below:

		For the three months ended March 31, 2009												For the three months ended March 31, 2008
		TSYS				Noncontrolling								TSYS				Noncontrolling
(in thousands)		Shareholders				Interests				Total				Shareholders				Interests				Total
Net income		$	46,526				415			$	46,941			$	56,614				250			$	56,864
Other comprehensive income (OCI), net of tax:
Foreign currency translation adjustments			(3,777	)			(587	)			(4,364	)			4,353				962				5,315
Change in accumulated OCI related to postretirement healthcare plans			21				¾				21				12				¾				12
Total		$	42,770				(172	)		$	42,598			$	60,979				1,212			$	62,191

     The income tax effects allocated to and the cumulative balance of accumulated other comprehensive income are as follows:

		Beginning Balance				Pretax												Ending Balance
(in thousands)		December 31, 2008				Amount				Tax Effect				Net-of-Tax Amount				March 31, 2009
Foreign currency translation adjustments		$	(5,858	)		$	(4,308	)			531			$	(3,777	)		$	(9,635	)
Change in accumulated OCI related to postretirement healthcare plans			(769	)			38				(17	)			21				(748	)
Total		$	(6,627	)		$	(4,270	)			514			$	(3,756	)		$	(10,383	)

     Consistent with its overall strategy of pursuing international investment opportunities, TSYS adopted the permanent reinvestment exception under Accounting Principles Board Opinion No. 23 (APB 23) “Accounting for Income Taxes — Special Areas,” with respect to future earnings of certain foreign subsidiaries. Its decision to permanently reinvest foreign earnings offshore means TSYS will no longer allocate taxes to foreign currency translation adjustments associated with these foreign subsidiaries accumulated in other comprehensive income.

Note 8 — Share-Based Compensation

     The Company’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the SEC, contains a discussion of the Company’s share-based compensation plans and policy.

Share-Based Compensation

     TSYS’ share-based compensation costs are included as expenses and classified as salaries, other personnel expenses and spin-related expenses. TSYS does not include amounts associated with share-based compensation as costs capitalized as software development and contract acquisition costs as these awards are typically granted to individuals not involved in capitalizable activities. For the three months ended March 31, 2009, share-based compensation was $5.3 million, compared to $7.9 million for the same period in 2008. Included in the $5.3 million amount for 2009 and $7.9 million amount for 2008 is approximately $2.4 million and $5.7 million, respectively, related to expensing the fair value of stock options.

Nonvested Share Awards

     During the first three months of 2009, the Company issued 457,220 shares of TSYS common stock with a market value of $6.0 million to certain key employees and non-management members of its Board of Directors under nonvested stock bonus awards for services to be provided in the future by such officers, directors and employees. The market value of the TSYS common stock at the date of issuance is amortized as compensation expense over the vesting period of the awards.

     During the first three months of 2008, the Company issued 695,411 shares of TSYS common stock with a market value of $15.2 million to certain key employees and non-management members of its Board of Directors under nonvested stock bonus awards for services to be provided in the future by such officers, directors and employees. The market value of the TSYS common stock at the date of issuance is amortized as compensation expense over the vesting period of the awards.

     As of March 31, 2009, there was approximately $19.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a remaining weighted average period of 2.4 years.

     During the first three months of 2008, TSYS authorized a total grant of 182,816 shares of nonvested stock to two key executives with a performance-vesting schedule (2008 performance-vesting shares). These 2008 performance-vesting shares have seven one-year performance periods (2008-2014) during each of which the Compensation Committee establishes an earnings per share goal and, if such goal is attained during any performance period, 20% of the performance-vesting shares will vest, up to a maximum of 100% of the total grant. Compensation expense for each year’s award is measured on the grant date based on the quoted market price of TSYS common stock and is expensed on a straight-line basis for the year.

     During 2005, TSYS authorized a total grant of 126,087 shares of nonvested stock to two key executives with a performance-vesting schedule (2005 performance-vesting shares). These performance-vesting shares have seven one-year performance periods (2005-2011) during each of which the Compensation Committee establishes an earnings per share goal and, if such goal is attained during any performance period, 20% of the performance-vesting shares will vest, up to a maximum of 100% of the total grant. Compensation expense for each year’s award is measured on the grant date based on the quoted market price of TSYS common stock and is expensed on a straight-line basis for the year.

     As of March 31, 2009, there was approximately $846,000 of total unrecognized compensation cost related to both the 2008 grant and 2005 grant of nonvested performance-vesting share-based compensation arrangements. That cost is expected to be recognized over the remainder of 2009.

Performance Based Awards

     During the first quarters of 2009 and 2008, respectively, TSYS authorized performance based awards that have a market condition calculated on a combination of earnings per share growth and TSYS’ performance compared to a three-year Total Shareholder Return versus peers. Vesting of the awards will occur on the last day of the three-year market condition valuation period if the participant is still employed on that date. The fair value of these awards is based on a Monte Carlo simulation as prescribed by Statement of Financial Accounting Standards No. 123 (Revised) (SFAS No. 123R) “Share-Based Payment (Revised).” Although authorized by the TSYS Board, the final amount of the awards is not known until the Compensation Committee has determined the final terms of the awards, at which time the award is deemed granted. The March 2008 award was authorized in 2008, however it was not deemed granted until the Compensation Committee determined the final terms of the award in January 2009. Likewise, the January 2009 award was authorized in 2009, however the award will not be deemed granted until the Compensation Committee determines the final terms of the award, which is expected to be in January 2010. The Company engaged a third-party valuation specialist to ascertain the fair value of these awards. The awards will be amortized through the end of the respective three-year periods.

     A summary of the awards authorized in each year is below:

Fair Value

Grant Date

Month

Primary

Secondary

Estimated

Amortized

Retirement

Terms

Authorized

Measure

Measure

Method

Valuation

through

Provision

Determined

February 2009

2009 EPS Growth

Three-year Total Shareholder Return (2009-2012)

Monte Carlo simulation

$4.0 million

December 2011

Age 62 with 15 years of service, or age 65 regardless of service

To be determined (January 2010)

March 2008

2008 EPS Growth

Three-year Total Shareholder Return (2008-2011)

Monte Carlo simulation

$1.0 million

December 2010

Age 62 with 15 years of service, or age 65 regardless of service

January 2009

     Until the awards were deemed granted, TSYS excluded the issuance of these awards in reporting shares outstanding from the calculation of basic and diluted EPS (although related compensation expense on these awards are included properly in net income and related EPS calculation).

Stock Option Awards

     During the first three months of March 2009, the Company granted 1,047,949 stock options to key TSYS executive officers. The average fair value of the option grant was $5.31 per option and was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions: exercise price of $13.11; risk-free interest rate of 3.19%; expected volatility of 42.00%; expected term of 8.6 years; and dividend yield of 2.14%.

     During the first three months of March 2008, the Company granted 768,855 stock options to key TSYS executive officers. The average fair value of the option grant was $9.73 per option and was estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions: exercise price of $23.15; risk-free interest rate of 3.42%; expected volatility of 36.57%; expected term of 8.7 years; and dividend yield of 1.21%.

     As of March 31, 2009, there was approximately $7.9 million of total unrecognized compensation expense cost related to TSYS stock options that is expected to be recognized over a remaining weighted average period of 2.3 years.

Note 9 — Cost of Services and Selling, General and Administrative Expenses

     The Company’s operating expenses consists of cost of services and selling, general and administrative expenses. The Company presents these expenses as employment, technology and facilities and other expenses. Overall, the Company believes its expenses consist predominately of cost of sales type expenses, while selling, general and administrative expenses are insignificant.

Note 10 — Income Taxes

     TSYS is the parent of an affiliated group that files a consolidated U.S. Federal income tax return and most state and foreign income tax returns on a separate entity basis. In the normal course of business, the Company is subject to examinations by these taxing authorities unless statutory examination periods lapse. TSYS is no longer subject to U.S. Federal income tax examinations for years before 2005 and with a few exceptions, the Company is no longer subject to income tax examinations from state and local authorities for years before 2001 and from foreign authorities before 2003. There are currently no Federal tax examinations in progress. However, a number of tax examinations are in progress by the relevant foreign and state tax authorities. Although TSYS is unable to determine the ultimate outcome of these examinations, TSYS believes that its liability for uncertain tax positions relating to these jurisdictions for such years is adequate.

     TSYS’ effective tax rate was 35.6% and 36.9% for the three months ended March 31, 2009 and March 31, 2008, respectively. The increased rate during the March 31, 2008 period was mostly due to discrete items charged during the 2008 period.

     TSYS adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” (FIN 48) on January 1, 2007. This interpretation prescribed a recognition threshold and measurement attribute for the financial statement recognition, measurement and disclosure of a tax position taken or expected to be taken in a tax return. The amount of unrecognized tax benefits did not change significantly during the three months ended March 31, 2009.

     TSYS recognizes potential interest and penalties related to the underpayment of income taxes as income tax expense in the condensed consolidated statements of income. Gross accrued interest and penalties on unrecognized tax benefits totaled $1.4 million and $1.3 million as of and March 31, 2009 and December 31, 2008, respectively. The total amounts of unrecognized income tax benefits as of March 31, 2009 and December 31, 2008 that, if recognized, would affect the effective tax rates are $4.4 million and $4.3 million (net of the Federal benefit on state tax issues), respectively, which include interest and penalties of $1.1 million and $1.1 million. TSYS does not expect any material changes to its calculation of uncertain tax positions during the next twelve months.

Note 11 — Segment Reporting and Major Customers

     The Company reports selected information about operating segments in accordance with Statement of Financial Accounting Standards No. 131 (SFAS No. 131), “Disclosures about Segments of an Enterprise and Related Information.” The Company’s segment information reflects the information that the chief operating decision maker (CODM) uses to make resource allocations and strategic decisions. The CODM at TSYS consists of the chairman of the board and chief executive officer, the president and the four senior executive vice presidents.

     Through online accounting and electronic payment processing systems, TSYS provides electronic payment processing and other services to card-issuing and merchant acquiring institutions in the United States and internationally. During the second quarter of 2008, TSYS reorganized and renamed its operating segments in a manner that reflects the way the CODM views the business. The new operating segments are North America Services segment, International Services segment and Merchant Services segment. As part of the reorganization, TSYS reclassified the segment results for TSYS de Mexico from International Services to North America Services to reflect the change.

     During the first quarter of 2009, the Company decided to sell TDM. As a result, TDM is classified as discontinued operations for all periods. TDM was included in the North America Services segment. Refer to Note 2 for more information.

     North America Services includes electronic payment processing services and other services provided from within the North America region. International Services includes electronic payment processing and other services provided from outside the North America region. Merchant Services includes electronic processing and other services provided to merchant acquiring institutions.

(in thousands)		North America				International				Merchant				Spin-Related
Operating Segments		Services				Services				Services				Costs				Consolidated
At March 31, 2009
Identifiable assets		$	1,451,129				310,787				215,584				—			$	1,977,500
Intersegment eliminations			(387,340	)			(1,007	)			(1	)			—				(388,348	)
Total assets		$	1,063,789				309,780				215,583				—			$	1,589,152

(in thousands)		North America				International				Merchant				Spin-Related
Operating Segments		Services				Services				Services				Costs				Consolidated
At December 31, 2008
Identifiable assets		$	1,416,724				324,313				212,779				—			$	1,953,816
Intersegment eliminations			(402,051	)			(977	)			¾				—				(403,028	)
Total assets		$	1,014,673				323,336				212,779				—			$	1,550,788
Three months ended March 31, 2009
Revenues before reimbursable items		$	223,782				70,584				58,206				—			$	352,572
Intersegment revenues			(5,888	)			(845	)			(393	)			—				(7,126	)
Revenues before reimbursable items from external customers		$	217,894				69,739				57,813				—			$	345,446
Segment total revenues		$	268,789				73,802				75,498				—			$	418,089
Intersegment revenues			(7,918	)			(845	)			(393	)			—				(9,156	)
Revenues from external customers		$	260,871				72,957				75,105				—			$	408,933
Depreciation and amortization		$	23,509				7,706				8,087				—			$	39,302
Intersegment expenses		$	1,311				(3,062	)			(7,405	)			—			$	(9,156	)
Segment operating income		$	58,033				6,004				14,077				—			$	78,114
Income from continuing operations before income taxes, noncontrolling interest and equity in income of equity investments		$	58,055				4,787				13,814				—			$	76,656
Income taxes		$	19,594				2,877				4,944				—			$	27,415
Equity in income of equity investments		$	666				377				—				—			$	1,043
Income from continuing operations, net of tax		$	39,127				2,287				8,870				—			$	50,284
Three months ended March 31, 2008
Revenues before reimbursable items		$	235,860				67,957				55,129				—			$	358,946
Intersegment revenues			(5,231	)			(403	)			(182	)			—				(5,816	)
Revenues before reimbursable items from external customers		$	230,629				67,554				54,947				—			$	353,130
Segment total revenues		$	287,012				69,824				70,937				—			$	427,773
Intersegment revenues			(7,362	)			(403	)			(182	)			—				(7,947	)
Revenues from external customers		$	279,650				69,421				70,755				—			$	419,826
Depreciation and amortization		$	24,732				7,695				6,554				—			$	38,981
Intersegment expenses		$	2,774				(3,541	)			(7,180	)			—			$	(7,947	)
Segment operating income		$	70,471				7,446				15,074				(6,895	)		$	86,096
Income from continuing operations before income taxes, noncontrolling interest and equity in income of equity investments		$	70,137				8,750				15,384				(6,895	)		$	87,376
Income taxes		$	26,509				2,914				5,408				(1,924	)		$	32,907
Equity in income of equity investments		$	888				1,274				—				—			$	2,162
Income from continuing operations, net of tax		$	44,516				7,111				9,976				(4,972	)		$	56,631

Revenues by Geographic Area

     Revenues for North America Services and Merchant Services include electronic payment processing and other services provided from the United States to clients domiciled in the United States or other countries. Revenues for International Services include electronic payment processing and other services provided from facilities outside the United States to clients based predominantly outside the United States.

     The following geographic data presents revenues for the three months ended March 31, 2009 and 2008, respectively, based on the domicile of the Company’s customers.

		Three months ended March 31,
(in millions)		2009				2008
United States		$	300.4				312.2
Europe			57.8				58.9
Canada			30.6				31.7
Japan			11.1				7.4
Mexico			2.2				3.7
Other			6.8				5.9
Total		$	408.9				419.8

     The following table reconciles geographic revenues to revenues by reportable segment for the three months ended March 31, 2009 and 2008, respectively, based on the domicile of the Company’s customers.

		North America Services								International Services								Merchant Services
(in millions)		2009				2008				2009				2008				2009				2008
United States		$	225.6				241.7				—				0.1				74.8				70.4
Europe			0.2				0.3				57.6				58.6				—				—
Canada			30.5				31.5				—				—				0.1				0.2
Japan			—				—				11.1				7.4				—				—
Mexico			2.2				3.7				—				—				—				—
Other			2.4				2.4				4.2				3.3				0.2				0.2
Total		$	260.9				279.6				72.9				69.4				75.1				70.8

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

(in millions)		At March 31, 2009				At December 31, 2008
United States		$	207.8				215.5
Europe			55.6				54.1
Japan			3.3				3.5
Other			6.3				6.6
Total		$	273.0				279.7

Major Customers

     For the three months ended March 31, 2009, the Company had one major customer which accounted for approximately 12.5%, or $51.3 million, of total revenues. For the three months ended March 31, 2008, this major customer accounted for approximately 13.1%, or $54.8 million, of total revenues. Revenues from major customers for the periods reported are primarily attributable to the North America Services and Merchant Services segments.

Note 12 — Supplementary Cash Flow Information

Contract Acquisition Costs

     Cash used for contract acquisition costs for the three months ended March 31, 2009 and 2008, respectively, are summarized as follows:

(in thousands)		March 31, 2009				March 31, 2008
Payments for processing rights		$	2,769				6,984
Conversion costs			8,223				10,184
Total		$	10,992				17,168

Nonvested Awards

     During the first three months of 2009 and 2008, the Company issued shares of common stock to certain key employees and non-management members of its Board of Directors under nonvested stock bonus awards for services to be provided by such key employees and directors in the future. Refer to Note 8 for more information.

Equipment and Software Acquired Under Capital Lease Obligations

     The Company acquired equipment and software under capital lease obligations in the amount of $4.3 million during 2009 related to storage and other peripheral hardware. The Company acquired software under capital lease obligations in the amount of $5.4 million for the three months ended March 31, 2008 related to a software enterprise license agreement and storage and other peripheral hardware.

Note 13 — Legal Proceedings

     The Company is subject to various legal proceedings and claims and is also subject to information requests, inquiries and investigations arising out of the ordinary conduct of its business. In the opinion of management, based in part upon the advice of legal

counsel, all matters are believed to be adequately covered by insurance, or if not covered, are believed to be without merit or are of such kind or involve such amounts that would not have a material adverse effect on the financial position, results of operations or cash flows of the Company if disposed of unfavorably. The Company establishes reserves for litigation and similar matters when those matters present loss contingencies that TSYS determines to be both probable and reasonably estimable in accordance with Statement of Financial Accounting Standards No. 5 (SFAS No. 5), “Accounting for Contingencies.”

Note 14 — Guarantees and Indemnifications

     The Company has entered into processing and licensing agreements with its clients that include intellectual property indemnification clauses. The Company generally agrees to indemnify its clients, subject to certain exceptions, against legal claims that TSYS’ services or systems infringe on certain third party patents, copyrights or other proprietary rights. In the event of such a claim, the Company is generally obligated to hold the client harmless and pay for related losses, liabilities, costs and expenses, including, without limitation, court costs and reasonable attorney’s fees. The Company has not made any indemnification payments pursuant to these indemnification clauses. In addition, the Company has indemnification obligations to Synovus Financial Corp. pursuant to the disaffiliation and related agreements entered into by the parties in connection with the spin-off.

     The Company has not recorded a liability for guarantees or indemnities in the accompanying condensed consolidated balance sheet since neither a range nor a maximum amount of potential future payments under such guarantees and indemnities is determinable.

Note 15 — Business Combinations

Infonox on the Web

     The Company acquired Infonox on the Web (Infonox) on November 4, 2008 for approximately $50.5 million, with contingent payments over the next three years of up to $25 million based on performance. The Company engaged a third-party valuation firm to identify and value acquisition intangibles. Infonox provides payment products on self-service and full-service transaction touch points in the gaming, banking and retail markets. The company delivers, manages, operates and supports services for several large publicly traded companies. The acquisition will add new payment technology and acceptance capabilities. Infonox is based in Sunnyvale, California, with an office in Pune, India.

     The preliminary purchase price allocation is presented below:

(in thousands)
Cash and cash equivalents		$	899
Intangible assets			21,500
Goodwill			28,694
Other assets			3,222
Total assets acquired			54,315
Liabilities assumed			3,831
Net assets acquired		$	50,484

     Revenues associated with Infonox are included in merchant acquiring services and are included in Merchant Services for segment reporting purposes.

Note 16 — Collaborative Arrangement

     In January 2009, TSYS adopted the Financial Accounting Standards Board (FASB) Emerging Issue Task Force No. 07-1 (EITF 07-1), “Accounting for Collaborative Arrangements.” EITF 07-1 is effective for reporting periods beginning after December 15, 2008, and it requires restatement of prior periods for all collaborative arrangements existing as of the effective date. Prior to the adoption of EITF 07-1, TSYS used the equity method of accounting for the joint ownership of the aircraft enterprise.

     In December 2007, TSYS acquired for approximately $12.1 million a 45% ownership interest in an enterprise jointly owned with two other entities which operates aircraft for the owners’ internal use. The arrangement allows each entity access to the aircraft and each entity pays for its usage of the aircraft. Each quarter, the net operating results of the enterprise are shared among the owners based on their respective ownership percentage.

     TSYS records its usage of the aircraft and its share of net operating results of the enterprise in Other Operating Expenses. The amounts of expense the Company recorded that is attributable to the collaborative arrangement for the three months ended March 31, 2009 and 2008 is $295,087 and $300,000, respectively.

     The following table illustrates the effect of the retrospective application on its Expenses and Equity income for its collaborative arrangements existing as of the effective date:

		Three Months Ended March 31, 2008
		As
		Previously				Effect of Adoption				Currently
(in thousands)		Reported				of EITF 07-1				Reported
Other operating expenses		$	—				300			$	300
Total operating expenses		$	—				300			$	300
Operating profit		$	—			$	(300	)		$	(300	)
Equity in income of equity investments, net of tax			(300	)			300				—
Net income		$	(300	)			—			$	(300	)

Note 17 — Earnings Per Share

     In June 2008, the FASB issued a FASB Staff Position EITF 03-6-1 (FSP EITF 03-6-1), “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” FSP EITF 03-6-1 holds that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are “participating securities” as defined in EITF 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128, ‘Earnings per Share,’” and therefore should be included in computing EPS using the two-class method. The impact on first quarter 2009 and 2008 EPS (as recast to show retroactive adoption of FSP EITF 03-6-1) does not change basic or diluted EPS.

     The two-class method is an earnings allocation method for computing EPS when an entity’s capital structure includes two or more classes of common stock or common stock and participating securities. It determines EPS based on dividends declared on common stock and participating securities and participation rights of participating securities in any undistributed earnings. FSP EITF 03-6-1 was effective for reporting periods beginning after December 15, 2008, and it requires restatement of prior periods.

     The diluted earnings per share calculation excludes stock options and nonvested awards that are convertible into 6.8 million common shares for the three months ended March 31, 2009 and excludes 6.3 million common shares for the three months ended March 31, 2008 because their inclusion would have been anti-dilutive.

TOTAL SYSTEM SERVICES, INC.

Financial Overview

     Total System Services, Inc.’s (TSYS’ or the Company’s) revenues are derived from providing electronic payment processing and related services to financial and nonfinancial institutions, generally under long-term processing contracts. TSYS Total Debt Management, Inc. (TDM) was reported under the North America Services operating segment prior to the Company reflecting it in discontinued operations.

     For a detailed discussion regarding the Company’s Operations, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

     A summary of the financial highlights for 2009, as compared to 2008, is provided below:

		Three months ended March 31,
(in millions, except per share data and employees)		2009				2008				Percent Change
Revenues before reimbursable items		$	345.4				353.1				(2.2	)%
Total revenues			408.9				419.8				(2.6	)
Operating income			78.1				86.1				(9.3	)
Net income attributable to TSYS			46.5				56.6				(17.8	)
Basic earnings per share (EPS)(1):
Income from continuing operations			0.26				0.29				(10.3	)
Net income			0.24				0.29				(17.3	)
Diluted EPS(1):
Income from continuing operations			0.26				0.29				(10.2	)
Net income			0.24				0.29				(20.0	)
Cash flows from operating activities			98.7				100.0				(1.3	)
Other:
Average accounts on file (AOF)			349.9				370.2				(5.5	)
Cardholder transactions processed			1,481.0				1,589.6				(6.8	)
Average full-time equivalent employees (FTE)			8,062				7,245				11.3