Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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 0-27512
CSG SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
47-0783182
(I.R.S. Employer Identification No.)
7887 East Belleview, Suite 1000
Englewood, Colorado 80111
(Address of principal executive offices, including zip code)
(303) 796-2850
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the last sales price of such stock, as of
the close of trading on January 31, 2000 was $1,747,664,105.
Shares of common stock outstanding at March 20, 2000: 52,077,921.
DOCUMENTS INCORPORATED BY REFERENCE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be filed on or prior to April 29, 2000, are incorporated by
reference into Part III of the Form 10-K.
1
CSG SYSTEMS INTERNATIONAL, INC.
1999 FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 8
Item 3. Legal Proceedings................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.............. 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 10
Item 6. Selected Financial Data.......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13
Item 8. Financial Statements and Supplementary Data...................... 25
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 45
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 45
Item 11. Executive Compensation.......................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 45
Item 13. Certain Relationships and Related Transactions.................. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 45
Signatures................................................................ 46
2
PART I
Item 1. Business
General
CSG Systems International, Inc. (the "Company" or "CSG") was formed in
October 1994 and acquired all of the outstanding stock of CSG Systems, Inc.
(formerly Cable Services Group, Inc.) from First Data Corporation ("FDC") in
November 1994 (the "CSG Acquisition"). CSG Systems, Inc. had been a subsidiary
or division of FDC from 1982 until the acquisition.
The Company's principal executive offices are located at 7887 East
Belleview, Suite 1000, Englewood, Colorado 80111, and the telephone number at
that address is (303) 796-2850. The Company's common stock is listed on the
Nasdaq National Market under the symbol "CSGS".
Company Overview
The Company provides customer care and billing solutions worldwide for the
converging communications markets, including cable television, direct
broadcast satellite ("DBS"), telephony, on-line services and others. The
Company's products and services enable its clients to focus on their core
businesses, improve customer service, and enter new markets and operate more
efficiently. The Company offers its clients a full suite of processing and
related services, and software and professional services which automate
customer care and billing functions. These functions include set-up and
activation of customer accounts, sales support, order processing, invoice
calculation, production and mailing, management reporting, and customer
analysis for target marketing. The Company's products and services combine the
reliability and high volume transaction processing capabilities of a mainframe
platform with the flexibility of client/server architecture. The Company
generated revenue of $322.2 million in 1999 compared to $236.6 million in
1998, an increase of 36%, and revenue grew at a compound annual growth rate of
35% over the five-year period ended December 31, 1999.
The Company has established a leading presence by developing strategic
relationships with major participants in the cable television and DBS
industries, and derived approximately 76% and 16% of its total revenues in
1999 from the U.S. cable television and U.S. and Canadian DBS industries,
respectively. The Company provides customer care and billing to one-third of
the households in the U.S. During 1999, the Company derived approximately 79%
of its total revenues from processing and related services. At December 31,
1999, the Company was servicing client sites having an aggregate of 33.8
million customers in the U.S., compared to 29.5 million customers serviced as
of December 31, 1998, an increase of 15%. During 1999, the Company converted
and processed approximately 4.5 million new customers on its systems. Total
domestic revenue per customer account for 1999 was $9.88, compared to $8.71
for 1998, an increase of 13%, and revenue per customer account grew at a
compound annual growth rate of 15% over the five-year period ended December
31, 1999.
The convergence of communications markets and growing competition are
increasing the complexity and cost of managing the interaction between
communications service providers and their customers. Customer care and
billing systems coordinate all aspects of the customer's interaction with a
service provider, from initial set-up and activation, to service activity
monitoring, through billing and accounts receivable management. The growing
complexity of communications services and the manner in which they are
packaged and priced has created increased demand for customer care and billing
systems which deliver enhanced flexibility and functionality. Because of the
significant level of technological expertise and capital resources required to
develop and implement such systems successfully, the majority of cable
television, DBS, and wireless service providers have elected to outsource
customer care and billing.
In 1998, the Company acquired substantially all of the assets of US Telecom
Advanced Technology Systems, Inc. ("USTATS") for approximately $6.0 million in
cash and assumption of certain liabilities of approximately $1.3 million.
USTATS, a South Carolina-based company, specializes in open systems,
3
client/server customer care and billing systems serving the telecommunications
markets. The Company used the acquired technology and software primarily to
enhance its current service-bureau telephony customer care and billing system.
In September 1997, the Company entered into a 15-year processing agreement
with Tele-Communications, Inc. ("TCI") which expires in 2012. In March 1999,
AT&T completed its merger with TCI and consolidated the TCI operations into
AT&T Broadband ("AT&T"). The Company continues to service AT&T under the terms
of the 15-year processing contract (the "AT&T Contract"). The AT&T Contract
has minimum financial commitments over the 15-year life of the contract and
includes exclusive rights to provide customer care and billing products and
services for AT&T's offerings of wireline video, all Internet/high-speed data
services, residential wireline telephony services, and print and mail
services. As of December 31, 1999, the Company had successfully converted
approximately 11 million AT&T cable television customers onto its system,
bringing the total of AT&T customers on the Company's system to approximately
14 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional discussion of the AT&T Contract and
the TCI and AT&T merger.
In addition, during 1997, the Company purchased certain SUMMITrak software
technology assets that were in development from TCI. The Company continued the
research and development ("R&D") of certain software technologies acquired
from TCI. Such efforts included the completion of the R&D projects and the
integration of the completed software technologies into certain of the
Company's current products. The related products from these development
efforts were available for general release in 1999. See Note 4 to the
Company's Consolidated Financial Statements for additional discussion of the
SUMMITrak asset acquisition.
Growth Strategy
The Company's growth strategy is designed to provide revenue and profit
growth. The key elements of the strategy include:
Expand Core Processing Business. The Company will continue to leverage its
investment and expertise in high-volume transaction processing to expand its
processing business. The processing business provides highly predictable
recurring revenues through multi-year contracts with a client base which
includes leading communications service providers in growing markets. The
Company increased the number of customers processed on its systems from 18.0
million as of December 31, 1995 to 33.8 million as of December 31, 1999. The
Company provides a full suite of customer care and billing products and
services which combine the reliability and high volume transaction processing
capabilities of a mainframe platform with the flexibility of client/server
architecture.
Introduce New Products and Services. The Company has a significant installed
client base to which it can sell additional value-added products and services.
The Company has increased its annual revenue per U.S. domestic customer from
$5.60 in 1995 to $9.88 in 1999, a compound annual growth rate of 15%, due
primarily to the introduction of new products and services. The Company will
continue to develop software applications, which will enhance and extend the
functionality of its customer care and billing solution and also provide
additional revenue opportunities.
Enter New Markets. As communications markets converge, the Company's
products and services can facilitate efficient entry into new markets by
existing or new clients. For example, as the cable television providers expand
into on-line services and telephony, the Company will continue to offer the
customer care and billing solutions necessary to meet their needs. The Company
plans to enter new markets, such as the HSD/ISP and IP markets, that with new
and/or acquired technology, or modifications to the Company's existing
technology, could be served by the Company's customer care and billing
solutions.
Enhance Growth Through Focused Acquisitions. The Company follows a
disciplined approach to acquire assets and businesses which provide the
technology and technical personnel to expedite the Company's product
development efforts, provide complementary products or services, or provide
access to new markets or clients.
4
Continue Technology Leadership. The Company believes that its technology in
customer care and billing solutions gives communications service providers a
competitive advantage. The Company's continuing investment in R&D is designed
to position the Company to meet the growing and evolving needs of existing and
potential clients.
CSG Products and Services
CSG offers the most complete suite of flexible, scaleable products and
services in the communications market, serving voice, video and data
providers--handling all aspects of the customer lifecycle. CSG has invested an
average of 12% of revenues in R&D in the last five years. This has allowed the
Company to increase its offering from two products to more than 25. Listed
below are several of the products that make up the Company's Broadband
Express(TM) solution.
Customer Acquisition
Advanced Customer Service Representative(R) (ACSR(R)) is a Windows-based
software program that provides CSRs (customer service representatives) with
a complete view of a customer's account, easily showing all the customer's
services. Add-on modules include Customer Interaction Tracking(R)--which
tracks customers by type and subject, and features a planner for scheduling
follow-ups and reminders; Customer Based Training--a tutorial system; and
Application Object Interface--which develops customized applications and
requests special status updates from the ACSR system.
Credit Verification Service allows clients to determine whether an
individual qualifies for service based on their credit history and risk.
Risk Management System helps clients determine the credit-worthiness of
applicants and assists in collection efforts through online access to
credit histories and previous unpaid accounts.
Provisioning and Usage
Real-Time Usage Handling System provides real-time rating and aggregation
of convergence usage-based services such as Internet and telephony. The
robust and easy-to-use graphical user interface (GUI) enables clients to
set up and modify complex service plans in real-time.
Service Delivery System takes manual and automated tasks and configures
them into a logical workflow system, to perform certain functions such as
notifying external providers and activating telephony and high-speed
Internet services.
Product Pricing and Discounting
CSG Vantage(R) allows clients to collect and leverage marketing and
consumer behavior information to offer specific package pricing and
discounts to their customers.
CSG Convergent Express allows clients to seamlessly offer multiple lines
of business and cross product discount for these services. Using this
product, clients can create special package and pricing models based on
types of services to which their customers subscribe.
CCS Discount Module automates the process of establishing package pricing
and special discount programs within the customer care and billing system.
This module allows CSG clients to monitor their customer's buying patterns
as well as competitive trends, and to build and automatically apply
frequent buyer programs, loyalty discounts and other enhanced discounting
packages.
Customer Maintenance
Communications Control System (CCS(R)) lets CSRs enroll new customers,
modify services for current customers, schedule installation and repairs,
and process billing.
5
Call Center ExpressSM is a suite of products that promotes customer self-
care and improves CSR efficiency. Over the phone, without the assistance of
a CSR, customers can check account balances and order a pay-per-view event.
In addition, when a call comes into the call center, a customer's account
information automatically appears on the CSR's computer screen.
CSG WorkForce ExpressSM is a suite of products that efficiently
dispatches field technicians, provides automatic and manual routing of work
orders, and workforce management functions. It connects each technician
with the customer care and billing system through a hand-held device (CSG
TechNet(R)), which presents information including the route to the next job
and background on the customer.
CSG Care Express(TM) is a web-based application providing end-user
customers with the ability to sign up for new services, add or modify
existing services, and manage their convergent account.
Billing and Invoicing
CSG Enhanced Statement Presentation(R) lets clients tailor logos,
graphics, and messages on customer invoices--turning a monthly bill into an
easy-to-read communications and marketing tool.
Internet Bill Presentment and Payment (IBPP) allows end-user customers to
view and pay bills via the Internet. This product maintains the previous
month's statements online and notifies customers of new statements via e-
mail. In addition, IBPP allows customers to view unbilled usage in real-
time.
CSG Statement Express(R) allows CSRs to use their computers to call up
the actual invoice a customer receives, so that it can be discussed with
the customer.
Collection and Delinquency
Paybill Advantage(R) lets customers have their bills automatically
debited from their checking accounts or placed on their credit cards.
Credit Card Processing Services uses a one-time credit card transaction
to automatically collect payments for monthly services and special
circumstances, such as a delinquent customer.
Electronic Lockbox Service(R) (ELS(R)) automates the process of posting
electronic payments, dramatically reducing the possibility of an error in
payment.
Collections Service automates the accounts receivable and collections
systems for clients, increasing recovery rates and reducing costs.
Year 2000
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for discussion of the Company's efforts to address the year
2000 risks related to the Company's business.
Clients
The majority of the Company's largest clients (listed in alphabetic order)
are cable television and DBS providers located in the United States and
Canada, and are as follows:
AT&T Broadband (formerly TCI) Echostar Communications Corporation
Adelphia Communications Corp Media One Group, Inc.
Ameritech New Media Primestar by DIRECTV
Bell ExpressVu Prodigy Communications Corp
Charter Communications Time Warner
6
During the years ended December 31, 1999, 1998, and 1997, revenues from AT&T
represented approximately 50.5%, 37.4%, and 32.9% of total revenues, and
revenues from Time Warner Cable and its affiliated companies ("Time Warner")
represented approximately 10.2%, 14.1%, and 20.1% of total revenues,
respectively. The increase in the AT&T percentage between 1999 and 1998
relates primarily to the additional AT&T customers converted to the Company's
systems as a result of the 15-year AT&T Contract executed in September 1997.
The Company has separate processing agreements with multiple affiliates of
Time Warner and provides products and services to them under separately
negotiated and executed contracts.
Client and Product Support
The Company's clients typically rely on CSG for ongoing support and training
needs relating to the Company's products. The Company has a multi-level
support environment for its clients. The Company's Product Support Center
operates 24 hours a day, seven days a week. Clients call an 800 number and
through an automated voice response unit, direct their calls to the specific
product support areas where the questions are answered. In addition, each
client has a dedicated account manager. This professional helps clients
resolve strategic and business issues. The Company has a full-time training
staff and conducts ongoing training sessions both in the field and at its
training facilities located in Denver, Colorado and Omaha, Nebraska.
Sales and Marketing
The Company has assembled a direct sales and sales support organization. The
Company has organized its sales efforts around senior level account managers
who are responsible for new revenues and renewal of existing contracts within
an account. Account managers are supported by direct sales and sales support
personnel who are experienced in the various products and services that the
Company provides.
FDC Data Processing Facility
The Company outsources to FDC data processing and related services required
for operation of the CCS system. The Company's proprietary software is run in
FDC's facility to obtain the necessary mainframe computer capacity and support
without making the substantial capital investment that would be necessary for
the Company to provide this service internally. The Company's clients are
connected to the FDC facility through a combination of private and
commercially provided networks. FDC provides the services to the Company
pursuant to a five-year agreement which is scheduled to expire December 31,
2001. The Company believes it could obtain data processing services from
alternative sources, if necessary.
Research and Development
The Company's product development efforts are focused on developing new
products and improving existing products. The Company believes that the timely
development of new applications and enhancements is essential to maintaining
its competitive position in the marketplace. The Company's development efforts
for 1999 were focused primarily on the development of products to (i) increase
the efficiencies and productivity of its clients' operations, (ii) address the
systems needed to support the convergence of the communications markets, (iii)
support a web-enabled, customer self-care and electronic bill
presentment/payment application, and (iv) allow clients to effectively rollout
new products and services to new and existing markets, such as residential
telephony, High-Speed Data/ISP and IP markets. The Company expects its
development efforts to focus on similar tasks in 2000 and expects to spend a
similar percentage of its total revenues on R&D in the future.
The Company's total R&D expense, excluding purchased R&D, was $34.4 million,
$27.5 million, and $22.6 million for the years ended December 31, 1999, 1998,
and 1997, or 10.7%, 11.6%, and 13.2% of total revenues, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Competition
The market for customer care and billing systems in the converging
communications industries is highly competitive. The Company competes with
both independent providers and in-house developers of customer
7
management systems. The Company believes its most significant competitors are
DST Systems, Inc., Convergys Corporation, Portal Software, Inc., Kenan Systems
(a division of Lucent Technologies, Inc.), and in-house systems. As the
Company enters additional market segments, it expects to encounter additional
competitors. Some of the Company's actual and potential competitors have
substantially greater financial, marketing and technological resources than
the Company.
The Company believes that the principal competitive factors in its markets
include time to market, flexibility and architecture of the system, breadth of
product features, product quality, customer service and support, quality of
R&D effort, and price.
Proprietary Rights and Licenses
The Company relies on a combination of trade secrets and copyright laws,
patents, license agreements, non-disclosure and other contractual provisions,
and technical measures to protect its proprietary rights. The Company
distributes its products under service and software license agreements which
typically grant clients non-exclusive licenses to use the products. Use of the
software products is restricted and subject to terms and conditions
prohibiting unauthorized reproduction or transfer of the software products.
The Company also seeks to protect the source code of its software as a trade
secret and as a copyrighted work. Despite these precautions, there can be no
assurance that misappropriation of the Company's software products and
technology will not occur. The Company also incorporates via licenses or
reselling arrangements a variety of third party technology and software
products that provide specialized functionality within its own products and
services. Although the Company believes that its product and service offerings
conform with such arrangements and do not infringe upon the intellectual
property rights of the other parties to such arrangements or of other third
parties, there can be no assurance that any third parties will not assert
contractual or infringement claims against the Company.
Employees
As of December 31, 1999, the Company had a total of 1,522 employees, an
increase of 194 from December 31, 1998. The Company's success is dependent
upon its ability to attract and retain qualified employees. None of the
Company's employees are subject to a collective bargaining agreement. The
Company believes that its relations with its employees are good.
Item 2. Properties
The Company leases five facilities, totaling approximately 159,000 square
feet in Denver, Colorado and surrounding communities. The Company utilizes
these facilities primarily for (i) corporate headquarters, (ii) sales and
marketing activities, (iii) product and operations support, and (iv) certain
R&D activities. The leases for these facilities expire in the years 2000
through 2010.
The Company leases six facilities, totaling approximately 280,000 square
feet in Omaha, Nebraska. The Company utilizes these facilities primarily for
(i) client services, training and product support, (ii) systems and
programming activities, (iii) R&D activities, (iv) statement production and
mailing, and (v) general and administrative functions. The leases for these
facilities expire in the years 2000 through 2007.
The Company leases one facility, totaling 63,000 square feet in Wakulla
County, Florida. This facility is used for statement production and mailing
and the lease expires in 2008.
The Company leases office space totaling 13,000 square feet in Slough,
Berkshire, in the United Kingdom for its U. K. operations. The lease for this
facility expires in 2002.
The Company believes that its facilities are adequate for its current needs
and that additional suitable space will be available as required. The Company
also believes that it will be able to extend leases as they terminate. See
Note 9 to the Company's Consolidated Financial Statements for information
regarding the Company's obligations under its facilities leases.
8
Item 3. Legal Proceedings
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. In the opinion
of the Company's management, after consultation with legal counsel, the
Company is not presently a party to any material pending or threatened legal
proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
***
Executive Officers of the Registrant
The present executive officers of the Company are Neal C. Hansen (Chairman
of the Board and Chief Executive Officer), John P. Pogge (President and Chief
Operating Officer), Greg A. Parker (Vice President and Chief Financial
Officer) and Edward C. Nafus (Executive Vice President). During 1998, the
Company executed employment agreements with each of the executive officers.
Information concerning such executive officers appears in the following
paragraphs:
Mr. Hansen, 59, is a co-founder of the Company and has been the Chairman of
the Board and Chief Executive Officer and a director of the Company since its
inception in 1994. From 1991 until founding the Company, Mr. Hansen served as
a consultant to several software companies, including FDC. From 1989 to 1991,
Mr. Hansen was a General Partner of Hansen, Haddix and Associates, a
partnership which provided advisory management services to suppliers of
software products and services. From 1983 to 1989, Mr. Hansen was Chairman and
Chief Executive Officer of US WEST Applied Communications, Inc., and President
of US WEST Data Systems Group.
Mr. Pogge, 46, joined the Company in 1995 and has served as President, Chief
Operating Officer and a director of the Company since September 1997. Prior to
that time, Mr. Pogge was an Executive Vice President of the Company and
General Manager, Business Units. From 1992 to 1995, Mr. Pogge was Vice
President, Corporate Development for US WEST, Inc. From 1987 to 1991, Mr.
Pogge served as Vice President and General Counsel of Applied Communications,
Inc. Mr. Pogge holds a J.D. degree from Creighton University School of Law and
a BBA in Finance from the University of Houston. Mr. Pogge and Mr. Parker are
brothers-in-law.
Mr. Parker, 41, joined the Company in July 1995 and has served as Vice
President and Chief Financial Officer since April 1997. Prior to that time,
Mr. Parker was Vice President, Finance. Previously, Mr. Parker was with Banc
One for thirteen years and was Chief Financial Officer for Banc One in Houston
and San Antonio. Mr. Parker received a BBA in Accounting and Economics from
the University of Iowa in 1980. Mr. Pogge and Mr. Parker are brothers-in-law.
Mr. Nafus, 59, joined the Company in August 1998 as Executive Vice
President. From 1992 to 1998, Mr. Nafus served as Executive Vice President of
First Data Corporation and President of First Data International. Mr. Nafus
was President of First Data Resources from 1989 to 1992, Executive Vice
President of First Data Resources from 1984 to 1989 and held various other
management positions with that company since 1984. Mr. Nafus holds a B.S.
degree in Mathematics from Jamestown College.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is listed on the Nasdaq National Market
("NASDAQ/NMS") under the symbol "CSGS". The following table sets forth, for
the fiscal quarters indicated, the high and low sale prices of the Company's
Common Stock as reported by NASDAQ/NMS since the Company's Initial Public
Offering on February 28, 1996. The per share amounts disclosed herein have
been adjusted to reflect the Company's two-for-one stock split which was
effective on March 5, 1999.
High Low
------ ------
1999
First quarter.................................................. $41.63 $31.75
Second quarter................................................. 45.00 23.44
Third quarter.................................................. 29.94 20.31
Fourth quarter................................................. 44.75 23.94
High Low
------ ------
1998
First quarter.................................................. $22.63 $18.44
Second quarter................................................. 24.50 18.91
Third quarter.................................................. 24.63 18.38
Fourth quarter................................................. 39.50 19.13
On March 20, 2000, the last sale price of the Company's Common Stock as
reported by NASDAQ/NMS was $65.88 per share. On January 31, 2000, the number
of holders of record of Common Stock was 273.
Dividends
The Company has not declared or paid cash dividends on its Common Stock
since its incorporation. The Company's debt agreement contains certain
restrictions on the payment of dividends. See Note 6 to the Company's
Consolidated Financial Statements.
10
Item 6. Selected Financial Data
The following selected financial data have been derived from the audited
financial statements of the Company. The selected financial data presented
below should be read in conjunction with, and is qualified by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements. The
information below is not necessarily indicative of the results of future
operations.
Company(1)(2)
-------------------------------------------------
Year ended December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- --------- -------- --------
(in thousands, except per share amounts)
Statements of Operations
Data:
Revenues:
Processing and related
services.................. $255,167 $191,802 $ 131,399 $113,422 $ 96,343
Software and professional
services.................. 66,995 44,838 40,405 18,875 61
-------- -------- --------- -------- --------
Total revenues............ 322,162 236,640 171,804 132,297 96,404
-------- -------- --------- -------- --------
Expenses:
Cost of processing and
related services:
Direct costs............... 88,475 77,155 58,259 52,027 46,670
Amortization of acquired
software(1)............... -- -- 10,596 11,003 11,000
Amortization of client
contracts and related
intangibles(1)............ 7,231 5,043 4,293 4,092 4,092
-------- -------- --------- -------- --------
Total cost of processing
and related services..... 95,706 82,198 73,148 67,122 61,762
Cost of software and
professional services..... 36,415 25,048 16,834 7,123 --
-------- -------- --------- -------- --------
Total cost of revenues.... 132,121 107,246 89,982 74,245 61,762
-------- -------- --------- -------- --------
Gross margin (exclusive of
depreciation).............. 190,041 129,394 81,822 58,052 34,642
-------- -------- --------- -------- --------
Operating expenses:
Research and development:
Research and development... 34,388 27,485 22,586 20,206 14,278
Charge for purchased
research and
development(5)............ -- -- 105,484 -- --
Impairment of capitalized
software development
costs(6).................. -- -- 11,737 -- --
Selling and marketing...... 14,361 11,810 10,198 8,213 3,770
General and administrative:
General and administrative. 25,781 22,959 19,385 13,702 11,406
Amortization of noncompete
agreements and
goodwill(1)............... 4,889 5,381 6,927 6,392 5,680
Impairment of intangible
assets(7)................. -- -- 4,707 -- --
Stock-based employee
compensation(1)........... 280 297 449 3,570 841
Depreciation............... 10,190 8,159 6,884 5,121 5,687
-------- -------- --------- -------- --------
Total operating expenses.. 89,889 76,091 188,357 57,204 41,662
-------- -------- --------- -------- --------
Operating income (loss)..... 100,152 53,303 (106,535) 848 (7,020)
-------- -------- --------- -------- --------
Other income (expense):
Interest expense........... (7,214) (9,771) (5,324) (4,168) (9,070)
Interest income............ 2,981 2,484 1,294 844 663
Other...................... 10 (21) 349 -- --
-------- -------- --------- -------- --------
Total other............... (4,223) (7,308) (3,681) (3,324) (8,407)
-------- -------- --------- -------- --------
Income (loss) before income
taxes, extraordinary item
and discontinued
operations................. 95,929 45,995 (110,216) (2,476) (15,427)
Income tax (provision)
benefit(8)................ (36,055) 39,643 -- -- --
-------- -------- --------- -------- --------
Income (loss) before
extraordinary item and
discontinued operations.... 59,874 85,638 (110,216) (2,476) (15,427)
Extraordinary loss from
early extinguishment of
debt(3)(5)................ -- -- (577) (1,260) --
-------- -------- --------- -------- --------
Income (loss) from
continuing operations...... 59,874 85,638 (110,793) (3,736) (15,427)
Discontinued operations(4):
Loss from operations....... -- -- -- -- (3,093)
Gain (loss) from
disposition............... -- -- 7,922 -- (660)
-------- -------- --------- -------- --------
Total gain (loss) from
discontinued operations.. -- -- 7,922 -- (3,753)
-------- -------- --------- -------- --------
Net income (loss)........... $ 59,874 $ 85,638 $(102,871) $ (3,736) $(19,180)
======== ======== ========= ======== ========
Diluted net income (loss)
per common share(9):
Income (loss) attributable
to common stockholders.... $ 1.10 $ 1.62 $ (2.16) $ (.07) $ (2.76)
Extraordinary loss from
early extinguishment of
debt...................... -- -- (.01) (.03) --
Gain (loss) from
discontinued operations... -- -- .15 -- (.54)
-------- -------- --------- -------- --------
Net income (loss)
attributable to common
stockholders.............. $ 1.10 $ 1.62 $ (2.02) $ (.10) $ (3.30)
======== ======== ========= ======== ========
Weighted average diluted
common shares............. 54,660 52,991 50,994 43,746 6,901
======== ======== ========= ======== ========
11
Company(1)(2)
---------------------------------------------
Year ended December 31,
---------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
Other Data (at Period End):
Number of clients' customers
processed...................... 33,753 29,461 21,146 19,212 17,975
Balance Sheet Data (at Period
End):
Cash and cash equivalents....... $ 48,676 $ 39,593 $ 20,417 $ 6,134 $ 3,603
Working capital................. 32,092 7,050 3,518 4,430 2,359
Total assets(5)................. 274,968 271,496 179,793 114,910 105,553
Total debt(3)(5)................ 81,000 128,250 135,000 32,500 85,068
Redeemable convertible preferred
stock(3)....................... -- -- -- -- 62,985
Stockholders' equity
(deficit)(1)(3)(5)(6).......... 116,862 60,998 (33,086) 41,964 (61,988)
- --------
(1) The Company was formed in October 1994 and acquired all of the
outstanding shares of CSG Systems, Inc., formerly Cable Services Group,
Inc., from First Data Corporation ("FDC") on November 30, 1994 (the "CSG
Acquisition"). The Company did not have any substantive operations prior
to the CSG Acquisition. The CSG Acquisition was accounted for as a
purchase and the Company's Consolidated Financial Statements (the
"Consolidated Financial Statements") since the date of the acquisition
are presented on the new basis of accounting established for the
purchased assets and liabilities. The Company incurred certain
acquisition-related charges as a result of the CSG Acquisition. These
acquisition-related charges include periodic amortization of acquired
software, client contracts and related intangibles, noncompete agreement
and goodwill, and stock-based employee compensation.
(2) On June 28, 1996, the Company acquired all of the outstanding shares of
Bytel Limited. Bytel Limited changed its name to CSG International
Limited ("CSGI") in 1998. The acquisition was accounted for using the
purchase method of accounting.
(3) The Company completed an initial public offering ("IPO") of its Common
Stock in March 1996. The Company sold 6,670,000 shares of Common Stock
resulting in net proceeds to the Company of $44.8 million. Such proceeds
were used to repay long-term debt of $40.3 million and to pay accrued
dividends of $4.5 million on Redeemable Convertible Preferred Stock
("Preferred Stock"). As of the closing of the IPO, all of the Preferred
Stock was automatically converted into 35,999,996 shares of Common Stock.
The Company incurred an extraordinary loss of $1.3 million for the write-
off of deferred financing costs attributable to the portion of the long-
term debt repaid.
(4) Contemporaneously with the CSG Acquisition, the Company purchased from
FDC all of the outstanding capital stock of Anasazi Inc. ("Anasazi"). On
August 31, 1995, the Company completed a substantial divestiture of
Anasazi, resulting in the Company owning less than 20% of Anasazi. In
September 1997, the Company sold its remaining ownership interest in
Anasazi for $8.6 million in cash and recognized a gain of $7.9 million.
The Company accounted for its ownership in Anasazi as discontinued
operations after its acquisition in 1994.
(5) During 1997, the Company purchased certain SUMMITrak technology assets
from Tele-Communications, Inc. ("TCI") and entered into a 15-year
processing contract with TCI. In March 1999, AT&T completed its merger
with TCI and has consolidated the TCI operations into AT&T Broadband
("AT&T"). The Company continues to service AT&T under the terms of the
15-year processing contract (the "AT&T Contract"). The total purchase
price was approximately $159 million, with approximately $105 million
charged to purchased research and development and the remaining amount
allocated primarily to the AT&T Contract. The Company financed the asset
acquisition with a $150.0 million term credit facility (the "Term Credit
Facility"), of which $27.5 million was used to retire the Company's
previously outstanding debt, resulting in an extraordinary loss of $0.6
million for the write-off of deferred financing costs attributable to
such debt. See Note 4 to the Consolidated Financial Statements for
additional discussion.
(6) During 1997, the Company recorded a non-recurring charge of $11.7 million
to reduce certain CSG Phoenix assets to their net realizable value as of
December 31, 1997.
(7) During 1997, the Company recorded a non-recurring charge of $4.7 million
for the impairment of certain intangible assets related to software
systems which the Company decided to no longer market and support.
(8) During 1998, the Company recorded an income tax benefit of $39.6 million
related primarily to the elimination of its valuation allowance against
its deferred tax assets. See Note 7 to the Consolidated Financial
Statements for further discussion.
(9) On March 5, 1999, the Company completed a two-for-one stock split for
shareholders of record on February 8, 1999. In January 1996, the Company
also completed a two-for-one stock split. Both splits were effected as a
stock dividend. Share and per share data for all periods presented herein
have been adjusted to give effect to both splits. Diluted net income
(loss) per common share and the shares used in the per share computation
have been computed on the basis described in Note 2 to the Consolidated
Financial Statements.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company. The Company was formed in October 1994 and acquired all of the
outstanding stock of CSG Systems, Inc. from First Data Corporation ("FDC") in
November 1994 (the "CSG Acquisition"). CSG Systems, Inc. had been a subsidiary
or division of FDC from 1982 until the acquisition.
The Company provides customer care and billing solutions worldwide for the
converging communications markets, including cable television, direct
broadcast satellite, telephony, on-line services and others. The Company
offers its clients a full range of processing services, software and support
services that automate customer management functions, including billing, sales
support and order processing, invoice calculation and production, management
reporting and customer analysis for target marketing. The Company's products
and services combine the reliability and high volume transaction processing
capabilities of a mainframe platform with the flexibility of client/server
architecture. The Company provides its services to more than one-third of the
households in the United States.
Forward-Looking Statements. This report contains a number of forward-looking
statements relative to future plans of the Company and its expectations
concerning the customer care and billing industry, as well as the converging
telecommunications industry it serves, and similar matters. Such forward-
looking statements are based on assumptions about a number of important
factors, and involve risks and uncertainties that could cause actual results
to differ materially from estimates contained in the forward-looking
statements. Some of the risks that are foreseen by management are contained in
Exhibit 99.01 of this report. Exhibit 99.01 constitutes an integral part of
this report, and readers are strongly encouraged to read that section closely
in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations.
AT&T Contract and Merger. In September 1997, the Company entered into a 15-
year processing contract with Tele-Communications, Inc. ("TCI"). In March
1999, AT&T completed its merger with TCI and has consolidated the TCI
operations into AT&T Broadband ("AT&T"). The Company continues to service AT&T
under the terms of the 15-year processing contract (the "AT&T Contract").
Stock Split. On March 5, 1999, the Company completed a two-for-one stock
split, effected as a stock dividend, for shareholders of record on February 8,
1999. Share and per share data for all periods presented herein have been
adjusted to give effect to the split.
Stock Offering. In April 1998, the Company completed a secondary public
stock offering of approximately 7.0 million shares of Common Stock. The
primary shareholders in the offering included Morgan Stanley affiliated
entities and General Motors employee benefit plan trusts. The Company received
none of the proceeds from the offering, nor incurred any expense.
Acquisitions
USTATS Asset Acquisition. On July 30, 1998, the Company acquired
substantially all of the assets of US Telecom Advanced Technology Systems,
Inc. ("USTATS") for approximately $6.0 million in cash and assumption of
certain liabilities of approximately $1.3 million. USTATS, a South Carolina-
based company, specializes in open systems, client/server customer care and
billing systems serving the telecommunications markets. The Company used the
acquired technology and software primarily to enhance its current service-
bureau telephony customer care and billing system. The total purchase price of
$7.3 million has been allocated to the technology and software acquired and is
being amortized over its expected useful life of five years.
Acquisition of SUMMITrak Assets. In September 1997, the Company purchased
certain SUMMITrak software technology assets that were in development from
TCI. The Company continued the research and development ("R&D") of certain
software technologies that were acquired from TCI. Such efforts included the
completion of the R&D projects and the integration of the completed software
technologies into certain of its
13
current products. The related products from these development efforts were
available for general release in 1999. See Note 4 to the Company's
Consolidated Financial Statements for additional discussion of the SUMMITrak
asset acquisition.
Acquisition-Related Charges
Acquisition Charges. The CSG Acquisition was accounted for using the
purchase method. As a result, the Company has recorded recurring, periodic
amortization of acquired software, client contracts and related intangibles,
noncompete agreement, goodwill and stock-based employee compensation
(collectively, the "Acquisition Charges"). The Acquisition Charges totaled
$7.5 million, $8.2 million, and $20.7 million for the years ended December 31,
1999, 1998 and 1997, respectively. Going forward, the Acquisition Charges will
be approximately $0.2 million per year until fully amortized in 2004.
Discontinued Operations. Contemporaneously with the CSG Acquisition, the
Company purchased from FDC all of the outstanding shares of Anasazi Inc.
("Anasazi") for $6.0 million cash. The Company accounted for its ownership in
Anasazi as discontinued operations after its acquisition in 1994. On August
31, 1995, the Company completed a substantial divestiture of Anasazi,
resulting in the Company owning less than 20% of Anasazi. As a result,
Anasazi's results of operations subsequent to August 31, 1995 are not included
in the Company's results of operations as the Company accounted for its
investment in Anasazi under the cost method subsequent to August 31, 1995. In
September 1997, the Company sold its remaining interest in Anasazi for $8.6
million in cash and recognized a gain of $7.9 million.
Non-Recurring Items
Charge for Purchased Research and Development. During 1997, the Company
recorded a charge of $105.5 million related primarily to the portion of the
SUMMITrak asset acquisition purchase price allocated to purchased research and
development related to software technologies which had not reached
technological feasibility and had no other alternative future use as of the
acquisition.
Impairment of Capitalized Software Development Costs. During 1997, the
Company recorded a charge of $11.7 million related to certain CSG Phoenix
assets. After the consideration of multiple factors and events, consisting
primarily of an increase in demand for the Company's outsourced processing
services and previously announced delays in the delivery of CSG Phoenix, such
assets were reduced to their estimated net realizable value as of December 31,
1997. The charge primarily included previously capitalized internal
development costs and purchased software incorporated into the product.
Impairment of Intangible Assets. During 1997, the Company recorded a charge
of $4.7 million for the impairment of certain intangible assets related to
software systems which the Company decided to no longer market and support.
This impairment charge related principally to the Company's CableMAX product.
CableMAX was a personal computer-based customer management system targeted at
smaller cable systems of 2,500 customers or less. During 1997, the Company
decided not to invest the resources necessary to make the software year 2000
compliant, resulting in the impairment of the CableMAX intangible assets.
Extraordinary Loss From Early Extinguishment Of Debt. In September 1997, the
Company retired its outstanding bank indebtedness of $27.5 million in
conjunction with obtaining financing for the SUMMITrak asset acquisition. Upon
repayment of the outstanding debt, the Company recorded an extraordinary loss
of $0.6 million for the write-off of deferred financing costs.
Income Tax Benefit. As of September 30, 1998, the Company had a valuation
allowance of $48.5 million against certain of its deferred tax assets due to
the uncertainty that it would realize the income tax benefit from these
assets. During the fourth quarter of 1998, the Company concluded that it was
more likely than not that it would realize the entire tax benefit from its
deferred tax assets. As a result, the Company eliminated the entire valuation
allowance of $48.5 million as of December 31, 1998, which resulted in the
Company recording a net
14
income tax benefit of $39.6 million during the fourth quarter. This conclusion
was based primarily upon the Company's expected profitable operations in
future periods. See below for additional discussion.
Adjusted Results of Operations
Impact of Acquisition Charges and Non-recurring Charges on Earnings. As
discussed above, the Company has incurred Acquisition Charges and non-
recurring charges in each of the last three years. The total of these charges
was $7.5 million, $8.2 million, and $135.3 million for the years ended
December 31, 1999, 1998 and 1997, respectively. The Company's adjusted results
of operations excluding these items are shown in the following table. In
addition to the exclusion of these expenses from the calculation, the adjusted
results of operations were computed using an effective income tax rate of
38.0%, and outstanding shares on a diluted basis.
For the year ended
December 31,
--------------------------
1999 1998 1997
-------- ------- -------
(in thousands, except
per share amounts)
Adjusted Results of Operations:
Operating income............................... $107,613 $61,512 $36,131
Operating income margin........................ 33.4% 26.0% 21.0%
Income before income taxes..................... 103,390 54,204 32,450
Net income..................................... 64,102 33,606 20,119
Earnings per diluted common share.............. 1.17 .63 .39
Weighted average diluted common shares......... 54,660 52,991 52,138
15
Results of Operations
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated.
Year Ended December 31,
-------------------------------------------------------
1999 1998 1997
----------------- ----------------- ------------------
% of % of % of
Amount Revenue Amount Revenue Amount Revenue
-------- ------- -------- ------- --------- -------
(in thousands)
Revenues:
Processing and related
services.............. $255,167 79.2% $191,802 81.1% $ 131,399 76.5%
Software and
professional services. 66,995 20.8 44,838 18.9 40,405 23.5
-------- ------ -------- ----- --------- -----
Total revenues........ 322,162 100.00 236,640 100.0 171,804 100.0
-------- ------ -------- ----- --------- -----
Expenses:
Cost of processing and
related services:
Direct costs........... 88,475 27.5 77,155 32.6 58,259 33.9
Amortization of
acquired software..... -- -- -- -- 10,596 6.2
Amortization of client
contracts and related
intangibles........... 7,231 2.2 5,043 2.1 4,293 2.5
-------- ------ -------- ----- --------- -----
Total cost of
processing and
related services..... 95,706 29.7 82,198 34.7 73,148 42.6
Cost of software and
professional services. 36,415 11.3 25,048 10.6 16,834 9.8
-------- ------ -------- ----- --------- -----
Total cost of
revenues............. 132,121 41.0 107,246 45.3 89,982 52.4
-------- ------ -------- ----- --------- -----
Gross margin (exclusive
of depreciation)....... 190,041 59.0 129,394 54.7 81,822 47.6
-------- ------ -------- ----- --------- -----
Operating expenses:
Research and
development:
Research and
development........... 34,388 10.7 27,485 11.6 22,586 13.2
Charge for purchased
research and
development........... -- -- -- -- 105,484 61.4
Impairment of
capitalized software
development costs..... -- -- -- -- 11,737 6.8
Selling and marketing.. 14,361 4.4 11,810 5.0 10,198 5.9
General and
administrative:
General and
administrative........ 25,781 8.0 22,959 9.7 19,385 11.3
Amortization of
noncompete agreements
and goodwill.......... 4,889 1.5 5,381 2.3 6,927 4.0
Impairment of
intangible assets..... -- -- -- -- 4,707 2.7
Stock-based employee
compensation.......... 280 .1 297 .1 449 .3
Depreciation........... 10,190 3.2 8,159 3.4 6,884 4.0
-------- ------ -------- ----- --------- -----
Total operating
expenses............. 89,889 27.9 76,091 32.1 188,357 109.6
-------- ------ -------- ----- --------- -----
Operating income (loss). 100,152 31.1 53,303 22.6 (106,535) (62.0)
-------- ------ -------- ----- --------- -----
Other income (expense):
Interest expense....... (7,214) (2.2) (9,771) (4.1) (5,324) (3.1)
Interest income........ 2,981 .9 2,484 1.0 1,294 .7
Other.................. 10 -- (21) -- 349 .2
-------- ------ -------- ----- --------- -----
Total other........... (4,223) (1.3) (7,308) (3.1) (3,681) (2.2)
-------- ------ -------- ----- --------- -----
Income (loss) before
income taxes,
extraordinary item and
discontinued
operations............. 95,929 29.8 45,995 19.5 (110,216) (64.2)
Income tax (provision)
benefit............... (36,055) (11.2) 39,643 16.7 -- --
-------- ------ -------- ----- --------- -----
Income (loss) before
extraordinary item and
discontinued
operations............. 59,874 18.6 85,638 36.2 (110,216) (64.2)
Extraordinary loss from
early extinguishment
of debt............... -- -- -- -- (577) (.3)
-------- ------ -------- ----- --------- -----
Income (loss) from
continuing operations.. 59,874 18.6 85,638 36.2 (110,793) (64.5)
Gain from disposition
of discontinued
operations............ -- -- -- -- 7,922 4.6
-------- ------ -------- ----- --------- -----
Net income (loss)....... $ 59,874 18.6% $ 85,638 36.2% $(102,871) (59.9)%
======== ====== ======== ===== ========= =====
16
Twelve Months Ended December 31, 1999 Compared to Twelve Months Ended December
31, 1998
Revenues. Total revenues increased $85.5 million, or 36.1%, to $322.2
million in 1999, from $236.6 million in 1998.
Revenues from processing and related services increased $63.4 million, or
33.0%, to $255.2 million in 1999, from $191.8 million in 1998. Of the total
increase in revenue, approximately 68% resulted from the Company serving a
higher number of customers for its clients and approximately 32% was due to
increased revenue per customer. Customers serviced as of December 31, 1999 and
1998 were 33.8 million and 29.5 million, respectively, an increase of 14.6%.
The increase in the number of customers serviced was due to the conversion of
additional customers by new and existing clients to the Company's systems, and
internal customer growth experienced by existing clients. During 1999, the
Company converted and processed approximately 4.5 million new customers on its
systems, with approximately 3.4 million of these new customers coming from
AT&T.
Revenues from software and professional services increased $22.1 million, or
49.4%, to $67.0 million in 1999, from $44.8 million in 1998. The Company sells
its software products principally to its existing client base to (i) enhance
the core functionality of its service bureau processing application, (ii)
increase the efficiency and productivity of its clients' operations, and (iii)
allow clients to effectively rollout new products and services to new and
existing markets. The increase in revenue between years relates to the
continued strong demand for the Company's existing software products,
principally ACSR, and the rollout of additional new products to meet the
changing needs of the Company's client base.
Total domestic revenue per customer account for 1999 was $9.88, compared to
$8.71 for 1998, an increase of 13.4%. Revenue per customer increased due
primarily to (i) a greater percentage of processing revenues in 1999 being
generated under the AT&T Contract, (ii) price increases included in client
contracts, and (iii) increased software sales to new and existing clients.
Cost of Processing and Related Services. Direct processing costs as a
percentage of related revenues were 34.7% for 1999, compared to 40.2% for
1998. The improvement between years relates primarily to better overall
leveraging of the direct processing costs as a result of the continued growth
of the customer base processed on the Company's system. Amortization of client
contracts and related intangibles increased $2.2 million, or 43.4%, to $7.2
million in 1999, from $5.0 million in 1998. The increase in expense is due
primarily to the amortization of the value assigned to the AT&T Contract. The
value assigned to the AT&T Contract is being amortized over the life of the
contract in proportion to the financial minimums included in the contract.
Amortization related to the AT&T Contract was $3.3 million in 1999, compared
to $1.9 million in 1998. For 2000, the scheduled amortization for the AT&T
Contract is $3.4 million.
Cost of Software and Professional Services. The cost of software and
professional services as a percentage of related revenues was 54.4% in 1999,
compared to 55.9% in 1998. The slight decrease in this percentage is due
primarily to the timing of the sales cycle for new products introduced both in
1999 and 1998.
Gross Margin. Gross margin increased $60.6 million, or 46.9%, to $190.0
million in 1999, from $129.4 million in 1998, due primarily to revenue growth.
The gross margin as a percentage of total revenues increased to 59.0% in 1999,
compared to 54.7% in 1998. The overall increase in the gross margin percentage
is due primarily to the improvement in the gross margin percentage for
processing and related services, due primarily to the increase in revenue per
customer while controlling the cost of delivering such services.
Research and Development Expense. R&D expense increased $6.9 million, or
25.1%, to $34.4 million in 1999, from $27.5 million in 1998. As a percentage
of total revenues, R&D expense decreased to 10.7% in 1999, from 11.6% in 1998.
The Company did not capitalize any software development costs during 1999. The
Company capitalized third party, contracted programming costs of approximately
$1.4 million during 1998, related primarily to enhancements to existing
products. As a result, total R&D development expenditures (i.e., the total R&D
costs expensed, plus the capitalized development costs) for 1999 and 1998,
were $34.4 million, or 10.7% of total revenues, and $28.9 million, or 12.2% of
total revenues, respectively.
17
The overall increase in the R&D expenditures between periods is due
primarily to increased efforts on several products which are in development
and enhancements of the Company's existing products. The Company's development
efforts for 1999 were focused primarily on the development of products to (i)
increase the efficiencies and productivity of its clients' operations, (ii)
address the systems needed to support the convergence of the communications
markets, (iii) support a web-enabled, customer self-care and electronic bill
presentment/payment application, and (iv) allow clients to effectively rollout
new products and services to new and existing markets, such as residential
telephony, High-Speed Data/ISP and IP markets. The Company expects its
development efforts to focus on similar tasks in 2000 and expects to spend a
similar percentage of its total revenues on R&D in the future.
Selling and Marketing Expense. Selling and marketing ("S&M") expense
increased $2.6 million, or 21.6%, to $14.4 million in 1999, from $11.8 million
in 1998. As a percentage of total revenues, S&M expense decreased to 4.4% in
1999, from 5.0% in 1998. The decrease in S&M expenses as a percentage of total
revenues is due primarily to increased revenues, while controlling S&M costs.
General and Administrative Expense. General and administrative ("G&A")
expense increased $2.8 million, or 12.3%, to $25.8 million in 1999, from $23.0
million in 1998. As a percentage of total revenues, G&A expense decreased to
8.0% in 1999, from 9.7% in 1998. The increase in G&A expenses relates
primarily to the continued expansion of the Company's management and
administrative staff and other administrative costs to support the Company's
overall growth. The decrease in G&A expenses as a percentage of total revenues
is due primarily to increased revenue, while controlling G&A costs.
Amortization of Noncompete Agreements and Goodwill. Amortization of
noncompete agreements and goodwill decreased $0.5 million, or 9.1%, to $4.9
million in 1999, from $5.4 million in 1998. The decrease in amortization
expense is due primarily to the noncompete agreement from the CSG Acquisition
becoming fully amortized as of November 30, 1999.
Depreciation Expense. Depreciation expense increased $2.0 million, or 24.9%,
to $10.2 million in 1999, from $8.2 million in 1998. The increase in expense
relates to capital expenditures made throughout 1999 and 1998 in support of
the overall growth of the Company, consisting principally of computer hardware
and related equipment and statement processing equipment and related
facilities. Depreciation expense for all property and equipment is reflected
separately in the aggregate and is not included in the cost of revenues or the
other components of operating expenses.
Operating Income. Operating income was $100.2 million for 1999, compared to
$53.3 million in 1998, with the increase attributable to the factors discussed
above. The Company's operating income margin, excluding the Acquisition
Charges discussed above, was 33.4% for 1999, compared to 26.0% for 1998.
Interest Expense. Interest expense decreased $2.6 million, or 26.2%, to $7.2
million in 1999, from $9.8 million in 1998, with the decrease attributable
primarily to (i) scheduled principal payments on the Company's long-term debt,
(ii) optional prepayments on long-term debt made during 1999, and (iii) a
decrease in interest rates between periods. The balance of the Company's long-
term debt as of December 31, 1999, was $81.0 million, compared to $128.3
million as of December 31, 1998, a decrease of $47.3 million.
Interest Income. Interest income increased $0.5 million, or 20.0%, to $3.0
million in 1999, from $2.5 million in 1998, with the increase attributable
primarily to an increase in operating funds available for investment.
Income Tax (Provision) Benefit. As of September 30, 1998, the Company had
recorded a valuation allowance of $48.5 million against certain of its
deferred tax assets due to the uncertainty that it would realize the income
tax benefit from those assets. During the fourth quarter of 1998, the Company
concluded that it was more likely than not that it would realize the entire
tax benefit from its deferred tax assets. As a result, the Company eliminated
the entire valuation allowance of $48.5 million as of December 31, 1998, which
resulted in the Company reflecting a net income tax benefit of $39.6 million
for 1998.
18
For the year ended December 31, 1999, the Company recorded an income tax
provision of $36.1 million, or an effective income tax rate of approximately
38%. As of December 31, 1999, management continues to believe that sufficient
taxable income will be generated to realize the entire benefit of its deferred
tax assets. The Company's assumptions of future profitable operations are
supported by its strong operating performances in 1999 and 1998, and the
conversion of a significant number of new customers onto its processing system
during these periods.
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended December
31, 1997
Revenues. Total revenues increased $64.8 million, or 37.7%, to $236.6
million in 1998, from $171.8 million in 1997.
Revenues from processing and related services increased $60.4 million, or
46.0%, to $191.8 million in 1998, from $131.4 million in 1997. Of the total
increase in revenue, approximately 61% resulted from the Company serving a
higher number of customers for its clients and approximately 39% was due to
increased revenue per customer. Customers serviced as of December 31, 1998 and
1997 were 29.5 million and 21.1 million, respectively, an increase of 39.3%.
The increase in the number of customers serviced was due to the conversion of
additional customers by new and existing clients to the Company's systems, and
internal customer growth experienced by existing clients. During 1998, the
Company converted and processed approximately 9.0 million new customers on its
systems, with approximately 7.7 million of these new customers coming from
AT&T.
Revenues from software and professional services increased $4.4 million, or
11.0%, to $44.8 million in 1998, from $40.4 million in 1997. This increase
relates to the continued strong demand of the Company's software products and
related professional services.
Total domestic revenue per customer account for 1998 was $8.71, compared to
$7.73 for 1997, an increase of 12.7%. Revenue per customer increased due
primarily to (i) the AT&T Contract, which was executed in September 1997, (ii)
increased usage of ancillary services by clients, and (iii) price increases
included in client contracts.
Cost of Processing and Related Services. Direct processing costs as a
percentage of related revenues were 40.2% for 1998, compared to 44.3% for
1997. The improvement between years relates primarily to better overall
leveraging of the direct processing costs as a result of the continued growth
of the customer base processed on the Company's system. Amortization of
acquired software decreased to zero in 1998, from $10.6 million in 1997, due
to acquired software from the CSG Acquisition becoming fully amortized as of
November 30, 1997. Amortization of client contracts and related intangibles
increased $0.7 million, or 17.5%, to $5.0 million in 1998, from $4.3 million
in 1997. The increase in expense is due to amortization of the value assigned
to the AT&T Contract, offset by a decrease in the amortization of certain
intangible assets from the CSG Acquisition becoming fully amortized as of
November 30, 1997. Amortization related to the AT&T Contract was $1.9 million
in 1998, compared to $0.3 million in 1997.
Cost of Software and Professional Services. The cost of software and
professional services as a percentage of related revenues was 55.9% in 1998,
compared to 41.7% in 1997. The increase in this percentage between years
relates primarily to the timing of the sales cycle for new products introduced
in 1998.
Gross Margin. Gross margin increased $47.6 million, or 58.1%, to $129.4
million in 1998, from $81.8 million in 1997, due primarily to revenue growth.
The gross margin as a percentage of total revenues increased to 54.7% in 1998,
compared to 47.6% in 1997. The overall increase in the gross margin percentage
is due primarily to the increase in revenues while the amount of amortization
of acquired software decreased, and to a lesser degree, the improvement in the
gross margin percentage for processing and related services, due primarily to
the increase in revenue per customer while controlling the cost of delivering
such services.
Research and Development Expense. R&D expense increased $4.9 million, or
21.7%, to $27.5 million in 1998, from $22.6 million in 1997. As a percentage
of total revenues, R&D expense decreased to 11.6% in 1998, from 13.2% in 1997.
19
During 1997, the Company capitalized software development costs of
approximately $9.7 million, which consisted of $8.4 million of internal
development costs and $1.3 million of purchased software. The Company
capitalized third party, contracted programming costs of approximately $1.4
million during 1998, related primarily to enhancements to existing products.
As a result, total R&D development expenditures (i.e., the total R&D costs
expensed, plus the capitalized development costs) for 1998 and 1997, were
$28.9 million, or 12.2% of total revenues, and $31.0 million, or 18.0% of
total revenues, respectively. The overall decrease in the R&D expenditures
between periods is due primarily to effective control of development costs,
primarily the reduction of third party, contracted programming services.
Selling and Marketing Expense. S&M expense increased $1.6 million, or 15.8%,
to $11.8 million in 1998, from $10.2 million in 1997. As a percentage of total
revenues, S&M expense decreased to 5.0% in 1998, from 5.9% in 1997. The
overall decrease in S&M expenses as a percentage of total revenues is due
primarily to increased revenues, while controlling S&M costs.
General and Administrative Expense. G&A expense increased $3.6 million, or
18.4%, to $23.0 million in 1998, from $19.4 million in 1997. As a percentage
of total revenues, G&A expense decreased to 9.7% in 1998, from 11.3% in 1997.
The increase in G&A expenses relates primarily to the continued expansion of
the Company's administrative staff and other administrative costs to support
the Company's overall growth. The decrease in G&A expenses as a percentage of
total revenues is due primarily to increased revenue, while controlling G&A
costs.
Amortization of Noncompete Agreements and Goodwill. Amortization of
noncompete agreements and goodwill decreased $1.5 million, or 22.3%, to $5.4
million in 1998, from $6.9 million in 1997. The decrease in amortization
expense is due primarily to a write-down of certain intangible assets in 1997.
See Note 2 to the Consolidated Financial Statements for additional discussion.
Depreciation Expense. Depreciation expense increased $1.3 million, or 18.5%,
to $8.2 million in 1998, from $6.9 million in 1997. The increase in expense
relates to capital expenditures made throughout 1998 and 1997 in support of
the overall growth of the Company, consisting principally of computer hardware
and related equipment and statement processing equipment and related
facilities. Depreciation expense for all property and equipment is reflected
separately in the aggregate and is not included in the cost of revenues or the
other components of operating expenses.
Operating Income (Loss). Operating income was $53.3 million for 1998,
compared to an operating loss of $106.5 million in 1997. The change between
years relates primarily to the non-recurring charges recorded in 1997, as
discussed above. The Company's operating income margin, excluding the
Acquisition Charges and non-recurring charges discussed above, was 26.0% for
1998, compared to 21.0% for 1997.
Interest Expense. Interest expense increased $4.5 million, or 83.5%, to $9.8
million in 1998, from $5.3 million in 1997, with the increase attributable
primarily to the financing of the Company's acquisition of the SUMMITrak
assets in September 1997. The balance of the Company's long-term debt as of
December 31, 1998 was $128.3 million, compared to $135.0 million as of
December 31, 1997, a decrease of $6.7 million.
Interest Income. Interest income increased $1.2 million, or 92.0%, to $2.5
million in 1998, from $1.3 million in 1997, with the increase attributable
primarily to an increase in operating funds available for investment and an
increase in interest charges on aged client accounts.
Income Tax Benefit. As of September 30, 1998, the Company had a valuation
allowance of $48.5 million against certain of its deferred tax assets due to
the uncertainty that it would realize the income tax benefit from these
assets. During the fourth quarter of 1998, the Company concluded that it was
more likely than not that it would realize the entire tax benefit from its
deferred tax assets. As a result, the Company eliminated the entire valuation
allowance of $48.5 million as of December 31, 1998, which resulted in the
Company reflecting a net income tax benefit of $39.6 million for 1998.
20
Financial Condition, Liquidity and Capital Resources
As of December 31, 1999, the Company's principal sources of liquidity
included cash and cash equivalents of $48.7 million and a revolving credit
facility with a bank in the amount of $40 million, of which there were no
borrowings outstanding as of December 31, 1999. The Company's ability to
borrow under the revolving credit facility is subject to maintenance of
certain levels of eligible receivables. At December 31, 1999, all of the $40.0
million revolving credit facility was available to the Company. The revolving
credit facility expires in September 2002. The Company's working capital as of
December 31, 1999 and 1998 was $32.1 million and $7.1 million, respectively.
As of December 31, 1999 and 1998, the Company had $67.5 million and $60.5
million, respectively, in net billed trade accounts receivable, an increase of
$7.0 million, with the increase primarily a result of the Company's revenue
growth. The Company's trade accounts receivable balance includes billings for
several non-revenue items, such as postage, communication lines, travel and
entertainment reimbursements, sales tax, and deferred items. As a result, the
Company evaluates its performance in collecting its accounts receivable
through its calculation of days billings outstanding (DBO) rather than a
typical days sales outstanding (DSO) calculation. DBO is calculated based on
the billing for the period (including non-revenue items) divided by the
average net trade accounts receivable balance for the period. The Company's
DBO calculations for the years ended December 31, 1999 and 1998 were 55 and 56
days, respectively.
The Company's net cash flows from operating activities for the years ended
December 31, 1999, 1998 and 1997 were $102.1 million, $47.3 million and $31.4
million, respectively. The increase of $54.7 million, or 115.7% in 1999 over
1998 relates to a $37.8 million increase in net cash flows from operations, in
addition to an increase in the net change in operating assets and liabilities
of $16.9 million. The increase of $15.9 million, or 50.6%, in 1998 over 1997
relates to an $18.0 million increase in net cash flows from operations, offset
by a decrease in the net change in operating assets and liabilities of $2.1
million.
The Company's net cash flows used in investing activities totaled $36.7
million in 1999, compared to $27.1 million in 1998, an increase of $9.6
million. The increase between years relates primarily to conversion incentive
payments of $24.7 million (principally to AT&T) in 1999, compared to $4.0
million in 1998. This increase is offset by (i) a cash payment of $6.0 million
for the acquisition of assets of USTATS in 1998, (ii) software additions of
$1.4 million in 1998, and (iii) a decrease in property and equipment purchases
of $3.7 million. The Company's net cash flows used in investing activities
totaled $117.4 million in 1997. The decrease of $90.3 million between 1998 and
1997 relates primarily to the cash payments of $106.5 million for the
SUMMITrak assets acquired in September 1997 and a decrease of $8.7 million in
capitalized software development costs between years, with these decreases
offset by (i) proceeds of $8.6 million from the final disposition of Anasazi
in 1997, (ii) a cash payment of $6.0 million for the acquisition of assets of
USTATS in 1998, (iii) conversion incentive payments of $4.0 million made in
1998, and (iv) an increase in purchases of net property and equipment of $6.3
million.
The Company's net cash flows used in financing activities was $56.1 million
in 1999, compared to $1.1 million in 1998, an increase of $55.0 million. The
significant increase between years relates to (i) an increase in scheduled
principal payments on long-term debt of $8.9 million, (ii) optional long-term
debt prepayments of $31.6 million made in 1999, and (iii) repurchase of
655,500 shares of common stock for $20.2 million in 1999, as discussed below.
This increase is offset by an increase in proceeds received from the issuance
of common stock of $5.4 million, related primarily to the exercise of stock
options by employees. The Company's net cash flows used in financing
activities was $100.7 million in 1997. The decrease of $101.8 million from
1997 to 1998 relates primarily to the net change in the Company's long-term
debt between years. In 1997, the Company generated $150.0 million from a new
debt agreement entered into primarily to fund the SUMMITrak asset acquisition,
and repaid long-term debt of $47.5 million, which included (i) $5.0 million of
scheduled payments on the previous debt agreement, (ii) $27.5 million of
existing debt which was refinanced as part of the new debt agreement, and
(iii) an optional prepayment of $15.0 million on the new debt. The scheduled
principal payments made in 1998 were $6.8 million.
21
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
for 1999 was $124.6 million or 38.7% of total revenues, compared to $73.5
million or 31.0% of total revenues for 1998. EBITDA is presented here as a
measure of the Company's debt service ability and is not intended to represent
cash flows for the periods.
Interest rates for the Term Credit Facility and revolving credit facility
are chosen at the option of the Company and are based on the LIBOR rate or the
prime rate, plus an additional percentage spread, with the spread dependent
upon the Company's leverage ratio. As of December 31, 1999, the spread on the
LIBOR rate and prime rate was 0.50% and 0%, respectively. See Note 6 to the
Consolidated Financial Statements for additional discussion of the Term Credit
Facility.
The Company was required to make certain monetary conversion payments under
the AT&T Contract. AT&T surpassed the milestone of 13 million customers
processed on the Company's systems during the third quarter of 1999. Upon
reaching this significant milestone, AT&T was paid its final monetary
conversion incentive by the Company. The total monetary conversion incentives
paid during 1999 to AT&T were $22.0 million.
Effective August 4, 1999, the Company's Board of Directors approved a stock
repurchase plan which authorized the Company at its discretion to purchase up
to a total of 5.0 million shares of its Common Stock from time to time as
market and business conditions warrant. As of December 31, 1999, the Company
had repurchased 655,500 shares of Common Stock for $20.2 million (a weighted
average price of $30.88 per share). The repurchased shares are held as
treasury shares.
For income tax purposes, the amortization of the intangible assets from
acquisitions (including the intangible assets related to the CSG Acquisition
and the charge for purchased R&D related to the SUMMITrak asset acquisition)
are principally deductible over 15 years on a straight-line basis. The Company
has paid U.S. income taxes since its inception in 1994. Based on its current
projections, the Company expects to pay U.S. income taxes for 2000, and its
effective book income tax rate for 2000 is expected to be approximately 38%.
The Company continues to make significant investments in capital equipment,
facilities, research and development, and at its discretion, may continue to
make stock repurchases. The Company had no significant capital commitments as
of December 31, 1999. The Company believes that cash generated from
operations, together with the current cash and cash equivalents and the amount
available under the revolving credit facility, will be sufficient to meet its
anticipated cash requirements for operations, income taxes, debt service,
capital expenditures, and stock repurchases for both its short- and long-term
purposes. The Company also believes it has significant unused borrowing
capacity and could obtain additional cash resources by amending its current
credit facility and/or establishing a new credit facility.
Market Risk
The Company is exposed to various market risks, including changes in
interest rates and foreign currency exchange rates. Market risk is the
potential loss arising from adverse changes in market rates and prices. The
Company has entered into an interest rate collar agreement to manage its
interest rate risk from the variable rate features of its long-term debt. The
Company does not utilize any derivative financial instruments for purposes of
managing its foreign currency exchange rate risk. The Company does not enter
into derivatives or other financial instruments for trading or speculative
purposes.
Interest Rate Risk. The Company had long-term debt (including current
maturities) of $81.0 million as of December 31, 1999. Interest rates for the
debt are chosen at the option of the Company and are based on the LIBOR rate
or the prime rate, plus an additional percentage spread, with the spread
dependent upon the Company's leverage ratio. As of December 31, 1999, the
spread on the LIBOR rate and prime rate was 0.50% and 0%, respectively. As of
December 31, 1999, the entire amount of the debt was under either a three- or
six-month LIBOR contract, with an overall weighted average interest rate of
6.55% (i.e., LIBOR at 6.05% plus spread of 0.50%). The carrying amount of the
Company's long-term debt approximates fair value due to its
22
variable interest rate features. See Note 6 to the Consolidated Financial
Statements for additional description of the long-term debt and scheduled
principal payments.
As required by the debt agreement with its bank, the Company entered into a
three-year interest rate collar in December 1997 with a major bank to manage
its risk from its variable rate long-term debt. The underlying notional amount
covered by the collar agreement is $60.6 million as of December 31, 1999, and
decreases over the three-year term in relation to the scheduled principal
payments on the long-term debt. Any payment on the 4.9% (LIBOR) interest rate
floor, or receipt on the 7.5% (LIBOR) interest rate cap component of the
collar, would be recognized as an adjustment to interest expense in the period
incurred. There are no amounts due or receivable under this agreement as of
December 31, 1999, and the agreement had no effect on the Company's interest
expense for 1999, 1998 or 1997. The fair value of the collar agreement is not
recognized in the Company's financial statements. The fair value of the collar
agreement at December 31, 1999, based on a quoted market price, was not
significant.
Foreign Exchange Rate Risk. The Company's foreign currency transactions
relate almost entirely to the operations conducted through its United Kingdom
("UK") subsidiary, CSGI. CSGI's transactions are executed primarily within the
UK and generally are denominated in British pounds. The Company does not
utilize any derivative financial instruments for purposes of managing its
foreign currency exchange rate risk. Exposure to variability in currency
exchange rates is mitigated by the fact that purchases and sales are typically
in the same currency with similar maturity dates and amounts. A hypothetical
adverse change of 10% in year-end exchange rates would not have a material
effect upon the Company's financial condition or results of operations.
AT&T Contract and Merger
AT&T completed its merger with TCI in March 1999 and has consolidated the
TCI operations into AT&T Broadband. During the years ended December 31, 1999,
1998 and 1997, revenues from AT&T and affiliated companies generated under the
AT&T Contract represented approximately 50.5%, 37.4%, and 32.9% of total
revenues, respectively. The AT&T Contract has a 15-year term and expires in
2012. The AT&T Contract has minimum financial commitments over the term of the
contract and includes exclusive rights to provide customer care and billing
products and services for AT&T's offerings of wireline video, all
Internet/high-speed data services, residential wireline telephony services,
and print and mail services. The AT&T Contract provides certain performance
criteria and other obligations to be met by the Company. The Company is
required to perform certain remedial efforts and is subject to certain
penalties if it fails to meet the performance criteria or other obligations.
The Company is also subject to an annual technical audit to determine whether
the Company's products and services include innovations in features and
functions that have become standard in the wireline video industry. To date,
the Company believes it has complied with the terms of the contract. Since
execution of the AT&T Contract in September 1997 through December 31, 1999,
the Company has successfully converted approximately 11 million AT&T cable
television customers onto its system.
AT&T began its efforts to provide convergent communications services in
several United States cities during 1999 and expects to continue these efforts
in 2000. The Company is working closely with AT&T to provide customer care and
billing services to customers in those cities.
The Company expects to continue performing successfully under the AT&T
Contract, and is hopeful that it can continue to sell products and services to
the combined entity that are in excess of the minimum financial commitments
and exclusive rights included in the contract.
See Note 4 to the Consolidated Financial Statements for discussion regarding
the Company's Common Stock Warrants held by AT&T.
Year 2000
Results of Computer Systems Rollover Into Year 2000. The Company's year 2000
("Y2K") program was described in the Company's most recent Form 10-Q dated
November 15, 1999. This program was substantially
23
completed prior to January 1, 2000, and included rigorous compliance criteria
and testing of the Company's various computer systems that could be affected
by Y2K. As of the date of this filing, the Company has not experienced any
significant disruptions in its operations as a result of its computer systems
rollover to, and processing of dates within, the year 2000. This included the
Company's information technology ("IT") systems (including products and
services), non-IT systems with embedded technology, and software and hardware
from significant vendors. Any Y2K-related disruptions within the Company's
systems occurred primarily during the first week of January 2000, and
consisted of minor items only (e.g., screen and/or report displays), all of
which were timely resolved without significant cost to or effort by the
Company, and had minimal impact to the Company's or its clients' operations.
Although the Company has not experienced any significant disruptions to date,
there is no assurance that the Company will not experience any future Y2K-
related disruptions.
Costs to Address the Company's Year 2000 Issues. Since inception of its
program in 1995 through December 31, 1999, the Company has incurred and
expensed costs of approximately $4.2 million related to its Y2K compliance
efforts, with approximately $1.4 million of this amount incurred in 1999. The
total estimated costs to be incurred in the future related to this matter are
not expected to be significant. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from
those anticipated.
Continuing Y2K Compliance Efforts and Remaining Risks. The Company believes
that the year 2000 dates with the most significant risk of disruptions
(January 1, 2000 and February 29, 2000) have passed without significant
disruptions to the Company and/or its clients. The Company believes if any Y2k
disruptions are experienced in the future, such disruptions would be of a
similar nature as those items already reported to the Company's Product
Support Center ("PSC"), and therefore, could be timely and adequately
identified and resolved using existing problem reporting, remediation and
recovery procedures. The Company continues to maintain its Y2K corporate
program as a means to monitor continued Y2K compliance and whether any
reported events to the PSC resulted from Y2K-related issues.
Although the Company believes the risk of any significant Y2K-related
disruptions in the future is low, there can be no assurances that (i) the
Company's systems and products (including software and hardware from
significant vendors) contain all the necessary date code changes to avoid any
significant disruptions related to processing of dates into and beyond the
Year 2000, or (ii) if such disruptions are experienced, that the Company can
timely identify and resolve any disruptions without significant impact to the
Company's and/or its clients' operations. Furthermore, it has been widely
reported that a significant amount of litigation surrounding business
interruptions may arise out of Y2K issues. Although the Company is currently
not aware of any such litigation that might affect the Company, the
unprecedented nature of potential litigation regarding Y2K compliance issues
makes it uncertain whether, or to what extent, the Company may be affected by
such litigation in the future.
Certain Factors That May Affect Future Results of Operations. Except for
statements of existing or historical facts, the foregoing discussion of Y2K
consists of forward-looking statements and assumptions relating to forward-
looking statements, including without limitation the statements relating to
future costs, the timetable for completion of Y2K compliance efforts,
potential problems relating to Y2K, the Company's state of readiness, third
party representations, and the Company's plans and objectives for addressing
Y2K problems. Certain factors could cause actual results to differ materially
from the Company's expectations, including without limitation (i) the failure
of vendors and service providers to timely achieve Y2K compliance, (ii) system
incompatibilities with third parties resulting from software conversions,
(iii) the Company's systems and products not containing all necessary date
code changes, (iv) the failure of existing or future clients to achieve Y2K
compliance, (v) potential litigation arising out of Y2K issues, the risk of
which may be greater for information technology based service providers such
as the Company, (vi) the failure of the Company's validation and testing phase
to detect operational problems internal to the Company, in the Company's
products or services or in the Company's interface with service providers,
vendors or clients, whether such failure results from the technical inadequacy
of the Company's validation and testing efforts, the technological
infeasibility of testing certain non-IT systems, the perceived cost-benefit
constraints against conducting all available testing, or the unavailability of
third parties to participate in testing, or (vii) the failure to timely
implement a contingency plan to the extent Y2K compliance is not achieved.
24
Item 8. Financial Statements and Supplementary Data
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Report of Independent Public Accountants................................... 26
Consolidated Balance Sheets as of December 31, 1999 and 1998............... 27
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997....................................................... 28
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.......................................... 29
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997....................................................... 30
Notes to Consolidated Financial Statements................................. 31
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
CSG Systems International, Inc.:
We have audited the accompanying consolidated balance sheets of CSG Systems
International, Inc. (a Delaware corporation) and Subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CSG Systems International,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen llp
Omaha, Nebraska
January 17, 2000
26
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 48,676 $ 39,593
Accounts receivable--
Trade--
Billed, net of allowance of $2,975 and $2,051............ 67,477 60,529
Unbilled................................................. 8,311 2,828
Other..................................................... 909 1,179
Deferred income taxes..................................... 1,972 1,803
Other current assets...................................... 2,850 2,275
-------- --------
Total current assets...................................... 130,195 108,207
-------- --------
Property and equipment, net................................ 26,507 24,711
Software, net.............................................. 6,145 9,422
Noncompete agreements and goodwill, net.................... 2,652 7,596
Client contracts and related intangibles, net.............. 55,343 59,791
Deferred income taxes...................................... 52,845 59,389
Other assets............................................... 1,281 2,380
-------- --------
Total assets.............................................. $274,968 $271,496
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 21,711 $ 19,125
Customer deposits......................................... 10,549 10,018
Trade accounts payable.................................... 9,450 10,471
Accrued employee compensation............................. 16,386 12,276
Deferred revenue.......................................... 16,746 13,470
Conversion incentive payments............................. -- 22,032
Accrued income taxes...................................... 11,710 6,756
Other current liabilities................................. 11,551 7,009
-------- --------
Total current liabilities................................. 98,103 101,157
-------- --------
Non-current liabilities:
Long-term debt, net of current maturities................. 59,289 109,125
Deferred revenue.......................................... 714 216
-------- --------
Total non-current liabilities............................. 60,003 109,341
-------- --------
Commitments and contingencies (Note 9)
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000
shares authorized; zero shares issued and outstanding.... -- --
Common stock, par value $.01 per share; 100,000,000 shares
authorized; 13,591,947 and 11,421,416 shares reserved for
common stock warrants, employee stock purchase plan and
stock incentive plans; 51,638,629 and 51,465,646 shares
outstanding.............................................. 523 515
Common stock warrants; 3,000,000 warrants issued and
outstanding.............................................. 26,145 26,145
Additional paid-in capital................................ 136,373 120,599
Deferred employee compensation............................ (48) (328)
Notes receivable from employee stockholders............... (115) (478)
Other comprehensive income-cumulative translation
adjustments.............................................. (120) 38
Treasury stock, at cost, 722,486 shares and 66,000 shares. (20,374) (97)
Accumulated deficit....................................... (25,522) (85,396)
-------- --------
Total stockholders' equity................................ 116,862 60,998
-------- --------
Total liabilities and stockholders' equity................ $274,968 $271,496
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
-----------------------------
1999 1998 1997
-------- -------- ---------
Revenues:
Processing and related services............... $255,167 $191,802 $ 131,399
Software and professional services............ 66,995 44,838 40,405
-------- -------- ---------
Total revenues............................... 322,162 236,640 171,804
-------- -------- ---------
Expenses:
Cost of processing and related services:
Direct costs.................................. 88,475 77,155 58,259
Amortization of acquired software............. -- -- 10,596
Amortization of client contracts and related
intangibles.................................. 7,231 5,043 4,293
-------- -------- ---------
Total cost of processing and related
services.................................... 95,706 82,198 73,148
Cost of software and professional services.... 36,415 25,048 16,834
-------- -------- ---------
Total cost of revenues....................... 132,121 107,246 89,982
-------- -------- ---------
Gross margin (exclusive of depreciation)....... 190,041 129,394 81,822
-------- -------- ---------
Operating expenses:
Research and development:
Research and development...................... 34,388 27,485 22,586
Charge for purchased research and development. -- -- 105,484
Impairment of capitalized software development
costs........................................ -- -- 11,737
Selling and marketing......................... 14,361 11,810 10,198
General and administrative:
General and administrative.................... 25,781 22,959 19,385
Amortization of noncompete agreements and
goodwill..................................... 4,889 5,381 6,927
Impairment of intangible assets............... -- -- 4,707
Stock-based employee compensation............. 280 297 449
Depreciation.................................. 10,190 8,159 6,884
-------- -------- ---------
Total operating expenses..................... 89,889 76,091 188,357
-------- -------- ---------
Operating income (loss)........................ 100,152 53,303 (106,535)
-------- -------- ---------
Other income (expense):
Interest expense.............................. (7,214) (9,771) (5,324)
Interest income............................... 2,981 2,484 1,294
Other......................................... 10 (21) 349
-------- -------- ---------
Total other.................................. (4,223) (7,308) (3,681)
-------- -------- ---------
Income (loss) before income taxes,
extraordinary item and discontinued
operations.................................... 95,929 45,995 (110,216)
Income tax (provision) benefit................ (36,055) 39,643 --
-------- -------- ---------
Income (loss) before extraordinary item and
discontinued operations....................... 59,874 85,638 (110,216)
Extraordinary loss from early extinguishment
of debt...................................... -- -- (577)
-------- -------- ---------
Income (loss) from continuing operations....... 59,874 85,638 (110,793)
Gain from disposition of discontinued
operations................................... -- -- 7,922
-------- -------- ---------
Net income (loss).............................. $ 59,874 $ 85,638 $(102,871)
======== ======== =========
Basic net income (loss) per common share:
Income (loss) before extraordinary item and
discontinued operations...................... $ 1.16 $ 1.67 $ (2.16)
Extraordinary loss from early extinguishment
of debt...................................... -- -- (.01)
Gain from disposition of discontinued
operations................................... -- -- .15
-------- -------- ---------
Net income (loss) attributable to common
stockholders................................. $ 1.16 $ 1.67 $ (2.02)
======== ======== =========
Weighted average common shares................ 51,675 51,198 50,994
======== ======== =========
Diluted net income (loss) per common share:
Income (loss) before extraordinary item and
discontinued operations...................... $ 1.10 $ 1.62 $ (2.16)
Extraordinary loss from early extinguishment
of debt...................................... -- -- (.01)
Gain from disposition of discontinued
operations................................... -- -- .15
-------- -------- ---------
Net income (loss) attributable to common
stockholders................................. $ 1.10 $ 1.62 $ (2.02)
======== ======== =========
Weighted average diluted common shares........ 54,660 52,991 50,994
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
28
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
NOTES
RECEIVABLE TOTAL
COMMON COMMON ADDITIONAL DEFERRED FROM CUMULATIVE STOCKHOLDERS'
STOCK COMMON STOCK PAID-IN EMPLOYEE EMPLOYEE TRANSLATION TREASURY ACCUMULATED EQUITY
OUTSTANDING STOCK WARRANTS CAPITAL COMPENSATION STOCKHOLDERS ADJUSTMENTS STOCK DEFICIT (DEFICIT)
----------- ------ -------- ---------- ------------ ------------ ----------- -------- ----------- -------------
BALANCE,
December 31,
1996........... 50,978 $510 $ -- $111,112 $(1,207) $(861) $ 573 $ -- $(68,163) $ 41,964
Comprehensive
loss:
Net loss........ -- -- -- -- -- -- -- -- (102,871) --
Foreign currency
translation
adjustments.... -- -- -- -- -- -- (574) -- -- --
Comprehensive
loss........... -- -- -- -- -- -- -- -- -- (103,445)
Issuance of
common stock
for purchase of
assets......... 3 -- -- 75 -- -- -- -- -- 75
Issuance of
common stock
warrants,
granted as part
of the
SUMMITrak asset
acquisition.... -- -- 26,145 -- -- -- -- -- -- 26,145
Amortization of
deferred stock-
based employee
compensation
expense........ -- -- -- -- 449 -- -- -- -- 449
Repurchase of
common stock... (209) (2) -- (342) 122 176 -- -- -- (46)
Exercise of
stock options
for common
stock.......... 149 2 -- 1,016 -- -- -- -- -- 1,018
Purchase of
common stock
pursuant to
employee stock
purchase plan.. 39 -- -- 439 -- -- -- -- -- 439
Tax benefit of
stock options
exercised...... -- -- -- 315 -- -- -- -- -- 315
------ ---- ------- -------- ------- ----- ----- -------- -------- --------
BALANCE,
December 31,
1997........... 50,960 510 26,145 112,615 (636) (685) (1) -- (171,034) (33,086)
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- -- 85,638 --
Foreign currency
translation
adjustments.... -- -- -- -- -- -- 39 -- -- --
Comprehensive
income......... -- -- -- -- -- -- -- -- -- 85,677
Amortization of
deferred stock-
based employee
compensation
expense........ -- -- -- -- 297 -- -- -- -- 297
Repurchase of
common stock... (66) -- -- (12) 11 146 -- (97) -- 48
Exercise of
stock options
for common
stock.......... 540 5 -- 4,957 -- -- -- -- -- 4,962
Payments on
notes
receivable from
stockholders... -- -- -- -- -- 61 -- -- -- 61
Purchase of
common stock
pursuant to
employee stock
purchase plan.. 32 -- -- 622 -- -- -- -- -- 622
Tax benefit of
stock options
exercised...... -- -- -- 2,417 -- -- -- -- -- 2,417
------ ---- ------- -------- ------- ----- ----- -------- -------- --------
BALANCE,
December 31,
1998........... 51,466 515 26,145 120,599 (328) (478) 38 (97) (85,396) 60,998
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- -- 59,874 --
Foreign currency
translation
adjustments.... -- -- -- -- -- -- (158) -- -- --
Comprehensive
income......... -- -- -- -- -- -- -- -- -- 59,716
Amortization of
deferred stock-
based employee
compensation
expense........ -- -- -- -- 280 -- -- -- -- 280
Repurchase of
common stock... (656) -- -- -- -- -- -- (20,277) -- (20,277)
Common stock
swap for option
exercise....... -- -- -- 35 -- -- -- -- -- 35
Exercise of
stock options
for common
stock.......... 795 8 -- 10,000 -- -- -- -- -- 10,008
Payments on
notes
receivable from
stockholders... -- -- -- -- -- 363 -- -- -- 363
Purchase of
common stock
pursuant to
employee stock
purchase plan.. 34 -- -- 926 -- -- -- -- -- 926
Tax benefit of
stock options
exercised...... -- -- -- 4,813 -- -- -- -- -- 4,813
------ ---- ------- -------- ------- ----- ----- -------- -------- --------
BALANCE,
December 31,
1999........... 51,639 $523 $26,145 $136,373 $ (48) $(115) $(120) $(20,374) $(25,522) $116,862
====== ==== ======= ======== ======= ===== ===== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
-----------------------------
1999 1998 1997
-------- -------- ---------
Cash flows from operating activities:
Net income (loss).............................. $ 59,874 $ 85,638 $(102,871)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities--
Depreciation................................... 10,190 8,159 6,884
Amortization................................... 15,026 12,684 23,035
Deferred income taxes.......................... 6,373 (52,880) (6,206)
Charge for purchased research and development.. -- -- 105,484
Impairment of capitalized software development
costs......................................... -- -- 11,737
Impairment of intangible assets................ -- -- 4,707
Stock-based employee compensation.............. 280 297 449
Extraordinary loss from early extinguishment
of debt....................................... -- -- 577
Gain from discontinued operations.............. -- -- (7,922)
Changes in operating assets and liabilities:
Trade accounts and other receivables, net..... (12,255) (16,320) (9,511)
Other current and noncurrent assets........... (633) (75) 11
Trade accounts payable and other liabilities.. 23,196 9,811 5,038
-------- -------- ---------
Net cash provided by operating activities.... 102,051 47,314 31,412
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net....... (12,003) (15,706) (9,389)
Acquisition of assets.......................... -- (5,974) (106,500)
Additions to software.......................... -- (1,410) (10,185)
Proceeds from disposition of discontinued
operations.................................... -- -- 8,654
Payments of conversion incentive payments...... (24,692) (3,968) --
-------- -------- ---------
Net cash used in investing activities........ (36,695) (27,058) (117,420)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 10,934 5,584 1,457
Payment of note receivable from employee
stockholders.................................. 454 64 --
Repurchase of common stock..................... (20,242) (2) (46)
Proceeds from long-term debt................... -- -- 150,000
Payments on long-term debt..................... (47,250) (6,750) (47,500)
Payment of deferred financing costs............ -- -- (3,181)
-------- -------- ---------
Net cash provided by (used in) financing
activities.................................. (56,104) (1,104) 100,730
-------- -------- ---------
Effect of exchange rate fluctuations on cash.... (169) 24 (439)
-------- -------- ---------
Net increase in cash and cash equivalents....... 9,083 19,176 14,283
Cash and cash equivalents, beginning of period.. 39,593 20,417 6,134
-------- -------- ---------
Cash and cash equivalents, end of period........ $ 48,676 $ 39,593 $ 20,417
======== ======== =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for--
Interest....................................... $ 6,386 $ 8,151 $ 4,767
Income taxes................................... $ 19,905 $ 7,259 $ 3,357
Supplemental disclosure of non-cash investing and financing activities:
During 1998, the Company assumed liabilities of $1.3 million as part of the
purchase price for the USTATS asset acquisition.
During 1997, the Company granted 3.0 million common stock warrants, valued
at $26.1 million, and recorded a liability for $26.0 million for conversion
incentive payments as part of the purchase price for the SUMMITrak asset
acquisition.
The accompanying notes are an integral part of these consolidated financial
statements.
30
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
CSG Systems International, Inc. (the "Company" or "CSG"), a Delaware
corporation, was formed in October 1994 and acquired all of the outstanding
shares of CSG Systems, Inc. ("CSG Systems") from First Data Corporation
("FDC") in November 1994 (the "CSG Acquisition"). CSG Systems had been a
subsidiary or division of FDC from 1982 until the acquisition. The Company did
not have any substantive operations prior to the acquisition of CSG Systems.
Based in Denver, Colorado, the Company provides customer care and billing
solutions worldwide for the converging communications markets, including cable
television, direct broadcast satellite, telephony, on-line services and
others. The Company offers its clients a full range of processing services,
software and support services that automate customer management functions,
including billing, sales support and order processing, invoice calculation and
production, management reporting and customer analysis for target marketing.
On March 5, 1999, the Company completed a two-for-one stock split, effected
as a stock dividend, for shareholders of record on February 8, 1999. Share and
per share data for all periods presented herein have been adjusted to give
effect to the split.
In April 1998, the Company completed a secondary public stock offering of
approximately 7.0 million shares of Common Stock. The primary shareholders in
the offering included Morgan Stanley affiliated entities and General Motors
employee benefit plan trusts. The Company received none of the proceeds from
the offering, nor incurred any expense.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Consolidated Financial Statements. The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition. The Company classifies its revenues into two main
categories: processing and related services, and software and professional
services. Processing and related services revenues consist primarily of
monthly processing fees generated from the Company's core service bureau
customer care and billing application called Communication Control System
("CCS"), and services ancillary to CCS. Software and professional services
revenues consist primarily of software license and maintenance fees, and
professional services related to the delivery of such products, such as
installation and training services.
Processing and related services are recognized as the services are
performed. Processing fees are typically billed monthly based on the number of
client's customers serviced, ancillary services are typically billed on a per
transaction basis, and certain customized print and mail services are billed
on a usage basis.
The Company follows the guidelines of Statement of Position ("SOP") 97-2,
"Software Revenue Recognition", as amended, in accounting for its software
transactions. For sales transactions which have multiple elements, such as
software and services, the Company allocates the contract value to the
respective elements based on their relative fair values. Arrangements for
software license fees consist of both one-time perpetual licenses and term
licenses. Perpetual license fees are typically recognized upon delivery,
depending upon the
31
nature and extent of the installation and/or customization services, if any,
to be provided by the Company. Term license fees and maintenance fees are
recognized ratably over the contract term. Professional services are
recognized as the related services are performed.
Payments received for revenues not yet recognized are reflected as deferred
revenue in the accompanying consolidated balance sheets. Revenue recognized
prior to the scheduled billing date of an item is reflected as unbilled
accounts receivable.
Postage and Communications Lines. The Company passes through to its clients
the cost of postage and the cost of communication lines between client sites
and the mainframe data processing facility. Such reimbursements of costs are
netted against the expense and are not included in total revenues. The Company
requires postage and communications lines deposits from its clients based on
contractual arrangements. These amounts are reflected as current liabilities
regardless of the contract period.
Realizability of Long-Lived and Intangible Assets. The Company continually
evaluates whether events and circumstances have occurred that indicate the
remaining estimated useful life of long-lived and intangible assets may
warrant revision or that the remaining balance of these assets may not be
recoverable. The Company evaluates the recoverability of its long-lived and
intangible assets by measuring the carrying amount of the assets against the
estimated undiscounted future cash flows associated with them. At the time
such evaluations indicate that the future undiscounted cash flows of certain
long-lived and intangibles assets are not sufficient to recover the carrying
value of such assets, the assets are adjusted to their estimated fair values.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents.
Property and Equipment. Property and equipment are recorded at cost and are
depreciated over their estimated useful lives ranging from two to ten years.
Depreciation is computed using the straight-line method for financial
reporting purposes. Depreciation expense for all property and equipment is
reflected separately in the aggregate and is not included in the cost of
revenues or the other components of operating expenses. Depreciation for
income tax purposes is computed using accelerated methods.
Property and equipment at December 31 consists of the following (in
thousands):
1999 1998
-------- --------
Computer equipment....................................... $ 29,212 $ 24,515
Leasehold improvements................................... 3,515 3,676
Operating equipment...................................... 19,529 14,445
Furniture and equipment.................................. 5,162 4,639
Construction in process.................................. 931 1,179
Other.................................................... 22 22
-------- --------
58,371 48,476
Less--accumulated depreciation........................... (31,864) (23,765)
-------- --------
Property and equipment, net............................ $ 26,507 $ 24,711
======== ========
Software. Software at December 31 consists of the following (in thousands):
1999 1998
-------- --------
Acquired software........................................ $ 40,849 $ 40,849
Internally developed software............................ 2,547 3,964
-------- --------
43,396 44,813
Less--accumulated amortization........................... (37,251) (35,391)
-------- --------
Software, net.......................................... $ 6,145 $ 9,422
======== ========
32
Acquired software resulted from acquisitions and is stated at cost.
Amortization expense related to acquired software for the years ended December
31, 1999, 1998, and 1997 was $1.5 million, $0.6 million, and $10.6 million,
respectively.
The Company's research and development ("R&D") efforts consist of
development of new products and services as well as enhancements to existing
products and services. The Company capitalizes certain software development
costs when the resulting products reach technological feasibility and begins
amortization of such costs upon the general availability of the products for
licensing. The Company did not capitalize any costs in 1999, and capitalized
costs of $1.4 million and $9.7 million for the years ended December 31, 1998,
and 1997, respectively.
Amortization of internally developed software and acquired software costs
begins when the products are available for general release to clients and is
computed separately for each product as the greater of (i) the ratio of
current gross revenue for a product to the total of current and anticipated
gross revenue for the product, or (ii) the straight-line method over the
remaining estimated economic life of the product. Estimated lives of two to
five years are used in the calculation of amortization. Amortization expense
related to capitalized software development costs for the years ended December
31, 1999, 1998, and 1997 was $0.4 million, $0.7 million, and $0.6 million,
respectively.
The Company continually evaluates the carrying value of its unamortized
capitalized software development costs. The amount by which the unamortized
capitalized costs exceed the net realizable value of the asset is expensed.
During 1997, the Company recorded a charge of $11.7 million related to certain
CSG Phoenix capitalized costs. After the consideration of multiple factors and
events, consisting primarily of an increase in demand for the Company's
outsourced processing services and previously announced delays on the delivery
of CSG Phoenix, such assets were reduced to their estimated net realizable
value as of December 31, 1997. The charge primarily included previously
capitalized internal development costs and purchased software incorporated
into the product.
Noncompete Agreements and Goodwill. Noncompete agreements and goodwill as of
December 31 are as follows (in thousands):
1999 1998
-------- --------
Noncompete agreements.................................... $ 25,340 $ 25,340
Goodwill................................................. 7,039 7,134
-------- --------
32,379 32,474
Less--accumulated amortization........................... (29,727) (24,878)
-------- --------
Noncompete agreements and goodwill, net................ $ 2,652 $ 7,596
======== ========
The noncompete agreements resulted from acquisitions and are being amortized
on a straight-line basis over the terms of the agreements, ranging from three
to five years. Goodwill resulted from acquisitions and is being amortized over
seven to ten years on a straight-line basis.
During 1997, the Company recorded a charge of $4.7 million for the
impairment of certain intangible assets related to software systems which the
Company decided to no longer market and support. This impairment charge
related principally to the Company's CableMAX product. CableMAX was a personal
computer based customer management system that was targeted at smaller cable
systems of 2,500 customers or less. During 1997, the Company decided not to
invest the resources necessary to make the software year 2000 compliant,
resulting in the impairment to the CableMAX intangible assets. The estimated
fair value of the CableMAX intangible assets was based upon an analysis of
expected future cash flows and a quoted purchase price from an independent
buyer.
Client Contracts and Related Intangibles. Client contracts and related
intangibles which resulted from the CSG Acquisition were amortized over their
estimated lives of five and three years, respectively. The value
33
assigned to all other client contracts is being amortized over the lives of
the respective contracts. As of December 31, 1999 and 1998, accumulated
amortization for client contracts and related intangibles was $24.8 million
and $17.7 million, respectively.
Financial Instruments with Market Risk and Concentrations of Credit Risk. In
the normal course of business, the Company is exposed to credit risk resulting
from the possibility that a loss may occur from the failure of another party
to perform according to the terms of a contract. The Company regularly
monitors credit risk exposures and takes steps to mitigate the likelihood of
these exposures resulting in a loss. The primary counterparties to the
Company's accounts receivable and sources of the Company's revenues consist of
cable television providers throughout the United States. The Company generally
does not require collateral or other security to support accounts receivable.
The activity in the Company's allowance for uncollectible accounts receivable
for the years ended December 31 is as follows (in thousands);
1999 1998 1997
------- ------- ------
Balance, beginning of period....................... $ 2,051 $ 1,394 $ 819
Additions.......................................... 2,021 1,724 875
Reductions......................................... (1,097) (1,067) (300)
------- ------- ------
Balance, end of period............................. $ 2,975 $ 2,051 $1,394
======= ======= ======
Financial Instruments. The Company's balance sheet financial instruments as
of December 31, 1999 and 1998 include cash and cash equivalents, accounts
receivable, accounts payable, conversion incentive payments, and long-term
debt. Because of their short maturities, the carrying amounts of cash
equivalents, accounts receivable, accounts payable, and conversion incentive
payments approximate their fair value. The carrying amount of the Company's
long-term debt (including current maturities) approximates fair value due to
its variable interest rates.
In December 1997, the Company entered into a three-year interest rate collar
with a major bank to manage its risk from its variable rate long-term debt.
The underlying notional amount covered by the collar agreement was $60.6
million as of December 31, 1999, and decreases over the three-year term in
relation to the scheduled principal payments on the long-term debt. Any
payment on the 4.9% (LIBOR) interest rate floor, or receipt on the 7.5%
(LIBOR) interest rate cap component of the collar, would be recognized as an
adjustment to interest expense in the period incurred. There are no amounts
due or receivable under this agreement as of December 31, 1999, and the
agreement had no effect on the Company's interest expense for 1999, 1998, or
1997. The fair value of the collar agreement is not recognized in the
Company's financial statements. The fair value of the collar agreement at
December 31, 1999, based on a quoted market price, was not significant.
Translation of Foreign Currency. The Company's foreign subsidiaries use as
their functional currency the local currency of the countries in which they
operate. Their assets and liabilities are translated into U.S. dollars at the
exchange rates in effect at the balance sheet date. Revenues and expenses are
translated at the average rates of exchange prevailing during the period.
Translation gains and losses are included in total comprehensive income in the
Company's Consolidated Statements of Stockholders' Equity. Transaction gains
and losses related to intercompany accounts are not material and are included
in the determination of net income or loss.
Earnings Per Common Share. The Company follows Statement of Financial
Accounting Standards ("SFAS") No. 128 in calculating earnings per share
("EPS"). Basic EPS is computed by dividing income attributable to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS is consistent with the calculation of basic EPS
while giving effect to any dilutive potential common shares outstanding during
the period. Basic and diluted EPS are presented on the face of the Company's
Consolidated Statements of Operations. No reconciliation of the EPS numerator
is necessary as the basic and diluted net income available to common
stockholders is the same for all periods presented. The reconciliation of the
EPS denominator is as follows (in thousands):
34
Year Ended December 31
-----------------------
1999 1998 1997
------- ------- -------
Basic weighted average common shares................. 51,675 51,198 50,994
Dilutive shares from common stock warrants........... 838 -- --
Dilutive shares from common stock options............ 2,147 1,793 --
------- ------- -------
Weighted average diluted common shares............... 54,660 52,991 50,994
======= ======= =======
Common Stock options of 4.2 million shares were excluded from the
computation of diluted EPS for 1997 because their inclusion would have had an
antidilutive effect on EPS as a result of the Company's loss from continuing
operations for the year. Common Stock options of 0.6 million shares and 1.7
million shares for 1999 and 1998, respectively, were excluded from the
computation of diluted EPS because the exercise prices of these options were
greater than the average market price of the common shares for the respective
periods.
The diluted potential common shares related to the warrants were excluded
from the computation of diluted EPS for all quarters the warrants were not
considered exercisable. As of December 31, 1999, all of the 3.0 million
warrants were considered exercisable (Note 4).
Stock-Based Compensation. The Company accounts for its stock-based
compensation plans under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations, and
follows the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). See Note 12 for the required disclosures under
SFAS 123.
Comprehensive Income. During 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for
reporting and display of comprehensive income and its components in a
financial statement for the period in which they are recognized. The
components of comprehensive income are reflected in the Company's Consolidated
Statements of Stockholders' Equity.
Reclassification. Certain December 31, 1998 and 1997 amounts have been
reclassified to conform to the December 31, 1999 presentation.
3. Segment Reporting
During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires
disclosures of selected information about operating segments and related
disclosures about products and services, geographic areas, and major
customers. SFAS 131 requires operating segments to be determined based on the
way management organizes a company for purposes of making operating decisions
and assessing performance. Based on the guidelines of SFAS 131, the Company
has determined it has only one reportable segment: customer care and billing
solutions for the worldwide converging communications markets.
Products and Services. The Company provides customer care and billing
solutions worldwide for the converging communications markets, including cable
television, direct broadcast satellite, telephony, on-line services and
others. The Company generates a significant portion of its revenues from its
core service bureau processing product, CCS. The Company sells its software
products and professional services principally to its existing client base of
processing customers to (i) enhance the core functionality of its service
bureau processing application, (ii) increase the efficiency and productivity
of the clients' operations, and (iii) allow clients to effectively rollout new
products and services to new and existing markets, such as residential
telephony, High-Speed Data/ISP and IP markets.
The Company derived approximately 78.3%, 78.0%, and 76.7% of its total
revenues in the years ended December 31, 1999, 1998 and 1997, respectively,
from CCS and related products and ancillary services. The Company generated
75.8%, 77.7%, and 73.1% of its total revenues from the U.S. cable television
industry, and
35
15.5%, 13.0%, and 10.5% of its total revenues from the U.S. and Canadian
direct broadcast satellite ("DBS") industry during the years ended December
31, 1999, 1998 and 1997, respectively.
Geographic Regions. Revenues are generated from external customers only. The
Company uses the location of the customer as the basis of attributing revenues
to individual countries. Financial information relating to the Company's
operations by geographic areas is as follows (in thousands):
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
Total Revenue:
United States................................... $308,266 $221,778 $155,243
United Kingdom.................................. 9,569 11,740 15,756
Other........................................... 4,327 3,122 805
-------- -------- --------
$322,162 $236,640 $171,804
======== ======== ========
As of December 31,
-----------------------
1999 1998 1997
------- ------- -------
Long-Lived Assets (excludes intangible assets):
United States.................................... $25,903 $23,398 $15,780
United Kingdom................................... 604 1,313 1,377
------- ------- -------
$26,507 $24,711 $17,157
======= ======= =======
Significant Clients. During the years ended December 31, 1999, 1998, and
1997, revenues from AT&T represented approximately 50.5%, 37.4%, and 32.9% of
total revenues, and revenues from Time Warner Cable and its affiliated
companies ("Time Warner") represented approximately 10.2%, 14.1%, and 20.1% of
total revenues, respectively. See Note 4 for discussion of the Company's
contract with AT&T. The Company has separate processing agreements with
multiple affiliates of Time Warner and provides products and services to them
under separately negotiated and executed contracts.
4. Acquisitions
USTATS Asset Acquisition. On July 30, 1998, the Company acquired
substantially all of the assets of US Telecom Advanced Technology Systems,
Inc. ("USTATS") for approximately $6.0 million in cash and assumption of
certain liabilities of approximately $1.3 million. USTATS, a South Carolina-
based company, specializes in open systems, client/server customer care and
billing systems serving the telecommunications markets. The Company used the
acquired technology and software primarily to enhance its current service-
bureau telephony customer care and billing system. The cash portion of the
purchase price was paid out of corporate funds. The total purchase price of
$7.3 million has been allocated to the technology and software acquired and is
being amortized over its expected useful life of five years.
SUMMITrak Asset Acquisition. In September 1997, the Company purchased
certain SUMMITrak software technology assets (the "SUMMITrak Acquisition")
that were in development from Tele-Communications, Inc. ("TCI") and entered
into a 15-year exclusive contract with a TCI affiliate to consolidate 13.0
million TCI customers onto the Company's customer care and billing system. In
March 1999, AT&T completed its merger with TCI and has consolidated the TCI
operations into AT&T Broadband ("AT&T"). The Company continues to service AT&T
under the terms of the 15-year processing contract (the "AT&T Contract").
36
The purchase price for the SUMMITrak Acquisition was determined as follows
(in thousands):
Cash paid at closing............................................... $106,000
Transaction-related costs.......................................... 500
Conversion incentive payments...................................... 26,000
Common Stock warrants granted...................................... 26,145
--------
Total purchase price............................................. $158,645
========
The purchase price included certain conversion incentive payments, with the
amounts and the timing of the payments based principally upon the number of
AT&T customers converted to and processed on the Company's customer care and
billing system. AT&T surpassed the final milestone of 13 million customers
processed on the Company's systems during the third quarter of 1999. Upon
reaching this significant milestone, AT&T was paid its final monetary
conversion incentive by the Company. The total monetary conversion incentives
paid during 1999 and 1998 to AT&T were $22.0 million and $4.0 million,
respectively. The amounts paid were reflected in the Company's Consolidated
Balance Sheets as "conversion incentive payments".
The Company also granted 3.0 million Common Stock warrants to AT&T as part
of the overall purchase price. The warrants have a five-year life with a $12
per share exercise price. The fair value of the warrants included in the
purchase price was estimated as of the date of the grant using the Black-
Scholes pricing model.
The Company engaged an independent party to assist in the allocation of the
purchase price to the assets acquired. The Company allocated the purchase
price as follows (in thousands):
Purchased research and development................................. $105,000
AT&T Contract...................................................... 51,575
Other assets....................................................... 2,070
--------
Total allocated purchase price................................... $158,645
========
Purchased research and development represents R&D of software technologies
which had not reached technological feasibility as of the acquisition date,
and had no other alternative future use. Purchased research and development
was charged to operations in 1997. The Company continued the R&D of certain
software technologies acquired from AT&T. Such efforts included the completion
of the R&D projects and the integration of the completed software technologies
into certain of its current products. The related products from these
development efforts were available for general release in 1999.
The value assigned to the AT&T Contract is being amortized over the life of
the contract in proportion to the financial minimums included in the contract.
The amortization expense for the AT&T Contract was $3.3 million, $1.9 million,
and $0.3 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The other assets are being depreciated over their estimated
useful lives of three years.
5. Stock Repurchase Program
On August 4, 1999, the Company's Board of Directors approved a stock
repurchase plan which authorized the Company to purchase up to a total of 5.0
million shares of its Common Stock from time to time as market and business
conditions warrant. This program represents approximately 10% of the Company's
outstanding shares. During 1999, the Company repurchased a total of 655,500
shares for approximately $20.2 million (a weighted average price of $30.88 per
share). The repurchased shares are held as treasury shares.
6. Debt
In conjunction with the SUMMITrak Acquisition, the Company entered into a
$190.0 million debt agreement with a bank in September 1997 (the "1997 Debt"),
which consists of a $150.0 million term facility
37
(the "Term Credit Facility") and a $40.0 million revolving credit facility.
The proceeds from the Term Credit Facility were used to pay the $106.0 million
cash purchase price for the SUMMITrak assets, retire the Company's previous
bank debt of $27.5 million, and pay transaction costs of $3.4 million. The
remaining proceeds were used for general corporate purposes. In conjunction
with this refinancing, the Company recorded an extraordinary loss of $0.6
million for the write-off of deferred financing costs. The Company did not
recognize any income tax benefit related to the extraordinary loss. In
addition to the scheduled quarterly principal payments, the Company also made
optional principal payments on the Term Credit Facility of $31.6 million and
$15.0 million in 1999 and 1997, respectively.
Interest rates for the 1997 Debt, including the term and revolving credit
facilities, are chosen at the option of the Company and are based on the LIBOR
rate or the prime rate, plus an additional percentage spread, with the spread
dependent upon the Company's leverage ratio. As of December 31, 1999, the
spread on the LIBOR rate and prime rate was 0.50% and 0%, respectively. The
Company entered into an interest rate collar agreement in December 1997 to
manage its risk from the variable rate features of the 1997 Debt agreement
(Note 2). The 1997 Debt agreement is collateralized by all of the Company's
assets and the stock of its subsidiaries.
The 1997 Debt agreement requires maintenance of certain financial ratios and
contains other restrictive covenants, including restrictions on payment of
dividends, a fixed charge coverage ratio, a leverage ratio, and restrictions
on capital expenditures. As of December 31, 1999, the Company was in
compliance with all covenants. The payment of cash dividends or other types of
distributions on any class of the Company's stock is restricted unless the
Company's leverage ratio, as defined in the 1997 Debt agreement, is under
1.50. As of December 31, 1999, the leverage ratio was 0.62.
Long-term debt as of December 31 consists of the following (in thousands):
1999 1998
-------- --------
Term Credit Facility, due September 2002, quarterly
payments beginning June 30, 1998, ranging from $2.3
million to $13.4 million, interest at adjusted LIBOR
plus 0.50% (weighted average rate of 6.55% at
December 31,1999).................................... $ 81,000 $128,250
Revolving credit facility, due September 2002,
interest at adjusted LIBOR plus 0.50%................ -- --
-------- --------
81,000 128,250
Less-current portion.................................. (21,711) (19,125)
-------- --------
Long-term debt, net of current maturities............. $ 59,289 $109,125
======== ========
There were no borrowings made on the revolving credit facilities during the
years ended December 31, 1999, 1998, and 1997. Under the 1997 Debt agreement,
the Company pays an annual commitment fee on the unused portion of the
revolving credit facility, based upon the Company's leverage ratio. As of
December 31, 1999, the fee was 0.25%. The Company's ability to borrow under
the current revolving credit facility is subject to maintenance of certain
levels of eligible receivables. At December 31, 1999, all of the $40.0 million
revolving credit facility was available to the Company.
As of December 31, 1999 and 1998, unamortized deferred financing costs were
$1.1 million and $2.0 million, respectively. Deferred financing costs are
amortized to interest expense over the related term of the debt agreement
using a method which approximates the effective interest rate method. Interest
expense for the years ended December 31, 1999, 1998 and 1997 includes
amortization of deferred financing costs of approximately $0.9 million, $0.9
million, and $0.5 million, respectively.
As of December 31, 1999, scheduled maturities of the Company's long-term
debt for each of the years ending December 31 are: 2000--$21.7 million, 2001--
$25.9 million, and 2002--$33.4 million.
38
7. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). SFAS 109 is an asset and liability
approach which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events which have been recognized
in the Company's Consolidated Financial Statements or tax returns. In
estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactment of or changes in the tax law or rates.
Income tax provision (benefit) consists of the following (in thousands):
Year Ended December 31,
---------------------------
1999 1998 1997
------- -------- --------
Current:
Federal....................................... $25,442 $ 11,574 $ 4,466
State......................................... 3,029 1,594 615
Foreign....................................... 1,160 (36) 810
------- -------- --------
29,631 13,132 5,891
------- -------- --------
Deferred:
Federal....................................... 5,792 6,592 (38,298)
State......................................... 690 908 (5,276)
Foreign....................................... (58) 1,048 393
------- -------- --------
6,424 8,548 (43,181)
------- -------- --------
Change in valuation allowance................... -- (61,323) 37,290
------- -------- --------
Net income tax provision (benefit).............. $36,055 $(39,643) $ --
======= ======== ========
The difference between the income tax provision (benefit) computed at the
statutory federal income tax rate and the financial statement provision
(benefit) for income taxes is summarized as follows (in thousands):
Year Ended December 31,
---------------------------
1999 1998 1997
------- -------- --------
Provision (benefit) at federal rate of 35%..... $33,575 $ 16,099 $(36,005)
Change in valuation allowance.................. -- (59,224) 37,290
Effective state income taxes................... 2,415 1,625 (3,030)
Amortization of nondeductible goodwill......... 235 781 1,582
Stock-based employee compensation.............. 42 362 157
Other.......................................... (212) 714 6
------- -------- --------
$36,055 $(39,643) $ --
======= ======== ========
39
The deferred tax assets and liabilities result from differences in the
timing of the recognition of certain income and expense items for tax and
financial reporting purposes. The sources of these differences at December 31
are as follows (in thousands):
1999 1998
------- -------
Current deferred tax assets (liabilities):
Accrued expenses and reserves............................ $ 1,794 $ 1,598
Deferred revenue......................................... 129 205
Other.................................................... 49 --
------- -------
$ 1,972 $ 1,803
======= =======
Noncurrent deferred tax assets (liabilities):
Purchased research and development....................... $42,981 $47,086
Software................................................. 7,052 7,942
Client contracts and related intangibles................. (2,645) (370)
Noncompete agreements.................................... 6,034 5,104
Property and equipment................................... 125 705
Other.................................................... (702) (1,078)
------- -------
$52,845 $59,389
======= =======
As part of an acquisition accounted for as a purchase in 1996, the Company
acquired certain net deferred tax assets (principally related to net operating
loss carryforwards) and established a valuation allowance of approximately
$1.0 million against those net deferred tax assets as of the acquisition date.
Upon the realization of these deferred tax assets, the Company eliminated the
valuation allowance and reduced goodwill by a corresponding amount of $0.9
million in 1998.
As of December 31, 1997, the Company had a valuation allowance of $61.3
million against certain of its deferred tax assets due to the uncertainty that
it would realize the income tax benefit from these assets. During 1998, the
Company concluded that it was more likely than not that it would realize the
entire tax benefit from its deferred tax assets based on its evaluation of the
Company's anticipated profitability over the period of years that the
temporary differences were expected to become deductions. As a result, the
Company eliminated the entire valuation allowance as of December 31, 1998,
which resulted in the Company reflecting a net income tax benefit of $39.6
million for 1998. As of December 31, 1999, management continues to believe
that sufficient taxable income will be generated to realize the entire benefit
of these deferred tax assets. The Company's assumptions of future profitable
operations are supported by its strong operating performances in 1999 and
1998, and the conversion of a significant number of new customers onto its
processing system during these periods.
8. Employee Retirement Benefit Plans
Incentive Savings Plan. The Company sponsors a defined contribution plan
covering substantially all employees of the Company. Participants may
contribute up to 15% of their annual wages, subject to certain limitations, as
pretax, salary deferral contributions. The Company makes certain matching and
service-related contributions to the plan. The Company's matching and service-
related contributions for the years ended December 31, 1999, 1998 and 1997,
were approximately $3.4 million, $2.9 million, and $2.0 million, respectively.
Deferred Compensation Plan. The Company maintains a non-qualified deferred
compensation plan for certain Company executives which allows the participants
to defer a portion of their annual compensation. The Company provides a 25%
matching contribution of the participant's deferral, up to a maximum of $6,250
per year. The Company also credits the participant's deferred account with a
specified rate of return on an annual basis. The Company records the
actuarially determined present value of the obligations expected to be paid
under the plan. As of December 31, 1999 and 1998, the Company has recorded a
liability for this obligation of $1.1
40
million and $1.0 million, respectively. The Company's expense for this plan
for the years ended December 31, 1999, 1998 and 1997, which includes Company
contributions and interest expense, was $0.4 million, $0.4 million, and $0.5
million, respectively. The plan is unfunded.
9. Commitments and Contingencies
Operating Leases. The Company leases certain office and production
facilities under operating leases which run through 2010. Future aggregate
minimum lease payments under these agreements for the years ending December 31
are as follows: 2000--$6.1 million, 2001--$6.8 million, 2002--$6.3 million,
2003--$5.8 million, 2004--$4.5 million, thereafter--$16.9 million.
Total rent expense for the years ended December 31, 1999, 1998, and 1997,
was approximately $5.2 million, $3.9 million, and $3.4 million, respectively.
Service Agreements. The Company has service agreements with FDC and its
subsidiaries for data processing services, communication charges and other
related services. FDC provides data processing and related services required
for the operation of the Company's CCS system.
Effective January 1, 1997, the Company renegotiated its services agreement
with FDC and its subsidiaries. The new agreement expires December 31, 2001,
and is cancelable at the Company's option with (i) notice of six months any
time after January 1, 2000, and (ii) payment of a termination fee equal to 20%
of the fees paid in the twelve months preceding the notification of
termination. Under the agreement, the Company is charged based on usage and/or
actual costs, and is subject to certain limitations as to the amount of
increases or decreases in usage between years. The total amount paid under the
service agreements for the years ended December 31, 1999, 1998 and 1997, was
approximately $27.1 million, $22.1 million, and $19.2 million, respectively.
The Company believes it could obtain data processing services from alternative
sources, if necessary.
Legal Proceedings. From time to time, the Company is involved in litigation
relating to claims arising out of its operations in the normal course of
business. In the opinion of the Company's management, after consultation with
outside legal counsel, the ultimate dispositions of such matters will not have
a materially adverse effect on the Company's consolidated financial position
or results of operations.
10. Discontinued Operations
Contemporaneously with the CSG Acquisition, the Company purchased from FDC
all of the outstanding shares of Anasazi Inc. ("Anasazi") for $6.0 million
cash. The Company accounted for its ownership in Anasazi as discontinued
operations after its acquisition in 1994. On August 31, 1995, the Company
completed a substantial divestiture of Anasazi as part of a tax-free
reorganization, resulting in the Company owning less than 20% of Anasazi. As a
result, Anasazi's results of operations subsequent to August 31, 1995 are not
included in the Company's results of operations as the Company accounted for
its investment in Anasazi under the cost method subsequent to this date. In
September 1997, the Company sold its remaining interest in Anasazi for $8.6
million in cash and recognized a gain of $7.9 million.
11. Restricted Common Stock
During 1995 and 1994, the Company sold Common Stock to executive officers
and key employees pursuant to restricted stock agreements. Certain of these
shares vest over the individual's service period with the Company. The Company
has the option upon termination of employment to repurchase unvested shares of
restricted stock at either the original purchase price (ranging from $0.11 to
$2.13 per share) or the net book value per share, depending upon the specific
terms of the agreements. During the years ended December 31, 1998, and 1997,
the Company repurchased unvested shares of 66,000, and 209,100, respectively,
from terminated employees. The 66,000 shares repurchased in 1998 are held as
treasury shares. The shares repurchased in 1997 were cancelled. There were no
shares repurchased during 1999. As of December 31, 1999, 171,400 shares were
still subject to the repurchase option. In January 2000, the Company
repurchased 18,500 shares from a terminated
41
employee. The remainder of the 152,900 shares are scheduled to vest in 2000.
Deferred compensation of $0.05 million and $0.3 million as of December 31,
1999 and 1998, respectively, relates to the unvested shares and is reflected
as a component of stockholders' equity. Stock-based compensation expense
related to these shares for 1999, 1998 and 1997 was $0.3 million, $0.3
million, and $0.4 million, respectively.
Certain employees financed a portion of their stock purchases with full
recourse promissory notes. The notes accrue interest at 7% annually and have
terms of approximately five years. As of December 31, 1999 and 1998, the
outstanding balance of the promissory notes was approximately $0.1 million and
$0.5 million, respectively, and is reflected as a component of stockholders'
equity.
12. Stock-Based Compensation Plans
Stock Incentive Plans. During 1995, the Company adopted the Incentive Stock
Plan (the "1995 Plan") whereby 514,000 shares of the Company's Common Stock
have been reserved for issuance to eligible employees of the Company in the
form of stock options. The 190,100 options outstanding under the 1995 Plan at
December 31, 1999, vest annually over five years.
During 1996, the Company adopted the 1996 Stock Incentive Plan (the "1996
Plan") whereby 4,800,000 shares of the Company's Common Stock have been
reserved for issuance to eligible employees of the Company in the form of
stock options, stock appreciation rights, performance unit awards, restricted
stock awards, or stock bonus awards. In December 1997, upon shareholder
approval, the number of shares authorized for issuance under the 1996 Plan was
increased to 8,000,000. In May 1999, upon shareholder approval, the number of
shares authorized for issuance under the 1996 Plan was increased to
11,000,000. The 5,278,722 options outstanding under the 1996 Plan as of
December 31, 1999, vest over four to five years. Certain options become fully
vested upon a change in control of the Company.
During 1997, the Company adopted the Stock Option Plan for Non-Employee
Directors (the "Director Plan") whereby 200,000 shares of the Company's Common
Stock have been reserved for issuance to non-employee Directors of the Company
in the form of stock options. The 136,000 options outstanding under the
Director Plan at December 31, 1999, vest annually over three years.
Stock options are granted with an exercise price equal to the fair market
value of the Company's Common Stock as of the date of the grant. All
outstanding options have a 10-year term. A summary of the stock options issued
under the 1996 Plan, the Director Plan, and 1995 Plan and changes during the
years ending December 31 are as follows:
Year Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
Outstanding, beginning
of year................ 6,229,464 $17.23 4,152,220 $ 10.43 2,869,460 $ 9.31
Granted............... 731,050 33.85 3,276,000 23.86 2,223,400 11.61
Exercised............. (795,117) 12.63 (540,336) 9.20 (148,600) 6.80
Forfeited............. (560,575) 17.23 (658,420) 13.89 (792,040) 10.35
--------- ------ --------- ------- --------- ------
Outstanding, end of
year................... 5,604,822 $20.05 6,229,464 $ 17.23 4,152,220 $10.43
========= ====== ========= ======= ========= ======
Options exercisable at
year end............... 1,297,072 913,774 530,152
========= ========= =========
Weighted average fair
value of options
granted during the
year................... $13.04 $ 10.39 $ 4.60
====== ======= ======
Options available for
grant.................. 4,603,675 1,774,150 4,391,730
========= ========= =========
42
The following table summarizes information about the Company's stock options
as of December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range Of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 0.63 -
$ 1.88 190,100 5.6 $ 0.67 122,900 $ 0.68
$ 7.50 -
$11.06 1,269,066 6.9 9.13 547,716 9.09
$11.75 -
$14.88 581,210 6.9 14.53 309,010 14.54
$16.78 -
$23.44 1,362,521 8.3 20.87 291,196 20.76
$23.59 -
$27.97 1,623,875 8.9 26.48 25,000 24.05
$30.25 -
$39.50 578,050 8.9 35.98 1,250 32.71
-------- --------- --- ------ --------- ------
$ 0.63 -
$39.50 5,604,822 8.0 $20.05 1,297,072 $12.52
========= === ====== ========= ======
In January 2000, the Company granted 919,800 options at prices that range
from $38.44 per share to $47.63 per share under the 1996 Plan, with such
options vesting over four years. These options are not reflected in the above
tables as they were granted subsequent to December 31, 1999.
1996 Employee Stock Purchase Plan. During 1996, the Company adopted the 1996
Employee Stock Purchase Plan whereby 500,000 shares of the Company's Common
Stock have been reserved for sale to employees of the Company and its
subsidiaries through payroll deductions. The price for shares purchased under
the plan is 85% of market value on the last day of the purchase period.
Purchases are made at the end of each month. During 1999, 1998, and 1997,
respectively, 34,352 shares, 31,374 shares, and 39,318 shares have been
purchased under the plan for $0.9 million ($18.91 to $37.08 per share) $0.6
million ($15.62 to $33.58 per share), and $0.4 million ($7.17 to $17.00 per
share).
Stock-Based Compensation Plans. At December 31, 1999, the Company had four
stock-based compensation plans, as described above. The Company accounts for
these plans under APB Opinion No. 25, under which no compensation expense has
been recognized in 1999, 1998 or 1997.
Had compensation expense for the Company's four stock-based compensation
plans been based on the fair value at the grant dates for awards under those
plans consistent with the methodology of SFAS 123, the Company's net income
(loss) and net income (loss) per share attributable to common stockholders for
1999, 1998 and 1997 would approximate the pro forma amounts as follows (in
thousands, except per share amounts):
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- ---------
Net income (loss):
As reported.................................... $59,874 $85,638 $(102,871)
Pro forma...................................... 52,498 80,710 (104,776)
Diluted net income (loss) per common share:
As reported.................................... 1.10 1.62 (2.02)
Pro forma...................................... 0.96 1.52 (2.06)
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for options granted in 1999, 1998 and 1997, respectively: risk-
free interest rates of 5.0%, 4.9%, and 6.3%; dividend yield of zero percent
for all years; expected lives of 4.1 years, 4.4 years, and 3.9 years; and
volatility of 40.0% for all years. Consistent with SFAS 123, the Company
assumed zero volatility for all options granted prior to the date the Company
qualified as a public entity.
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 applies only to 1999, 1998 and 1997,
and additional awards in future years are anticipated.
43
13. Unaudited Quarterly Financial Data
Quarter Ended
-------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(in thousands, except per share amounts)
1999:
Total revenues.................... $71,087 $76,510 $84,034 $90,531
Gross margin (exclusive of
depreciation).................... 41,202 44,800 49,493 54,546
Operating income.................. 20,227 22,716 26,627 30,582
Income before income taxes........ 18,623 21,727 25,752 29,827
Income tax provision.............. (7,041) (8,234) (9,691) (11,089)
Net income attributable to common
stockholders..................... 11,582 13,493 16,061 18,738
Net income attributable to common
stockholders per share:
Basic........................... .22 .26 .31 .36
Diluted......................... .21 .25 .29 .34
1998:
Total revenues.................... $49,308 $54,244 $63,461 $69,627
Gross margin (exclusive of
depreciation).................... 26,158 29,152 34,757 39,327
Operating income.................. 8,377 10,707 15,456 18,763
Income before income taxes........ 6,484 8,651 13,576 17,284
Income tax benefit(1)............. -- -- -- 39,643
Net income attributable to common
stockholders..................... 6,484 8,651 13,576 56,927
Net income attributable to common
stockholders per share:
Basic........................... .13 .17 .26 1.11
Diluted......................... .12 .16 .26 1.06
- --------
(1) The fourth quarter of 1998 included an income tax benefit of $39.6
million, or $0.74 per diluted share, related primarily to the elimination
of the Company's valuation allowance against its deferred tax assets
(Note 7).
44
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
Item 10. Directors and Executive Officers of the Registrant
See the Proxy Statement for the Company's Annual Meeting of Stockholders,
which information regarding directors is incorporated herein by reference.
Information regarding the Company's executive officers will be omitted from
such proxy statement and is furnished in a separate item captioned "Executive
Officers of the Registrant" included in Part I of this Form 10-K.
Item 11. Executive Compensation
See the Proxy Statement for the Company's Annual Meeting of Stockholders,
which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See the Proxy Statement for the Company's Annual Meeting of Stockholders,
which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
See the Proxy Statement for the Company's Annual Meeting of Stockholders,
which information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules, and Exhibits:
(1) Financial Statements
The financial statements filed as part of this report are listed on
the Index to Consolidated Financial Statements on page 25.
(2) Financial Statement Schedules:
None. Any information required in the financial statement schedules
is provided in sufficient detail in the Consolidated Financial
Statements and notes thereto.
(3) Exhibits
Exhibits are listed in the Exhibit Index on page 47.
The Exhibits include management contracts, compensatory plans and
arrangements required to be filed as exhibits to the Form 10-K by Item
601(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K
None
45
Pursuant to the requirements of Section 13 or 15(d) 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.
CSG Systems International, Inc.
/s/ Neal C. Hansen
By: _________________________________
Neal C. Hansen
Chief Executive Officer
(Principal Executive Officer)
Date: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Neal C. Hansen Chairman of the Board of March 24, 2000
______________________________________ Directors and Chief
Neal C. Hansen Executive Officer
(Principal Executive
Officer)
/s/ John P. Pogge President, Chief Operating March 24, 2000
______________________________________ Officer and Director
John P. Pogge
/s/ Greg A. Parker Vice President and Chief March 24, 2000
______________________________________ Financial Officer
Greg A. Parker (Principal Financial
Officer)
/s/ Randy R. Wiese Vice President and March 24, 2000
______________________________________ Controller (Principal
Randy R. Wiese Accounting Officer)
/s/ George F. Haddix Director March 24, 2000
______________________________________
George F. Haddix
/s/ Royce J. Holland Director March 24, 2000
______________________________________
Royce J. Holland
/s/ Janice Obuchowski Director March 24, 2000
______________________________________
Janice Obuchowski
/s/ Bernard W. Reznicek Director March 24, 2000
______________________________________
Bernard W. Reznicek
/s/ Rockwell A. Schnabel Director March 24, 2000
______________________________________
Rockwell A. Schnabel
/s/ Frank V. Sica Director March 24, 2000
______________________________________
Frank V. Sica
46
EXHIBIT INDEX
Exhibit
Number Description
--------- -----------
2.01(1) Agreement of Merger among CSG Holdings, Inc., CSG Acquisition
Corporation, Cable Services Group, Inc. and First Data Resources
Inc., dated October 26, 1994
(2.02 intentionally omitted)
2.03(1) Amendment Agreement between First Data Corporation, First Data
Resources Inc., CSG Holdings, Inc., CSG Systems, Inc. and Anasazi
Inc., dated April 27, 1995
(2.04-2.06 intentionally omitted)
2.07(1) Founder Stock Purchase Agreement between CSG Holdings, Inc. and Neal
C. Hansen, dated November 30, 1994
2.08(1) Founder Stock Purchase Agreement between CSG Holdings, Inc. and
George Haddix, dated November 30, 1994
2.09(1) Founder Performance Stock Purchase Agreement between CSG Holdings,
Inc. and Neal C. Hansen, dated November 30, 1994, and first and
second amendments thereto
2.10(1) Founder Performance Stock Purchase Agreement between CSG Holdings,
Inc. and George Haddix, dated November 30, 1994, and first and
second amendments thereto
2.11(1) Series A Preferred Stock Purchase Agreement among CSG Holdings, Inc.
and the purchasers listed on the Schedule of Purchasers attached
thereto, dated November 30, 1994
2.12(1) Stockholders Agreement among CSG Holdings, Inc. and each of the
investors listed on the Schedule of Investors attached thereto,
dated November 30, 1994
(2.13-2.18 intentionally omitted)
2.19(4)* Restated and Amended CSG Master Subscriber Management System
Agreement between CSG Systems, Inc. and TCI Cable Management
Corporation dated August 10, 1997
2.19A(6)* Second Amendment to Restated and Amended CSG Master Subscriber
Management System Agreement between CSG Systems, Inc. and TCI Cable
Management Corporation, dated January 9, 1998.
2.19B(7)* First Amendment to Restated and Amended CSG Master Subscriber
Management System Agreement between CSG Systems, Inc. and TCI Cable
Management Corporation, dated June 29, 1998.
2.19C(8) Sixth Amendment to Restated and Amended CSG Master Subscriber
Management System Agreement between CSG Systems, Inc. and TCI Cable
Management Corporation, dated July 22, 1998.
2.19D(8)* Seventh Amendment to Restated and Amended CSG Master Subscriber
Management System Agreement between CSG Systems, Inc. and TCI Cable
Management Corporation, dated September 8, 1998.
2.19E(8) Eighth Amendment to Restated and Amended CSG Master Subscriber
Management System Agreement between CSG Systems, Inc. and TCI Cable
Management Corporation, dated September 25, 1998.
2.19F(8)* Eleventh Amendment to Restated and Amended CSG Master Subscriber
Management System Agreement between CSG Systems, Inc. and TCI Cable
Management Corporation, dated September 30, 1998.
2.19G(9)* Fifth, Ninth, Tenth, Thirteenth, Fourteenth, Seventeenth and
Nineteenth Amendments to Restated and Amended CSG Master Subscriber
Management System Agreement between CSG Systems, Inc. and TCI Cable
Management Corporation.
47
Exhibit
Number Description
----------- -----------
2.19H(10)* Fourth and Twenty-Second Amendments and Schedule L to Restated and
Amended CSG Master Subscriber Management System Agreement between
CSG Systems, Inc. and TCI Cable Management Corporation.
2.19I(11)* Twenty-Third, Twenty-Fourth, Twenty-Fifth, Twenty-Seventh, Twenty-
Eighth, Thirtieth, Thirty-Fourth Amendments and Schedule Q to
Restated and Amended CSG Master Subscriber Management System
Agreement between CSG Systems, Inc. and TCI Cable Management
Corporation.
2.19J(12)* Thirty-Sixth and Thirty-Eighth Amendments to Restated and Amended
CSG Master Subscriber Management System Agreement between CSG
Systems, Inc. and TCI Cable Management Corporation.
2.19K* Fifteenth, Twenty-Ninth, Forty-First and Forty-Third Amendments
and Schedules I and X to Restated and Amended CSG Master
Subscriber Management System Agreement between CSG Systems, Inc.
and TCI Cable Management Corporation.
2.20(4) Asset Purchase Agreement between CSG Systems International, Inc.
and TCI SUMMITrak of Texas, Inc., TCI SUMMITrak, L.L.C., and TCI
Technology Ventures, Inc., dated August 10, 1997
2.21(4) Contingent Warrant to Purchase Common Stock between CSG Systems
International, Inc. and TCI Technology Ventures, Inc., dated
September 19, 1997
2.22(4) Royalty Warrant to Purchase Common Stock between CSG Systems
International, Inc. and TCI Technology Ventures, Inc., dated
September 19, 1997
2.23(4) Registration Rights Agreement between CSG Systems International,
Inc. and TCI Technology Ventures, Inc., dated September 19, 1997
2.24(4) Loan Agreement among CSG Systems, Inc. and CSG Systems
International, Inc. as co-borrowers, and certain lenders and
Banque Paribas, as Agent, dated September 18, 1997
2.25(5) First Amendment to Loan Agreement among CSG Systems, Inc. and CSG
Systems International, Inc. as co-borrowers, and certain lenders
and Banque Paribas, as Agent, dated November 21, 1997
2.26(9) Second Amendment to Loan Agreement among CSG Systems, Inc. and CSG
Systems International, Inc. as co-borrowers, and certain lenders
and Banque Paribas, as Agent, dated November 16, 1998.
3.01(1) Restated Certificate of Incorporation of the Company
3.02(3) Restated Bylaws of CSG Systems International, Inc.
3.03(3) Certificate of Amendment of Restated Certificate of Incorporation
of CSG Systems International, Inc.
4.01(1) Form of Common Stock Certificate
10.01(1) CSG Systems International, Inc. 1995 Incentive Stock Plan
10.02(1) CSG Employee Stock Purchase Plan
10.03(11) CSG Systems International, Inc. 1996 Stock Incentive Plan
10.04(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and George Haddix, dated August 17, 1995, and
first amendment thereto
10.04A(6) Second Amendment of Employee Performance Stock Purchase Agreement
dated March 18, 1998.
10.05(1) Employee Restricted Stock Purchase Agreement between CSG Systems
International, Inc. and John P. Pogge, dated March 6, 1995
48
Exhibit
Number Description
------------ -----------
10.06(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and John P. Pogge, dated March 6, 1995, and
first and second amendments thereto
10.07(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and John P. Pogge, dated May 16, 1995, and
first and second amendments thereto
(10.08-10.10 intentionally omitted)
10.11(1) Registration Rights Agreement among CSG Systems International,
Inc. and the purchasers listed on the Schedule of Purchasers
attached thereto, dated November 30, 1994
(10.12-10.13 intentionally omitted)
10.14(9) Employment Agreement with Neal C. Hansen, dated November 17, 1998
10.15(5) Indemnification Agreements between CSG Systems International,
Inc. and certain directors
10.16(1) Indemnification Agreements between CSG Systems International,
Inc. and its directors and certain officers
(10.17-10.38 intentionally omitted)
10.39 CSG Systems, Inc. Wealth Accumulation Plan, as amended November
16, 1999
10.40(2)* Amended and Restated Services Agreement between First Data
Technologies, Inc. and CSG Systems, Inc., formerly known as Cable
Services Group, Inc., dated December 31, 1996
10.40A(2) Schedules 2.11, 2.14, 5.3 and 6.4 and Exhibit 9(a) to Schedule
5.6 to Amended and Restated Services Agreement between First Data
Technologies, Inc. and CSG Systems, Inc., formerly known as Cable
Services Group, Inc., dated December 31, 1996
10.40B(P)(2) Schedules 1.21 and 1.47 and Exhibit A to Schedule 5.6 to Amended
and Restated Services Agreement between First Data Technologies,
Inc. and CSG Systems, Inc., formerly known as Cable Services
Group, Inc., dated December 31, 1996
10.40C(8)* First Amendment to Amended and Restated Services Agreement
between CSG Systems, Inc. and First Data Technologies, Inc.,
dated July 8, 1998.
(10.41-10.43 intentionally omitted)
10.44(3) CSG Systems International, Inc. Stock Option Plan for Non-
Employee Directors
10.45(9) Employment Agreement with John P. Pogge, dated November 17, 1998.
10.46(9) Employment Agreement with Edward Nafus, dated November 17, 1998.
10.47(9) Employment Agreement with Greg Parker, dated November 17, 1998;
21.01 Subsidiaries of the Company
23.01 Consent of Arthur Andersen LLP
27.01 Financial Data Schedule (EDGAR Version Only)
99.01 Safe Harbor for Forward-Looking Statements Under the Private
Securities Litigation Reform Act of 1995--Certain Cautionary
Statements and Risk Factors
- --------
(1) Incorporated by reference to the exhibit of the same number to the
Registration Statement No. 333-244 on Form S-1.
(2) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K, as amended, for the year ended
December 31, 1996.
(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1997.
(4) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated October 6, 1997.
49
(5) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K, as amended for the year ended
December 31, 1997.
(6) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 1998.
(7) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1998.
(8) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1998.
(9) Incorporated by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K, as amended for the year ended
December 31, 1998.
(10) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 1999.
(11) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1999.
(12) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1999.
* Portions of the exhibit have been omitted pursuant to an application for
confidential treatment, and the omitted portions have been filed
separately with the Commission.
50