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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, 2000
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, 2001 was $1,589,472,740.
Shares of common stock outstanding at March 23, 2001: 52,386,958.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be filed on or prior to April 30, 2001, are incorporated by
reference into Part III of the Form 10-K.
CSG SYSTEMS INTERNATIONAL, INC.
2000 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
Market for Registrant's Common Equity and Related Stockholder
Item 5. Matters........................................................ 11
Item 6. Selected Financial Data........................................ 12
Management's Discussion and Analysis of Financial Condition and
Item 7. Results of Operations.......................................... 14
Item 8. Financial Statements and Supplementary Data.................... 26
Changes in and Disagreements With Accountants on Accounting and
Item 9. Financial Disclosure........................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant............. 46
Item 11. Executive Compensation......................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and Management. 46
Item 13. Certain Relationships and Related Transactions................. 46
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-
Item 14. K.............................................................. 46
Signatures............................................................... 47
2
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, 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 $398.9 million in 2000 compared to $322.2 million in
1999, an increase of 24%, and revenue grew at a compound annual growth rate of
32% over the five-year period ended December 31, 2000.
The Company has established a leading presence by developing strategic
relationships with major participants in the cable television and DBS
industries, and derived approximately 78% and 16% of its total revenues in
2000 from U.S. cable television and U.S. and Canadian DBS providers,
respectively. The Company provides customer care and billing to one-third of
the households in the U.S. During 2000 and 1999, the Company derived
approximately 74% and 79%, respectively, of its total revenues from processing
and related services. Total domestic customer accounts on the Company's
processing system as of December 31, 2000 were 35.8 million, compared to 33.8
million as of December 31, 1999, an increase of 6%. The Company converted
approximately 1.25 million new customer accounts onto its processing system
during 2000. The Company received $8.42 in processing revenue per video
account in 2000 compared to $8.03 in 1999, and $5.05 in processing revenue per
Internet account in 2000 compared to $4.71 per account in the previous year.
The convergence of communications markets and growing competition are
increasing the complexity and cost of managing the interaction between
communications companies and their customers. Customer care and billing
systems coordinate all aspects of the customer's interaction with a
communication company, 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.
AT&T Contract and Asset Acquisition
In September 1997, the Company purchased certain software technology assets
that were in development from Tele-Communications, Inc. ("TCI") and entered
into a 15-year exclusive contract with a TCI affiliate to consolidate all TCI
customers onto the Company's customer care and billing system. In March 1999,
AT&T completed its merger with TCI and consolidated the TCI operations into
AT&T Broadband ("AT&T"). The
3
Company continues to service AT&T under the terms of the 15-year processing
contract (the "AT&T Contract"). The Company generates a significant portion of
its total revenues under the AT&T Contract. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for additional
discussion of the AT&T Contract and the Company's business relationship with
AT&T.
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 that
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 35.8 million as of December 31, 2000, a
compound annual growth rate for this period of 15%. The Company provides a
full suite of customer care and billing products and services that 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 received $8.42 in processing revenue per video account in 2000
compared to $7.53 in 1998, and $5.05 in processing revenue per Internet
account in 2000 compared to $3.75 per account in 1998. The increase in
processing revenue per account relates primarily to (i) increased usage of
ancillary services by clients, (ii) the introduction of new products and
services, and (iii) price increases included in client contracts. In addition,
the Company continues to roll out new software applications and provide
professional services to enhance and extend the functionality of its customer
care and billing solution and also to support the Company's clients'
initiatives for new revenue opportunities. Software and professional services
revenues were $104.1 million in 2000 compared to $44.8 million in 1998. This
increase relates primarily to higher demand for the Company's customer
relationship management, call center, and workforce automation software
applications.
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, the Company will 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 Internet protocol ("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.
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 research and
development ("R&D") is designed to position the Company to meet the growing
and evolving needs of existing and potential clients.
Pursue International Opportunities. The Company's business strategy includes
a commitment to the marketing of its products and services internationally,
and the Company has acquired and established operations outside of the U.S.
CSG Products and Services
A background in high-volume transaction processing, complemented with world-
class applications software, allows CSG to offer the most comprehensive, pre-
integrated products and services to the communications market,
4
serving video, data and voice providers and handling all aspects of the
customer lifecycle. Since 1995, CSG has invested an average of 12% of revenues
in R&D. This has allowed the Company to increase its offering from two
products to more than 20. Listed below are several of the key products offered
by the Company.
Communications Control System (CCS(R)) is the Company's core customer care
and billing system. CCS can handle more than 100 million customer accounts
without significant capital investments by the Company. CCS lets customer
service representatives ("CSRs") enroll new customers, modify services for
current customers, schedule installation and repairs, and process billing.
Advanced Customer Service Representative(R) (ACSR(R)) is a Windows-based
software program that provides CSRs with a complete view of a customer's
account, easily showing all the customer's services. Add-on modules
include: Computer Based Training--a tutorial system; and Application Object
Interface--which develops customized applications and requests special
status updates from the ACSR system.
CSG Vantage(R) allows clients to collect and leverage marketing and
consumer behavior information to offer specific package pricing and
discounts to their customers.
Enhanced Statement Presentation(R) (ESP(R)) lets clients tailor logos,
graphics, and messages on customer invoices--turning a monthly bill into an
easy-to-read communications and marketing tool.
Customer Interaction Tracking(R) (CIT(R)) captures customer-related
interactions, tracking customers by type and subject, and featuring a
planner for scheduling follow-ups and reminders.
ACSR-T, is a telephony billing solution that allows providers to offer this
line of business via a single billing platform. Through a flexible
platform, it integrates ordering and provisioning functions, and offers
robust call rating capability.
CSG High Speed Data enables providers to offer, enroll and service
customers of this line of business via a single billing platform. Its
specialized functionality helps CSRs reduce average call times and improve
customer service.
Financial Services is a group of financial applications that automates
credit verification, certain accounts receivable functions and payment
methods via the CSR's desktop. The applications include:
Credit Verification Service/Risk Management System that automates risk
assessment, reducing financial risk by identifying high-risk customers.
Paybill Advantage(R) lets customers have their bills automatically
debited from their checking accounts.
Credit Card Processing Services uses a one-time or recurring credit
card transaction to automatically collect payments for monthly services
and special circumstances, such as a delinquent customer.
Collections Service automates the accounts receivable and collections
systems for clients, increasing recovery rates and reducing costs.
Cash Register Receipts allows for enhanced handling of front counter
and payment center transactions.
Call Center ExpressSM is a suite of products that promotes customer self-
care and improves CSR efficiency. The following are applications included
in this suite:
CSG Info Express(TM) allows customers to use interactive voice response
("IVR") technology to complete certain tasks such as checking account
balances or ordering a pay-per-view event. It helps to reduce staffing
requirements and decrease customer wait times.
5
CSG Screen Express(R) helps to reduce customer call times via instant
messaging directly to call center CSR's desktops. Additionally, this
product delivers real-time call center performance indicators such as
call hold times and number of calls in queue.
CSG Statement Express(R) presents the statement image via an online
viewing system allowing the CSR to save time when assisting customers
with bills. This application electronically stores, retrieves,
distributes and prints a statement exactly as it appears to customers.
CSG Direct SolutionsSM allows access to CSG's state-of-the art statement
presentation solutions regardless of billing system in use. It provides an
attractive cost-saving advantage to in-house statement printing.
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.
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(TM)), 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 self-care options such as the ability to sign up for new
services, add or modify existing services, and manage their convergent
account. Additionally, the electronic bill presentment and payment feature
allows end-user customers to view and pay bills via the Internet. This
product also maintains the previous month's statements online and notifies
customers of new statements via e-mail.
CSG.net(TM) is an end-to-end customer care and billing solution for the IP
market. This highly scaleable solution offers real-time service plan
creation and modification, real-time rating functionality, and robust
financial and reporting capabilities.
CSG NextGen(TM) is a pre-integrated, next-generation customer care and
billing solution that supports convergent services over multiple delivery
networks. This software application allows communications companies to meet
specific needs via a customizable platform that can accommodate multiple
languages and multiple currencies.
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:
AOL Time Warner DirecTV
AT&T Broadband (includes former TCI and MediaOne)
Echostar Communications
Adelphia Communications Corporation Corporation
Charter Communications Mediacom Communications
Cox Communications Prodigy Communications
Corporation
During the years ended December 31, 2000, 1999, and 1998, revenues from AT&T
represented approximately 50.4%, 50.5%, and 37.4% of total revenues, and
revenues from AOL Time Warner Inc. and its affiliated companies ("AOL Time
Warner") represented approximately 8.3%, 10.2%, and 14.1% of total revenues,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for discussion of the Company's contract with AT&T.
The Company has separate processing agreements with multiple affiliates of AOL
Time Warner and provides products and services to them under separately
negotiated and executed contracts.
6
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 computer services
required for operation of the CCS system and other CSG products. 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. During 2000, the
Company renegotiated its services agreement with FDC. The new agreement is
cancelable only for cause, and expires June 30, 2005. The previous agreement
was scheduled to expire December 31, 2001.
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 2000 were focused primarily on the development of products to
. increase the efficiencies and productivity of its clients' operations,
. address the systems needed to support the convergence of the
communications markets,
. support a web-enabled, customer self-care and electronic bill
presentment/payment application,
. allow clients to effectively roll out new products and services to new
and existing markets, such as residential telephony, high-speed data/ISP
and IP markets (including CSG.net, the Company's ASP offering to the ISP
market), interactive services (e.g., video-on-demand), and
. address the international customer care and billing system market.
The Company expects its development efforts to focus on similar tasks in
2001. Since 1995, the Company has invested an average of 12% of its total
revenues into R&D. The Company expects to spend a similar percentage of its
total revenues on R&D in the future.
The Company's total R&D expense was $42.3 million, $34.4 million, and $27.5
million for the years ended December 31, 2000, 1999, and 1998, or 10.6%,
10.7%, and 11.6% of total revenues, respectively. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for additional
discussion.
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 management
systems. The Company believes its most significant competitors are DST
Systems, Inc., Convergys
7
Corporation, Portal Software, Inc., Kenan Systems (a division of Lucent
Technologies, Inc.), Amdocs LTD, 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, 2000, the Company had a total of 1,823 employees, an
increase of 301 from December 31, 1999. 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 164,000 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 2001
through 2010.
The Company leases five facilities, totaling approximately 277,000 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 2001 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,
Berskshire, 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 7 to the Company's Consolidated Financial Statements for information
regarding the Company's obligations under its facilities leases.
8
Item 3. Legal Proceedings
On September 27, 2000, the Company received a Demand for Arbitration from
AT&T relating to the AT&T Contract the companies entered into in 1997. The
arbitration demand contained three claims. First, AT&T claimed that the
Company had failed to fulfill certain of its obligations under the contract
with respect to telephony software and services. Second, AT&T asked for a
declaratory judgment that the exclusivity clause of the AT&T Contract does not
apply to customers that were acquired by AT&T after execution of the agreement
with the Company. Third, AT&T claimed that the Company had breached the Most
Favored Nation clause of the agreement.
On October 10, 2000, AT&T agreed to dismiss with prejudice its Demand for
Arbitration with the Company. In connection with the dismissal, the companies
agreed to amend the AT&T Contract. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for additional discussion of
this matter.
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), Peter E. Kalan (Vice President and Chief Financial
Officer), Edward C. Nafus (Executive Vice President), and J. Richard Abramson
(Executive Vice President). The Company has employment agreements with each of
the executive officers. Information concerning such executive officers appears
in the following paragraphs:
Mr. Hansen, 60, 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, 47, 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. Kalan, 41, joined the Company in January 1997 and was named Chief
Financial Officer in October 2000. Prior to joining CSG, he was Chief
Financial Officer at Bank One, Chicago, and he also held various other
financial management positions with Bank One in Texas and Illinois from 1985
through 1996. Mr. Kalan holds a Bachelor of Arts degree in Business
Administration from the University of Texas at Arlington.
Mr. Nafus, 60, joined the Company in August 1998 as Executive Vice
President. From 1992 to 1998, Mr. Nafus served as Executive Vice President of
FDC 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
Mr. Abramson, 52, joined the Company in March 2000 as Senior Vice President
and was named Executive Vice President in August 2000. From 1998 to 2000, Mr.
Abramson was President, Communications & Media Unit for the Englewood-based
New Era of Networks, Inc. (NEON). He was President and Chief Executive Officer
of Evolving Systems, Inc., a provider of software and professional services to
the telecommunications industry, from 1996 to 1998 and served as Chairman,
President/CEO of Prairie Systems from 1990 to 1996. From 1984 to 1990, Mr.
Abramson served in various executive roles with Applied Communications, Inc.
including Senior Vice President/GM and Director of Sales. Mr. Abramson is a
graduate of the University of Nebraska at Lincoln.
10
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
------ ------
2000
First quarter................................................ $73.69 $37.81
Second quarter............................................... 60.00 40.88
Third quarter................................................ 60.00 29.00
Fourth quarter............................................... 50.25 27.94
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
On March 23, 2001, the last sale price of the Company's Common Stock as
reported by NASDAQ/NMS was $40.63 per share. On January 31, 2001, the number
of holders of record of Common Stock was 338.
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 4 to the Company's
Consolidated Financial Statements.
11
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,
-------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- --------- --------
(in thousands, except per share amounts)
Statements of Operations
Data:
Revenues:
Processing and related
services.................. $294,809 $255,167 $191,802 $ 131,399 $113,422
Software and professional
services.................. 104,086 66,995 44,838 40,405 18,875
-------- -------- -------- --------- --------
Total revenues............ 398,895 322,162 236,640 171,804 132,297
-------- -------- -------- --------- --------
Expenses:
Cost of processing and
related services(1)....... 107,022 95,706 82,198 73,148 67,122
Cost of software and
professional services..... 44,515 36,415 25,048 16,834 7,123
-------- -------- -------- --------- --------
Total cost of revenues.... 151,537 132,121 107,246 89,982 74,245
-------- -------- -------- --------- --------
Gross margin (exclusive of
depreciation).............. 247,358 190,041 129,394 81,822 58,052
-------- -------- -------- --------- --------
Operating expenses:
Research and development:
Research and development... 42,338 34,388 27,485 22,586 20,206
Charge for purchased
research and
development(5)............ -- -- -- 105,484 --
Impairment of capitalized
software development
costs(6).................. -- -- -- 11,737 --
Selling, general and
administrative:
Selling, general and
administrative............ 46,970 40,142 34,769 29,583 21,915
Amortization of noncompete
agreements and
goodwill(1)............... 643 4,889 5,381 6,927 6,392
Impairment of intangible
assets(7)................. -- -- -- 4,707 --
Stock-based employee
compensation(1)........... 48 280 297 449 3,570
Depreciation............... 12,077 10,190 8,159 6,884 5,121
-------- -------- -------- --------- --------
Total operating expenses.. 102,076 89,889 76,091 188,357 57,204
-------- -------- -------- --------- --------
Operating income (loss)..... 145,282 100,152 53,303 (106,535) 848
-------- -------- -------- --------- --------
Other income (expense):
Interest expense........... (5,808) (7,214) (9,771) (5,324) (4,168)
Interest and investment
income, net............... 5,761 2,981 2,484 1,294 844
Other...................... (32) 10 (21) 349 --
-------- -------- -------- --------- --------
Total other............... (79) (4,223) (7,308) (3,681) (3,324)
-------- -------- -------- --------- --------
Income (loss) before income
taxes, extraordinary item
and discontinued
operations................. 145,203 95,929 45,995 (110,216) (2,476)
Income tax (provision)
benefit(8)....... ........ (54,734) (36,055) 39,643 -- --
-------- -------- -------- --------- --------
Income (loss) before
extraordinary item and
discontinued operations.... 90,469 59,874 85,638 (110,216) (2,476)
Extraordinary loss from
early extinguishment of
debt(3)(5)................ -- -- -- (577) (1,260)
-------- -------- -------- --------- --------
Income (loss) from
continuing operations...... 90,469 59,874 85,638 (110,793) (3,736)
Gain from disposition of
discontinued
operations(4)............. -- -- -- 7,922 --
-------- -------- -------- --------- --------
Net income (loss)........... $ 90,469 $ 59,874 $ 85,638 $(102,871) $ (3,736)
======== ======== ======== ========= ========
Diluted net income (loss)
per common share(9):
Income (loss) available to
common stockholders....... $ 1.60 $ 1.10 $ 1.62 $ (2.16) $ (.07)
Extraordinary loss from
early extinguishment of
debt...................... -- -- -- (.01) (.03)
Gain from discontinued
operations................ -- -- -- .15 --
-------- -------- -------- --------- --------
Net income (loss) available
to common stockholders.... $ 1.60 $ 1.10 $ 1.62 $ (2.02) $ (.10)
======== ======== ======== ========= ========
Weighted average diluted
common shares............. 56,680 54,660 52,991 50,994 43,746
======== ======== ======== ========= ========
12
Company(1)(2)
---------------------------------------------
Year ended December 31,
---------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
Other Data (at Period End):
Number of clients' customers
processed....................... 35,808 33,753 29,461 21,146 19,212
Balance Sheet Data (at Period
End):
Cash, cash equivalents and short-
term investments................ $ 43,733 $ 48,676 $ 39,593 $ 20,417 $ 6,134
Working capital.................. 81,317 32,092 7,050 3,518 4,430
Total assets(5).................. 332,089 274,968 271,496 179,793 114,910
Total debt(3)(5)................. 58,256 81,000 128,250 135,000 32,500
Stockholders' equity
(deficit)(1)(3)(5)(6)........... 191,169 116,862 60,998 (33,086) 41,964
- --------
(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 included periodic amortization of acquired software, client
contracts and related intangibles, noncompete agreement and goodwill, and
stock-based employee compensation. During 1997 and 1996, cost of
processing and related services included $10.6 million and $11.0 million,
respectively, of amortization expense for acquired software from the CSG
Acquisition. During 1999, 1998, 1997, and 1996, cost of processing and
related services included $2.8 million, $3.0 million, $4.0 million, and
$4.1 million, respectively, of amortization expense for client contracts
and related intangibles from the CSG Acquisition. Amortization expense
related to the noncompete agreement from the CSG Acquisition was $0.4
million per month, and was fully amortized as of November 30, 1999.
(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 software technology assets
that were in development 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, 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.
(6) During 1997, the Company recorded a non-recurring charge of $11.7 million
to reduce certain software 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 5 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.
13
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. These 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 review that section
closely in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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.
14
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,
-----------------------------------------------------
2000 1999 1998
----------------- ----------------- -----------------
% of % of % of
Amount Revenue Amount Revenue Amount Revenue
-------- ------- -------- ------- -------- -------
(in thousands)
Revenues:
Processing and related
services............... $294,809 73.9% $255,167 79.2% $191,802 81.1%
Software and
professional services.. 104,086 26.1 66,995 20.8 44,838 18.9
-------- ----- -------- ----- -------- -----
Total revenues......... 398,895 100.0 322,162 100.0 236,640 100.0
-------- ----- -------- ----- -------- -----
Expenses:
Cost of processing and
related services....... 107,022 26.8 95,706 29.7 82,198 34.7
Cost of software and
professional services.. 44,515 11.2 36,415 11.3 25,048 10.6
-------- ----- -------- ----- -------- -----
Total cost of revenues. 151,537 38.0 132,121 41.0 107,246 45.3
-------- ----- -------- ----- -------- -----
Gross margin (exclusive
of depreciation)........ 247,358 62.0 190,041 59.0 129,394 54.7
-------- ----- -------- ----- -------- -----
Operating expenses:
Research and
development............ 42,338 10.6 34,388 10.7 27,485 11.6
Selling, general and
administrative:
Selling, general and
administrative......... 46,970 11.8 40,142 12.4 34,769 14.7
Amortization of
noncompete agreements
and goodwill........... 643 .2 4,889 1.5 5,381 2.3
Stock-based employee
compensation........... 48 -- 280 .1 297 .1
Depreciation............ 12,077 3.0 10,190 3.2 8,159 3.4
-------- ----- -------- ----- -------- -----
Total operating
expenses.............. 102,076 25.6 89,889 27.9 76,091 32.1
-------- ----- -------- ----- -------- -----
Operating income......... 145,282 36.4 100,152 31.1 53,303 22.6
-------- ----- -------- ----- -------- -----
Other income (expense):
Interest expense........ (5,808) (1.4) (7,214) (2.2) (9,771) (4.1)
Interest and investment
income, net............ 5,761 1.4 2,981 .9 2,484 1.0
Other................... (32) -- 10 -- (21) --
-------- ----- -------- ----- -------- -----
Total other............ (79) -- (4,223) (1.3) (7,308) (3.1)
-------- ----- -------- ----- -------- -----
Income before income
taxes................... 145,203 36.4 95,929 29.8 45,995 19.5
Income tax (provision)
benefit................ (54,734) (13.7) (36,055) (11.2) 39,643 16.7
-------- ----- -------- ----- -------- -----
Net income............... $ 90,469 22.7% $ 59,874 18.6% $ 85,638 36.2%
======== ===== ======== ===== ======== =====
15
Twelve Months Ended December 31, 2000 Compared to Twelve Months Ended December
31, 1999
Revenues. Total revenues increased $76.7 million, or 23.8%, to $398.9
million in 2000, from $322.2 million in 1999.
Revenues from processing and related services increased $39.6 million, or
15.5%, to $294.8 million in 2000, from $255.2 million in 1999. Of the total
increase in revenue, approximately 61% was due to the Company serving a higher
number of customers for its clients and approximately 39% was due to increased
revenue per customer. Customers served were as follows (in thousands):
As of December 31,
----------------------
2000 1999 Increase
------ ------ --------
Video............................................... 33,310 32,326 984
Internet............................................ 1,984 1,350 634
Telephony........................................... 514 77 437
------ ------ -----
Total............................................. 35,808 33,753 2,055
====== ====== =====
The increase in the number of customers served was due to the conversion of
additional customers by new and existing clients to the Company's processing
system, and internal customer growth experienced by existing clients. During
2000, the Company converted and processed approximately 1.25 million new
customers on its systems. As of December 31, 2000, the Company had a total
conversion backlog of approximately 5.0 million customers, which are expected
to be converted to the Company's processing system during 2001.
Total processing revenue per video and Internet account was as follows:
For the years ended
December 31,
--------------------
2000 1999 Increase
----- ----- --------
Video Account......................................... $8.42 $8.03 4.9%
Internet Account...................................... 5.05 4.71 7.2%
The increase in processing revenue per account relates primarily to (i)
increased usage of ancillary services by clients, (ii) the introduction of new
products and services, and (iii) price increases included in client contracts.
Revenues from software and professional services increased $37.1 million, or
55.4% to $104.1 million in 2000, from $67.0 million in 1999. The Company sells
its software products and professional services 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 roll out 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, primarily its customer relationship management and
call center applications (principally ACSR), and the rollout of additional new
products and services to meet the changing needs of the Company's client base.
Cost of Processing and Related Services. Processing costs as a percentage of
related revenues were 36.3% for 2000, compared to 37.5% for 1999. This
decrease in costs as a percentage of related revenues is due primarily to the
decrease in amortization of client contracts and related intangibles by $3.1
million between years. This decrease in amortization expense is due primarily
to the client contracts and related intangibles from the CSG Acquisition
becoming fully amortized as of November 30, 1999 (such amortization was $2.8
million in 1999).
Cost of Software and Professional Services. The cost of software and
professional services as a percentage of related revenues was 42.8% for 2000,
compared to 54.4% for 1999. This decrease in costs as a percentage of
16
related revenues is due primarily to (i) better overall leveraging of costs as
a result of higher software and professional services revenues for the year,
and (ii) the timing of the sales cycle for new products and services.
Gross Margin. Overall gross margin increased $57.3 million, or 30.2%, to
$247.4 million in 2000, from $190.0 million in 1999, due primarily to revenue
growth. The overall gross margin as a percentage of total revenues increased
to 62.0% in 2000, compared to 59.0% in 1999. The overall increase in the gross
margin percentage is due primarily to the increase in gross margin for
software and professional services as a result of the factors discussed above,
and to a lesser degree, a decrease in the amortization of client contracts and
related intangibles, as discussed above.
Research and Development Expense. R&D expense increased $8.0 million, or
23.1%, to $42.3 million in 2000, from $34.4 million in 1999. As a percentage
of total revenues, R&D expense decreased to 10.6% in 2000, from 10.7% in 1999.
The Company did not capitalize any software development costs during 2000 and
1999.
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 2000 were focused primarily on the development of products to:
. increase the efficiencies and productivity of its clients' operations,
. address the systems needed to support the convergence of the
communications markets,
. support a web-enabled, customer self-care and electronic bill
presentment/payment application,
. allow clients to effectively roll out new products and services to new
and existing markets, such as residential telephony, high-speed data/ISP
and IP markets (including CSG.net, the Company's ASP offering to the ISP
market), interactive services (e.g., video-on-demand), and
. address the international customer care and billing system market.
The Company expects its development efforts to focus on similar tasks in
2001 and expects to spend a similar percentage of its total revenues on R&D in
the future.
Selling, General and Administrative Expense. Selling, general and
administrative ("SG&A") expense increased $6.8 million, or 17.0%, to $47.0 in
2000, from $40.1 million in 1999. As a percentage of total revenues, SG&A
expense decreased to 11.8% in 2000, from 12.4% in 1999. The increase in SG&A
expense relates primarily to the continued expansion of the Company's sales,
management, and administrative staff, and increases in other sales and
administrative costs to support the Company's overall growth.
Amortization of Noncompete Agreements and Goodwill. Amortization of
noncompete agreements and goodwill decreased $4.2 million, or 86.8%, to $0.6
million in 2000, from $4.9 million in 1999. The decrease in amortization
expense is due entirely to the noncompete agreement from the CSG Acquisition
becoming fully amortized as of November 30, 1999.
Depreciation Expense. Depreciation expense increased $1.9 million, or 18.5%,
to $12.1 million in 2000, from $10.2 million in 1999. The increase in expense
relates to capital expenditures made throughout 2000 and 1999 in support of
the overall growth of the Company. Capital expenditures for 2000 were $22.2
million, compared to $12.0 million in 1999, and consisted principally of (i)
computer hardware and related equipment for both product and infrastructure
needs, (ii) statement processing equipment, and (iii) facilities and internal
infrastructure expansion. Depreciation expense for all property and equipment
is reflected separately in the aggregate and is not included in the other
components of operating expenses.
Operating Income. Operating income was $145.3 million for 2000, or 36.4% of
total revenues, compared to $100.2 million for 1999, or 31.1% of total
revenues. The increase between years relates to the factors discussed above.
17
Interest Expense. Interest expense decreased $1.4 million, or 19.5%, to $5.8
million in 2000, from $7.2 million in 1999, with the decrease attributable
primarily to (i) scheduled principal payments on the Company's long-term debt,
and (ii) optional prepayments on long-term debt during 1999. The balance of
the Company's long-term debt as of December 31, 2000, was $58.3 million,
compared to $81.0 million as of December 31, 1999, a decrease of $22.7
million.
Interest and Investment Income. Interest and investment income increased
$2.8 million, or 93.3%, to $5.8 million in 2000, from $3.0 million in 1999,
with the increase attributable primarily to an increase in operating funds
available for investment.
Income Tax Provision. The Company recorded an income tax provision of $54.7
million in 2000, or an effective income tax rate of approximately 38%. The
Company's effective income tax rate for 1999 was also approximately 38%. As of
December 31, 2000, 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 over the last several years.
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% was due to the Company serving a higher
number of customers for its clients and approximately 32% was due to increased
revenue per customer. Customers served were as follows (in thousands):
As of December 31,
----------------------
1999 1998 Increase
------ ------ --------
Video............................................... 32,326 28,596 3,730
Internet............................................ 1,350 865 485
Telephony........................................... 77 -- 77
------ ------ -----
Total............................................. 33,753 29,461 4,292
====== ====== =====
The increase in the number of customers served was due to the conversion of
additional customers by new and existing clients to the Company's processing
system, 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.
Total processing revenue per video and Internet account was as follows:
For the years ended
December 31,
--------------------
1999 1998 Increase
----- ----- --------
Video Account......................................... $8.03 $7.53 6.6%
Internet Account...................................... 4.71 3.75 25.6%
The increase in processing revenue per account relates primarily to a
greater percentage of video processing revenues in 1999 being generated under
the AT&T contract and price increases included in client contracts.
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 increase
in revenue between years relates to the continued strong demand for the
Company's existing software products, primarily its customer relationship
management and call center applications (principally ACSR and CIT), and the
rollout of additional new products (e.g., CSG Workforce Express) to meet the
changing needs of the Company's client base.
18
Cost of Processing and Related Services. Processing costs as a percentage
of related revenues were 37.5% for 1999, compared to 42.9% for 1998. This
decrease in costs as a percentage of related revenues is due 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,
offset by an increase of $2.2 million in amortization of client contracts and
related intangibles between years. This increase in amortization expense is
due primarily to the amortization of the value assigned to the AT&T Contract.
Amortization related to the AT&T Contract was $3.3 million in 1999, compared
to $1.9 million in 1998.
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.
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:
. increase the efficiencies and productivity of its clients' operations,
. address the systems needed to support the convergence of the
communications markets,
. support a web-enabled, customer self-care and electronic bill
presentment/payment application, and
. allow clients to effectively roll out new products and services to new
and existing markets, such as residential telephony, high-speed data/ISP
and IP markets.
Selling, General and Administrative Expense. SG&A expense increased $5.4
million, or 15.5%, to $40.1 million in 1999, from $34.8 million in 1998. As a
percentage of total revenues, SG&A expense decreased to 12.4% in 1999, from
14.7% in 1998. The increase in SG&A expense relates primarily to the continued
expansion of the Company's sales, management, and administrative staff, and
increases in other sales and administrative costs to support the Company's
overall growth.
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, and consisted principally of (i)
computer hardware and related equipment for both product and infrastructure
needs, (ii) statement processing equipment, and (iii) facilities and internal
infrastructure expansion. 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.
19
Operating Income. Operating income was $100.2 million for 1999, or 31.1% of
total revenues, compared to $53.3 million, or 22.6% of total revenues in 1998.
The increase between years relates to the factors discussed above.
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 Taxes. The Company recorded an income tax provision of $36.1 million
in 1999, or an effective income tax rate of approximately 38%. 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.
Financial Condition, Liquidity and Capital Resources
As of December 31, 2000, the Company's principal sources of liquidity
included cash, cash equivalents, and short-term investments of $43.7 million
and a revolving credit facility with a bank in the amount of $40.0 million, of
which there were no borrowings outstanding as of December 31, 2000. During the
third quarter of 2000, the Company began investing its excess cash balances in
various short-term investments (principally commercial paper). It is the
Company's intent to maintain a low-risk, liquid portfolio to take advantage of
investment opportunities, while providing a means to access such funds if
needed as a source of liquidity. See Note 2 to the Company's Consolidated
Financial Statements for additional discussion of the short-term investments.
The Company's ability to borrow under the revolving credit facility is subject
to maintenance of certain levels of eligible receivables. At December 31,
2000, 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, 2000 and 1999 was $81.3 million
and $32.1 million, respectively.
As of December 31, 2000 and 1999, the Company had $128.9 million and $67.5
million, respectively, in net billed trade accounts receivable, an increase of
$61.4 million. The increase relates primarily to the Company's general revenue
growth between years and the timing of the billing and collection of several
large software transactions outstanding as of December 31, 2000. In
particular, during 2000, the Company accommodated a client's request to
schedule the payment terms for a large software transaction three weeks across
yearend to assist the client in its capital planning. As of January 31, 2001,
the Company had collected approximately $89.3 million, or 69%, of the total
December 31, 2000 net billed trade accounts receivable, including the large
software receivable previously mentioned. See Note 2 to the Company's
Consolidated Financial Statements for additional discussion of the Company's
yearend accounts receivable balance and its concentration of credit risk.
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 monthly net trade accounts receivable balance for the period. Accounts
receivable reflected DBOs of 72 days and 61 days for
20
the fourth quarter and year ended December 31, 2000, respectively, compared to
55 days for both the quarter and year ended December 31, 1999. The increase in
fourth quarter and annual DBOs between years relates primarily to the large
increase in the December 31, 2000 net billed accounts receivable, for the
reasons stated above.
The Company's net cash flows from operating activities for the years ended
December 31, 2000, 1999 and 1998 were $66.8 million, $102.1 million and $47.3
million, respectively. The decrease of $35.3 million, or 34.6%, between 2000
and 1999 relates to a decrease in the net changes in operating assets and
liabilities of $57.9 million, offset by a $22.6 million increase in net cash
flows from operations. The decrease in the net changes in operating assets and
liabilities relates primarily to the large increase in December 31, 2000
billed accounts receivable, for the reasons stated above. The Company's cash
flows from operating activities for 2000 would have been in excess of $100
million if the payment due date on the particular software transaction
mentioned above had not been scheduled into 2001. The increase of $54.8
million, or 115.7%, in 1999 over 1998 relates to a $37.9 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 Company experienced a slight degradation in certain of its financial
measures of liquidity as of and for the quarter and year ended December 31,
2000, as discussed in the three previous paragraphs, primarily as a result of
the payment terms on the large software transaction mentioned above. The
Company does not view the increase in the December 31, 2000 billed trade
accounts receivable balance and the corresponding increase in the fourth
quarter DBOs as a concern for increased collectibility risk, evidenced by the
large amount of the receivables collected subsequent to yearend. The Company
anticipates that it will be able to return to its historical DBO levels of 55
to 60 days in the future. The decrease in cash flows from operating activities
for the quarter and year ended December 31, 2000, were directly related to the
increase in the billed accounts receivable as of December 31, 2000. The
Company views this as a short-term consequence only, and over time, the
Company believes it will continue to generate a significant amount of cash
flows from operating activities in the future.
The Company's net cash flows used in investing activities totaled $34.8
million in 2000, compared to $36.7 million in 1999, a decrease of $1.9
million. The decrease between years relates primarily to a decrease of
$23.6 million in acquisitions of and investments in client contracts. This
decrease is offset by (i) net purchases of short-term investments of $11.5
million in 2000, and (ii) an increase in property and equipment purchases of
$10.2 million. The Company's net cash flows used in investing activities
totaled $27.1 million in 1998. The increase of $9.6 million between 1999 and
1998 relates primarily to an increase in acquisitions of and investments in
client contracts of $20.7 million (related primarily to payments to AT&T).
This increase is offset by (i) a cash payment of $6.0 million for acquisition
of assets 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 financing activities was $47.4 million
in 2000, compared to $56.1 million in 1999, a decrease of $8.7 million. The
decrease between years relates primarily to (i) a decrease in principal
payments on long-term debt of $24.5 million (the Company made several large
optional debt prepayments in 1999) and (ii) an increase of $15.0 million in
proceeds from the exercise of stock options and warrants, and other equity
matters. This decrease is offset by an increase in stock repurchases of $30.8
million, as discussed below. The Company's net cash flows used in financing
activities was $1.1 million in 1998. The significant increase of $55.0 million
between 1999 and 1998 relates to (i) an increase in scheduled principal
payments on long-term debt of $8.9 million, (ii) optional debt prepayments of
$31.6 million made in 1999, and (iii) the repurchase of 0.65 million shares of
Common Stock for $20.2 million in 1999, as discussed below. This increase is
offset by an increase in proceeds from equity transactions of $5.7 million,
related primarily to the exercise of stock options by employees.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
for 2000 was $164.0 million, or 41.1% of total revenues, compared to $124.6
million, or 38.7% of total revenues, for 1999. 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 in accordance with generally accepted accounting
principles.
21
Total deferred revenues decreased by approximately $8.8 million from
December 31, 1999 to December 31, 2000, due primarily to performance on
several contracts during the first quarter of 2000 that had previously been
signed and billed in the latter part of 1999.
The balance of the Company's long-term debt as of December 31, 2000 was
$58.3 million, compared to $81.0 million as of December 31, 1999, a decrease
of $22.7 million. Of the total long-term debt balance as of December 31, 2000,
$25.5 million is scheduled to be paid in 2001, with the remaining amount of
$32.8 million scheduled for 2002. Interest rates for the Company's long-term
debt 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, 2000, the spread on the LIBOR rate and prime rate was 0.50% and
0%, respectively. See Note 4 to the Consolidated Financial Statements for
additional discussion of the Company's debt agreement.
As of December 31, 1999, the Company had 3.0 million Common Stock Warrants
(the "Warrants") outstanding to AT&T. On October 30, 2000, AT&T exercised its
right under the Warrants to purchase 1.0 million shares of the Company's
Common Stock at an exercise price of $12 per share, for a total exercise price
of $12.0 million. Immediately following the exercise of the Warrants, the
Company repurchased the 1.0 million shares at $47.42 per share (an average of
the closing price for the five-day trading period ended October 26, 2000) for
a total repurchase price of $47.4 million, pursuant to the Company's stock
repurchase program. As a result, the net cash outlay paid to AT&T for this
transaction was $35.4 million, which was paid by the Company with available
corporate funds.
On February 28, 2001, AT&T exercised its rights under the Warrants to
purchase the remaining 2.0 million shares of the Company's Common Stock at an
exercise price of $12 per share, for a total exercise price of $24.0 million.
Immediately following the exercise of the Warrants, the Company repurchased
the 2.0 million shares at $37.00 per share (approximates the closing price on
February 28, 2001) for a total repurchase price of $74.0 million, pursuant to
the Company's stock repurchase program. As a result, the net cash outlay paid
to AT&T for this transaction was $50.0 million, which was paid by the Company
with available corporate funds on March 28, 2001. After this transaction, AT&T
no longer has any warrants or other rights to purchase the Company's Common
Stock.
Effective August 4, 1999, the Company's Board of Directors approved a stock
repurchase program 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. During 2000 and 1999, the Company
repurchased 1.1 million shares (including the shares repurchased in
conjunction with the Warrant exercise discussed above) and 0.65 million shares
for $51.1 million and $20.2 million, respectively. The repurchased shares are
held as treasury shares. During February 2001, the Company purchased an
additional 0.28 million shares of its Common Stock on the open market for
$11.2 million, and repurchased the 2.0 million shares in conjunction with the
AT&T Warrant exercise discussed above. As a result, the shares repurchased
under the Company's stock repurchase program as of the date of this filing
totaled 4.03 million shares at a total cost of $156.5 million (weighted-
average price of $38.88 per share). See Notes 8 and 11 to the Company's
Consolidated Financial Statements for additional discussion of the stock
repurchase program.
The Company continues to make significant investments in client contracts,
capital equipment, facilities, research and development, and at its
discretion, may continue to make stock repurchases under its stock repurchase
program. In addition, as part of its growth strategy, the Company expects to
expand its international business and is continually evaluating potential
business and asset acquisitions. The Company had no significant capital
commitments as of December 31, 2000. The Company believes that cash generated
from operating activities, together with its current cash, cash equivalents,
short-term investments, and the amount available under its revolving credit
facility, will be sufficient to meet its anticipated cash requirements for
operations, income taxes, debt service, capital expenditures, investments in
client contracts, and stock repurchases for both its short- and long-term
purposes. The Company also believes it has significant additional borrowing
capacity and could obtain additional cash resources by amending its current
credit facility and/or establishing a new credit facility.
22
AT&T Contract
Dependence on AT&T. AT&T completed its merger with Tele-Communications,
Inc. ("TCI") in 1999 and completed its merger with MediaOne Group, Inc.
("MediaOne") in 2000. During the years ended December 31, 2000, 1999 and 1998,
revenues generated from AT&T Broadband and affiliated companies ("AT&T")
represented approximately 50.4%, 50.5%, and 37.4% of total revenues,
respectively. There are inherent risks whenever this large of a percentage of
total revenues is concentrated with one client. One such risk is that, should
AT&T's business generally decline or not grow as rapidly as anticipated, it
would have a material impact on the Company's results of operations.
AT&T Demand for Arbitration. On September 27, 2000, the Company received a
Demand for Arbitration from AT&T relating to the Master Subscriber Management
System Agreement (the "AT&T Contract") the companies entered into in 1997. The
arbitration demand contained three claims:
. AT&T claimed that the Company had failed to fulfill certain of its
obligations under the contract with respect to telephony software and
services,
. AT&T asked for a declaratory judgment that the exclusivity clause of the
AT&T Contract does not apply to customers that were acquired by AT&T
after execution of the AT&T Contract in 1997, and
. AT&T claimed that the Company had breached the Most Favored Nation clause
of the agreement.
On October 10, 2000, AT&T agreed to dismiss with prejudice its Demand for
Arbitration with the Company. In connection with the dismissal, the companies
agreed to amend the AT&T Contract. A copy of the contract amendment is
included in the exhibits to the Company's September 30, 2000 Report on Form
10-Q. The amendment includes, among other things, the following key
provisions:
. AT&T agreed to use its best efforts to convert 90% of the recently
acquired MediaOne video and high-speed data customers to the Company's
processing system by December 31, 2001, and the remaining 10% by June 30,
2002. Excluded from this obligation are any such customers that are sold
or exchanged (or under contract to do the same) by AT&T prior to December
31, 2001. The Company expects to start converting the MediaOne customers
(estimated at approximately 4 million total customers) onto its systems
in the first quarter of 2001. Once AT&T is processing certain incremental
customers on the Company's system, AT&T shall benefit from specified,
tiered processing fees. The Company does not believe this pricing change
will have a material impact to its annual processing revenue per customer
account.
. The Company waived certain exclusivity rights pertaining to residential
wireline telephony (i.e., AT&T's cable telephony initiative). At the time
the amendment was executed, the Company believed AT&T was in the process
of determining its overall cable telephony architecture in support of its
rollout efforts, and wanted more flexibility to determine which vendors
should participate in that strategy. In January 2001, AT&T announced it
had signed an agreement with another vendor to support its cable
telephony initiative. CSG has agreed to provide assistance in migrating
AT&T's cable telephony customers (currently processed on the Company's
systems) to the customer care and billing system of AT&T's designated
vendor. The Company does not believe the loss of the AT&T cable telephony
processing business will have a material impact on the Company's results
of operations.
. AT&T purchased expanded software licenses for the Company's call center
and workforce automation applications. AT&T is expected to use the
additional software licenses over the next 12 months as part of its
rollout of these software products to support more markets and the
conversion of the MediaOne customers to the Company's processing system.
Contract Rights and Obligations (as amended). The AT&T Contract 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, and print and mail services. The AT&T
Contract contains certain performance criteria and other obligations to be met
by the Company. The Company is required to perform certain remedial efforts
and is
23
subject to certain penalties if it fails to meet the performance criteria or
other obligations. The Company also is 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.
The Company expects to perform successfully under the AT&T Contract, and is
hopeful that it can continue to sell products and services to AT&T that are in
excess of the minimum financial commitments and exclusive rights included in
the contract. Should the Company fail to meet its obligations under the AT&T
Contract, and should AT&T be successful in any action to either terminate the
AT&T Contract in whole or in part, or collect damages caused by an alleged
breach, it would have a material impact on the Company's results of
operations.
Market Risk
The Company is exposed to various market risks, including changes in
interest rates, foreign currency exchange rates, and fluctuations and changes
in the market value of its short-term investments. Market risk is the
potential loss arising from adverse changes in market rates and prices. The
Company does not enter into derivatives or other financial instruments for
trading or speculative purposes.
Interest Rate Risk. The Company utilizes a derivative financial instrument
to manage its interest rate risk from the variable rate features of its long-
term debt. The Company had long-term debt (including current maturities) of
$58.3 million as of December 31, 2000. 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, 2000, the spread on the LIBOR
rate and prime rate was 0.50% and 0%, respectively. As of December 31, 2000,
the entire amount of the debt was under a one-month LIBOR contract, with an
interest rate of 7.14% (i.e., LIBOR at 6.64% plus spread of 0.50%). The
carrying amount of the Company's long-term debt approximates fair value due to
its variable interest rate features. See Note 4 to the Consolidated Financial
Statements for additional description of the long-term debt and scheduled
principal payments.
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. Upon expiration of this collar agreement in December 2000, the Company
entered into an interest rate cap agreement with a major bank, which expires
at the maturity date of the long-term debt in September 2002. The cost of the
cap agreement was minimal. The interest rate cap is 9.0% (LIBOR) and the
underlying notional amount covered by the cap agreement was $29.1 million as
of December 31, 2000, and decreases over the term of the agreement in relation
to the scheduled principal payments on the long-term debt. There are no
amounts receivable under this cap agreement as of December 31, 2000, and the
collar and the cap agreements had no effect on the Company's interest expense
for 2000, 1999, or 1998. At December 31, 2000, the fair value of the cap
agreement is not recognized in the Company's financial statements. The fair
value of the cap agreement at December 31, 2000, based on a quoted market
price, was less than $1,000.
Foreign Exchange Rate Risk. The Company does not utilize any derivative
financial instruments for purposes of managing its foreign currency 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. 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 yearend exchange rates would not have a material
effect upon the Company's financial condition or results of operations.
Market Risk Related To Short-term Investments. The Company does not utilize
any derivative financial instruments for purposes of managing its market risks
related to short-term investments. The Company generally invests its excess
cash balance in low-risk, short-term investments to limit its exposure to
market risks. The day-to-day management of the Company's short-term
investments is done by the money management branch of one of the largest
financial institutions in the United States. This financial institution
manages the Company's short-term investments based upon strict and formal
investment guidelines established by the Company. Under these guidelines,
investments are limited to highly liquid, short-term government and corporate
securities that have a credit rating of A-1 / P-1 or better.
24
Prior Measures of Operating Performance
In 1999 and 1998, the Company disclosed certain operating results on an
"adjusted" basis as its primary measure of operating performance. Operating
results on an adjusted basis were computed by (i) excluding acquisition-
related charges, (ii) using an effective income tax rate of 38%, and (iii)
using outstanding shares on a diluted basis. The acquisition-related charges
related to the CSG Acquisition. Substantially all of the acquisition-related
charges became fully amortized by November 30, 1999. As a result, in 2000, the
Company began disclosing actual, reported operating results as its primary
measure of operating performance for both the current and prior reporting
periods, as the acquisition-related charges were not considered significant in
2000 and 1999. The Company's previous disclosure for operating income, net
income, and earnings per diluted share on an adjusted basis (i) for the year
ended December 31, 1999 were $107.6 million, $64.1 million, and $1.17 per
diluted share, respectively, and (ii) for the year ended December 31, 1998,
were $61.5 million, $33.6 million, and $0.63 per diluted share, respectively.
Use of these operating measures on an adjusted basis as a basis of
comparability for 1999 and 1998 instead of the actual reported amounts would
result in different measures of operating improvement.
25
Item 8. Financial Statements and Supplementary Data
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
Report of Independent Public Accountants................................... 27
Consolidated Balance Sheets as of December 31, 2000 and 1999............... 28
Consolidated Statements of Income for the Years Ended December 31, 2000,
1999 and 1998............................................................. 29
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998.......................................... 30
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998....................................................... 31
Notes to Consolidated Financial Statements................................. 32
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 2000 and 1999, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
Arthur Andersen llp
Omaha, Nebraska,
February 28, 2001
27
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31,
------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 32,751 $ 48,676
Short-term investments.................................... 10,982 --
-------- --------
Total cash, cash equivalents and short-term investments... 43,733 48,676
Accounts receivable--
Trade--
Billed, net of allowance of $5,001 and $2,975............ 128,902 67,477
Unbilled................................................. 4,306 8,311
Other..................................................... 1,259 909
Deferred income taxes..................................... 3,247 1,972
Other current assets...................................... 7,507 2,850
-------- --------
Total current assets...................................... 188,954 130,195
-------- --------
Property and equipment, net................................ 36,630 26,507
Software, net.............................................. 4,284 6,145
Goodwill, net.............................................. 1,894 2,652
Client contracts and related intangibles, net.............. 52,368 55,343
Deferred income taxes...................................... 47,331 52,845
Other assets............................................... 628 1,281
-------- --------
Total assets.............................................. $332,089 $274,968
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................... $ 25,436 $ 21,711
Client deposits........................................... 12,391 10,549
Trade accounts payable.................................... 14,850 9,450
Accrued employee compensation............................. 19,147 16,386
Deferred revenue.......................................... 8,172 16,746
Accrued income taxes...................................... 15,633 11,710
Other current liabilities................................. 12,008 11,551
-------- --------
Total current liabilities................................. 107,637 98,103
-------- --------
Non-current liabilities:
Long-term debt, net of current maturities................. 32,820 59,289
Deferred revenue.......................................... 463 714
-------- --------
Total non-current liabilities............................. 33,283 60,003
-------- --------
Commitments and contingencies (Note 7)
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; 11,840,333 and 13,591,947 shares reserved for
common stock warrants, employee stock purchase plan and
stock incentive plans; 52,530,203 and 51,638,629 shares
outstanding.............................................. 543 523
Common stock warrants; 2,000,000 and 3,000,000 warrants
issued and outstanding................................... 17,430 26,145
Additional paid-in capital................................ 180,750 136,373
Notes receivable and deferred compensation related to
employees................................................ -- (163)
Treasury stock, at cost, 1,830,986 and 722,486 shares..... (71,497) (20,374)
Accumulated other comprehensive loss:
Foreign currency translation.............................. (654) (120)
Unrealized losses on short-term investments, net of tax... (350) --
Accumulated earnings (deficit)............................ 64,947 (25,522)
-------- --------
Total stockholders' equity................................ 191,169 116,862
-------- --------
Total liabilities and stockholders' equity................ $332,089 $274,968
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Processing and related services................. $294,809 $255,167 $191,802
Software and professional services.............. 104,086 66,995 44,838
-------- -------- --------
Total revenues................................. 398,895 322,162 236,640
-------- -------- --------
Expenses:
Cost of processing and related services......... 107,022 95,706 82,198
Cost of software and professional services...... 44,515 36,415 25,048
-------- -------- --------
Total cost of revenues......................... 151,537 132,121 107,246
-------- -------- --------
Gross margin (exclusive of depreciation)......... 247,358 190,041 129,394
-------- -------- --------
Operating expenses:
Research and development........................ 42,338 34,388 27,485
Selling, general and administrative:
Selling, general and administrative............. 46,970 40,142 34,769
Amortization of noncompete agreements and
goodwill....................................... 643 4,889 5,381
Stock-based employee compensation............... 48 280 297
Depreciation.................................... 12,077 10,190 8,159
-------- -------- --------
Total operating expenses....................... 102,076 89,889 76,091
-------- -------- --------
Operating income................................. 145,282 100,152 53,303
-------- -------- --------
Other income (expense):
Interest expense................................ (5,808) (7,214) (9,771)
Interest and investment income, net............. 5,761 2,981 2,484
Other........................................... (32) 10 (21)
-------- -------- --------
Total other.................................... (79) (4,223) (7,308)
-------- -------- --------
Income before income taxes....................... 145,203 95,929 45,995
Income tax (provision) benefit.................. (54,734) (36,055) 39,643
-------- -------- --------
Net income....................................... $ 90,469 $ 59,874 $ 85,638
======== ======== ========
Basic net income per common share:
Net income available to common stockholders..... $ 1.73 $ 1.16 $ 1.67
======== ======== ========
Weighted average common shares.................. 52,204 51,675 51,198
======== ======== ========
Diluted net income per common share:
Net income available to common stockholders..... $ 1.60 $ 1.10 $ 1.62
======== ======== ========
Weighted average diluted common shares.......... 56,680 54,660 52,991
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
(in thousands)
Notes
Receivable
Shares of and Deferred Unrealized
Common Common Additional Compensation Foreign Losses on Accumulated
Stock Common Stock Paid-in Related to Treasury Currency Short- Term Earnings
Outstanding Stock Warrants Capital Employees Stock Translation Investments (Deficit)
----------- ------ -------- ---------- ------------ -------- ----------- ----------- -----------
BALANCE,
December 31,
1997........... 50,960 $510 $26,145 $112,615 $(1,321) $ -- $ (1) $ -- $(171,034)
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- -- 85,638
Foreign currency
translation
adjustments.... -- -- -- -- -- -- 39 -- --
Comprehensive
income......... -- -- -- -- -- -- -- -- --
Amortization of
deferred stock-
based employee
compensation
expense........ -- -- -- -- 297 -- -- -- --
Repurchase of
common stock... (66) -- -- (12) 157 (97) -- -- --
Exercise of
stock options.. 540 5 -- 4,957 -- -- -- -- --
Payments on
notes
receivable from
employee
stockholders... -- -- -- -- 61 -- -- -- --
Purchase of
common stock
pursuant to
employee stock
purchase plan.. 32 -- -- 622 -- -- -- -- --
Tax benefit of
stock options
exercised...... -- -- -- 2,417 -- -- -- -- --
------ ---- ------- -------- ------- -------- ----- ----- ---------
BALANCE,
December 31,
1998........... 51,466 515 26,145 120,599 (806) (97) 38 -- (85,396)
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- -- 59,874
Foreign currency
translation
adjustments.... -- -- -- -- -- -- (158) -- --
Comprehensive
income......... -- -- -- -- -- -- -- -- --
Amortization of
deferred stock-
based employee
compensation
expense........ -- -- -- -- 280 -- -- -- --
Repurchase of
common stock... (656) -- -- -- -- (20,277) -- -- --
Common stock
swap for option
exercise....... -- -- -- 35 -- -- -- -- --
Exercise of
stock options.. 795 8 -- 10,000 -- -- -- -- --
Payments on
notes
receivable from
employee
stockholders... -- -- -- -- 363 -- -- -- --
Purchase of
common stock
pursuant to
employee stock
purchase plan.. 34 -- -- 926 -- -- -- -- --
Tax benefit of
stock options
exercised...... -- -- -- 4,813 -- -- -- -- --
------ ---- ------- -------- ------- -------- ----- ----- ---------
BALANCE,
December 31,
1999........... 51,639 523 26,145 136,373 (163) (20,374) (120) -- (25,522)
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- -- 90,469
Unrealized
losses on
short-term
investments
(net of tax
benefit of
$211).......... -- -- -- -- -- -- -- (350) --
Foreign currency
translation
adjustments.... -- -- -- -- -- -- (534) -- --
Comprehensive
income......... -- -- -- -- -- -- -- -- --
Amortization of
deferred stock-
based employee
compensation
expense........ -- -- -- -- 48 -- -- -- --
Repurchase of
common stock... (1,110) -- -- -- -- (51,123) -- -- --
Exercise of
stock options.. 971 10 -- 13,178 -- -- -- -- --
Exercise of
stock warrants. 1,000 10 (8,715) 20,705 -- -- -- -- --
Payments on
notes
receivable from
employee
stockholders... -- -- -- -- 115 -- -- -- --
Purchase of
common stock
pursuant to
employee stock
purchase plan.. 30 -- -- 1,136 -- -- -- -- --
Tax benefit of
stock options
exercised...... -- -- -- 9,358 -- -- -- -- --
------ ---- ------- -------- ------- -------- ----- ----- ---------
BALANCE,
December 31,
2000........... 52,530 $543 $17,430 $180,750 $ -- $(71,497) $(654) $(350) $ 64,947
====== ==== ======= ======== ======= ======== ===== ===== =========
Total
Stockholders'
Equity
(Deficit)
-------------
BALANCE,
December 31,
1997........... $(33,086)
Comprehensive
income:
Net income...... --
Foreign currency
translation
adjustments.... --
Comprehensive
income......... 85,677
Amortization of
deferred stock-
based employee
compensation
expense........ 297
Repurchase of
common stock... 48
Exercise of
stock options.. 4,962
Payments on
notes
receivable from
employee
stockholders... 61
Purchase of
common stock
pursuant to
employee stock
purchase plan.. 622
Tax benefit of
stock options
exercised...... 2,417
-------------
BALANCE,
December 31,
1998........... 60,998
Comprehensive
income:
Net income...... --
Foreign currency
translation
adjustments.... --
Comprehensive
income......... 59,716
Amortization of
deferred stock-
based employee
compensation
expense........ 280
Repurchase of
common stock... (20,277)
Common stock
swap for option
exercise....... 35
Exercise of
stock options.. 10,008
Payments on
notes
receivable from
employee
stockholders... 363
Purchase of
common stock
pursuant to
employee stock
purchase plan.. 926
Tax benefit of
stock options
exercised...... 4,813
-------------
BALANCE,
December 31,
1999........... 116,862
Comprehensive
income:
Net income...... --
Unrealized
losses on
short-term
investments
(net of tax
benefit of
$211).......... --
Foreign currency
translation
adjustments.... --
Comprehensive
income......... 89,585
Amortization of
deferred stock-
based employee
compensation
expense........ 48
Repurchase of
common stock... (51,123)
Exercise of
stock options.. 13,188
Exercise of
stock warrants. 12,000
Payments on
notes
receivable from
employee
stockholders... 115
Purchase of
common stock
pursuant to
employee stock
purchase plan.. 1,136
Tax benefit of
stock options
exercised...... 9,358
-------------
BALANCE,
December 31,
2000........... $191,169
=============
The accompanying notes are an integral part of these consolidated financial
statements.
30
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income...................................... $ 90,469 $ 59,874 $ 85,638
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation.................................... 12,077 10,190 8,159
Amortization.................................... 7,313 15,026 12,684
Deferred income taxes........................... 4,450 6,373 (52,880)
Stock-based employee compensation............... 48 280 297
Changes in operating assets and liabilities:
Trade accounts and other receivables, net...... (57,809) (12,255) (16,320)
Other current and noncurrent assets............ (4,709) (633) (75)
Accounts payable and accrued liabilities....... 14,925 23,196 9,811
-------- -------- --------
Net cash provided by operating activities..... 66,764 102,051 47,314
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment............. (22,173) (12,003) (15,706)
Acquisition of assets........................... -- -- (5,974)
Additions to software........................... -- -- (1,410)
Purchase of short-term investments.............. (11,543) -- --
Acquisitions of and investments in client
contracts...................................... (1,100) (24,692) (3,968)
-------- -------- --------
Net cash used in investing activities......... (34,816) (36,695) (27,058)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock.......... 14,324 10,934 5,584
Proceeds from exercise of stock warrants........ 12,000 -- --
Payments on notes receivable from employee
stockholders................................... 110 454 64
Repurchase of common stock...................... (51,081) (20,242) (2)
Payments on long-term debt...................... (22,744) (47,250) (6,750)
-------- -------- --------
Net cash used in financing activities......... (47,391) (56,104) (1,104)
-------- -------- --------
Effect of exchange rate fluctuations on cash..... (482) (169) 24
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (15,925) 9,083 19,176
Cash and cash equivalents, beginning of period... 48,676 39,593 20,417
-------- -------- --------
Cash and cash equivalents, end of period......... $ 32,751 $ 48,676 $ 39,593
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for--
Interest........................................ $ 5,608 $ 6,386 $ 8,151
Income taxes.................................... $ 36,963 $ 19,905 $ 7,259
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
an asset acquisition.
The accompanying notes are an integral part of these consolidated financial
statements.
31
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.
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 over one-third of the households in the United States.
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.
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
stockholders' equity. Transaction gains and losses related to intercompany
accounts are not material and are included in the determination of net income.
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. In December 1999, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements". This SAB summarizes the SEC staff's
views in applying generally accepted accounting principles to revenue
recognition and the required disclosures in financial statements. This SAB was
effective for the Company in the fourth quarter of 2000, with retroactive
application to January 1, 2000. During the fourth quarter of 2000, the Company
performed a review of its revenue recognition policies and determined that
they are in compliance with SAB 101.
32
The Company generates its revenues from three primary sources: processing
and related services, software transactions, 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 revenues consist primarily of software
license and maintenance fees. Professional services revenues consist of a
variety of consulting services, such as product installation and
customization, business consulting, project management and training services.
For multiple-element arrangements which include two or more of these revenue
sources, the Company generally accounts for each of the individual revenue
sources as a separate and discrete earnings process considering, among other
things, whether any undelivered element(s) is essential to the functionality
of the delivered element(s). For such multiple-element arrangements, total
revenue is allocated to the various elements based upon objective and reliable
evidence of the relative fair values specific to the Company's products and
services.
Processing and related services revenues are recognized as the services are
performed. Processing fees are typically billed monthly based on the number of
client's customers served, ancillary services are typically billed on a per
transaction basis, and certain customized print and mail services are billed
on a usage basis.
Software-related revenues are recognized using the guidelines of Statement
of Position ("SOP") 97-2, "Software Revenue Recognition", as amended. The
primary revenue recognition criteria outlined in SOP 97-2 include: evidence of
an arrangement; delivery; fixed or determinable fees; and collectibility. For
software transactions which have multiple elements, such as software and
services, the Company allocates the contract value to the respective elements
based on vendor-specific objective evidence of their individual fair values,
determined in accordance with SOP 97-2. Arrangements for software license fees
consist principally of one-time perpetual licenses, sold on a per seat or
other per unit basis. Perpetual license fees are typically recognized upon
delivery, depending upon the nature and extent of the installation and/or
customization services, if any, to be provided by the Company, and assuming
all other revenue recognition criteria have been met. Term license fees with
multiple payments which extend over several periods, and maintenance fees are
recognized ratably over the contract term.
Professional services revenues typically 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 trade
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 that are incurred on behalf of the
clients. 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 "client deposits" in the
accompanying consolidated balance sheets, and are classified 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 comparing 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.
33
Short-term Investments and Other Financial Instruments. The Company's short-
term investments at December 31, 2000 consist of commercial paper, with a
market value and an original cost of approximately $10.8 million, and common
stock, with a market value and original cost of approximately $0.2 million and
$0.8 million, respectively.
The Company classifies all of its short-term investments as "available-for-
sale" in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".
Short-term investments are stated at market value, with unrealized gains and
losses on such securities included, net of the related income tax effect, in
total comprehensive income in stockholders' equity. For all short-term
investments, unrealized losses that are considered "other than temporary" are
recognized immediately in earnings. Realized gains and losses on short-term
investments are included in earnings and are derived using the specific
identification method for determining the cost of the securities. There were
no material realized gains or losses on these investments during 2000. It is
the Company's intent to maintain a low-risk, liquid portfolio to take
advantage of investment opportunities, while providing a means to access such
funds if needed.
The Company's other balance sheet financial instruments as of December 31,
2000 and 1999 include cash and cash equivalents, accounts receivable, accounts
payable, and long-term debt. Because of their short maturities, the carrying
amounts of cash equivalents, accounts receivable, and accounts payable
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.
As of December 31, 2000, the Company's only off-balance sheet financial
instrument consisted of an interest rate cap agreement that was entered into
during December 2000. As of December 31, 1999, the Company's only off-balance
sheet financial instrument consisted of an interest rate collar agreement that
expired in December 2000. The fair value of the cap and collar agreements at
December 31, 2000 and 1999, respectively, based on quoted market prices, were
not significant. See Note 4 for additional discussion of the cap agreement.
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 and direct broadcast satellite
providers throughout the United States and Canada. As of December 31, 2000 and
1999, 51% and 49%, respectively, of the Company's net billed accounts
receivable was attributable to one of its significant clients, AT&T Broadband
("AT&T"). As of January 31, 2001, the Company had collected a significant
portion of the December 31, 2000 accounts receivable from AT&T.
The Company generally does not require collateral or other security to
support accounts receivable. The Company maintains an allowance for doubtful
accounts receivable based upon factors surrounding the credit risk of specific
clients, historical trends and other information. The activity in the
Company's allowance for uncollectible accounts receivable for the years ended
December 31 is as follows (in thousands):
2000 1999 1998
------ ------- -------
Balance, beginning of period....................... $2,975 $ 2,051 $ 1,394
Additions charged to expense....................... 2,791 2,021 1,724
Reductions for receivables written off............. (765) (1,097) (1,067)
------ ------- -------
Balance, end of period............................. $5,001 $ 2,975 $ 2,051
====== ======= =======
Property and Equipment. Property and equipment are recorded at cost and are
depreciated over their estimated useful lives ranging from three 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
34
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):
Useful
Lives
(years) 2000 1999
------- -------- --------
Computer equipment............................... 3 $ 37,798 $ 29,212
Leasehold improvements........................... 5-10 4,740 3,515
Operating equipment.............................. 3-5 24,836 19,551
Furniture and equipment.......................... 8 8,723 5,162
Construction in process.......................... -- 2,990 931
-------- --------
79,087 58,371
Less--accumulated depreciation................... (42,457) (31,864)
-------- --------
Property and equipment, net.................... $ 36,630 $ 26,507
======== ========
Software. Software at December 31 consists of the following (in thousands):
2000 1999
-------- --------
Acquired software........................................ $ 40,849 $ 40,849
Internally developed software............................ 2,547 2,547
-------- --------
43,396 43,396
Less--accumulated amortization........................... (39,112) (37,251)
-------- --------
Software, net.......................................... $ 4,284 $ 6,145
======== ========
Acquired software resulted from acquisitions and is stated at cost.
Amortization expense related to acquired software for the years ended December
31, 2000, 1999, and 1998 was $1.5 million, $1.5 million, and $0.6 million,
respectively.
The Company's research and development ("R&D") efforts consist of developing
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. The Company did not
capitalize any costs in 2000 or 1999, and capitalized costs of $1.4 million
for the year ended December 31, 1998.
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 internally developed software for the years ended December 31,
2000, 1999, and 1998, was $0.4 million, $0.4 million, and $0.7 million,
respectively.
Noncompete Agreements and Goodwill. Noncompete agreements resulted from
acquisitions and were amortized on a straight-line basis over the terms of the
agreements, ranging from three to five years. Amortization expense for
noncompete agreements for 1999 and 1998 was $4.2 million and $4.6 million,
respectively. The noncompete agreements were fully amortized as of November
30, 1999.
35
Goodwill at December 31 consists of the following (in thousands):
2000 1999
------- -------
Goodwill................................................... $ 6,777 $ 7,039
Less--accumulated amortization............................. (4,883) (4,387)
------- -------
Goodwill, net............................................ $ 1,894 $ 2,652
======= =======
Goodwill resulted from acquisitions and is being amortized over seven to ten
years on a straight-line basis.
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, and were fully amortized as of
November 30, 1999 and 1997, respectively. The remaining client contracts
represent cash payments and Common Stock Warrants issued to clients based upon
the number of client customers converted to and processed on the Company's
customer care and billing system. These client contracts are being amortized
ratably over the lives of the respective contracts. Amortization related to
client contracts and related intangibles for the years ended December 31,
2000, 1999, and 1998, was $4.1 million, $7.2 million, and $5.0 million,
respectively. As of December 31, 2000 and 1999, accumulated amortization for
client contracts and related intangibles was $28.9 million and $24.8 million,
respectively.
Earnings Per Common Share. The Company follows SFAS No. 128 in calculating
earnings per share ("EPS"). Basic EPS is computed by dividing income available
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 accompanying consolidated statements of income. No reconciliation of
the EPS numerators is necessary as net income is used as the numerator for all
periods presented. The reconciliation of the EPS denominators is as follows
(in thousands):
Year Ended December
31
--------------------
2000 1999 1998
------ ------ ------
Basic weighted average common shares.................... 52,204 51,675 51,198
Dilutive shares from common stock warrants............ 2,136 838 --
Dilutive shares from common stock options............. 2,340 2,147 1,793
------ ------ ------
Weighted average diluted common shares.................. 56,680 54,660 52,991
====== ====== ======
Common stock options of 0.3 million, 0.6 million, and 1.7 million shares for
2000, 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, 2000, all of the warrants were
considered exercisable.
Stock-Based Compensation. The Company accounts for its stock-based
compensation plans in accordance with 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 9 for the
required disclosures under SFAS 123.
Comprehensive Income. In 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 established standards for
reporting and display of comprehensive income and its components. The adoption
of this standard did not have any impact on the Company's net income or
stockholders' equity. The components of comprehensive income are reflected in
the accompanying consolidated statement of stockholders' equity.
36
Reclassification. Certain December 31, 1999 and 1998 amounts have been
reclassified to conform to the December 31, 2000 presentation.
Accounting Pronouncements Issued But Not Yet Effective. SFAS No. 133,
"Accounting for Derivative Instruments and for Hedging Activities", as amended
("SFAS 133"), became effective for the Company on January 1, 2001. SFAS 133
establishes accounting and reporting standards requiring every derivative
instrument, as defined, to be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Adoption of SFAS 133 in 2001 did not have a
significant effect on the Company's consolidated financial statements.
3. Segment Reporting and Description of Business
Segment information has been prepared in accordance with 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 base of
processing clients 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 roll out new
products and services to new and existing markets, such as residential
telephony, high-speed data/ISP and IP markets.
The Company derived approximately 75.8%, 78.3%, 78.0%, of its total revenues
in the years ended December 31, 2000, 1999, and 1998, respectively, from CCS
processing and related products and services. The Company generated 77.7%,
75.8%, and 77.7%, of its total revenues from U.S. cable television providers,
and 16.0%, 15.5%, and 13.0%, of its total revenues from U.S. and Canadian
direct broadcast satellite providers during the years ended December 31, 2000,
1999, and 1998, 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,
--------------------------
2000 1999 1998
-------- -------- --------
Total Revenue:
United States.................................. $391,897 $308,266 $221,778
All Other (principally, United Kingdom and
Canada)....................................... 6,998 13,896 14,862
-------- -------- --------
$398,895 $322,162 $236,640
======== ======== ========
As of December 31,
--------------------------
2000 1999 1998
-------- -------- --------
Long-Lived Assets (excludes intangible assets):
United States.................................. $ 36,299 $ 25,903 $ 23,398
All Other...................................... 331 604 1,313
-------- -------- --------
$ 36,630 $ 26,507 $ 24,711
======== ======== ========
37
Significant Clients. During the years ended December 31, 2000, 1999, and
1998, revenues from AT&T represented approximately 50.4%, 50.5%, and 37.4% of
total revenues, and revenues from AOL Time Warner Inc. and its affiliated
companies ("AOL Time Warner") represented approximately 8.3%, 10.2%, and 14.1%
of total revenues, respectively. The Company has separate processing
agreements with multiple affiliates of AOL Time Warner and provides products
and services to them under separately negotiated and executed contracts.
The Company generates a significant portion of its total revenues under its
contract with AT&T (the "AT&T Contract"), as amended. There are inherent risks
whenever this large of a percentage of total revenues is concentrated with one
client. The AT&T Contract 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, and print
and mail services. The AT&T Contract contains 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 also is
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.
4. Debt
The Company's debt at December 31 consists of the following (in thousands):
2000 1999
-------- --------
Term credit facility, due September 2002, quarterly
payments beginning June 30, 1998, ranging from $2.3
million to $13.1 million, interest at adjusted LIBOR
plus 0.50% (7.14% and 6.55% at December 31, 2000 and
1999, respectively).................................. $ 58,256 $ 81,000
Revolving credit facility, due September 2002,
interest at adjusted LIBOR plus 0.50%................ -- --
-------- --------
58,256 81,000
Less-current portion.................................. (25,436) (21,711)
-------- --------
Long-term debt, net of current maturities............. $ 32,820 $ 59,289
======== ========
The term and revolving credit facilities are included in the same debt
agreement with a major bank (the "Debt Agreement"). Interest rates for both
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, 2000 and 1999, the spread on the LIBOR rate and
prime rate was 0.50% and 0%, respectively. The Debt Agreement is
collateralized by all of the Company's assets and the stock of its
subsidiaries.
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.
Upon expiration of this collar agreement in December 2000, the Company entered
into an interest rate cap agreement with a major bank, which expires at the
maturity date of the long-term debt in September 2002. The cost of the cap
agreement was minimal. The interest rate cap is 9.0% (LIBOR) and the
underlying notional amount covered by the cap agreement was $29.1 million as
of December 31, 2000, and decreases over the term of the agreement in relation
to the scheduled principal payments on the long-term debt. There are no
amounts receivable under this cap agreement as of December 31, 2000, and the
collar and the cap agreements had no effect on the Company's interest expense
for 2000, 1999, or 1998.
The Debt Agreement requires maintenance of certain financial ratios and
contains other restrictive covenants, including restrictions on payment of
dividends, maintenance of a fixed charge coverage ratio and leverage ratio,
and restrictions on capital expenditures. As of December 31, 2000, the Company
was in compliance with all covenants. The payment of cash dividends or other
types of distributions on any class of the
38
Company's stock is restricted unless the Company's leverage ratio, as defined
in the Debt Agreement, is under 1.50. As of December 31, 2000, the leverage
ratio was 0.34.
There were no borrowings made on the revolving credit facilities during the
years ended December 31, 2000, 1999, and 1998. Under the 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,
2000, 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, 2000, all of the $40.0 million revolving
credit facility was available to the Company.
As of December 31, 2000 and 1999, unamortized deferred financing costs were
$0.5 million and $1.1 million, respectively. Deferred financing costs are
amortized to interest expense over the related term of the debt agreement
using a method that approximates the effective interest rate method. Interest
expense for the years ended December 31, 2000, 1999, and 1998 includes
amortization of deferred financing costs of approximately $0.6 million, $0.9
million, and $0.9 million, respectively.
As of December 31, 2000, scheduled maturities of the Company's long-term
debt for each of the years ending December 31 are: 2001--$25.5 million, and
2002--$32.8 million.
5. 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 that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that 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,
--------------------------
2000 1999 1998
------- ------- --------
Current:
Federal....................................... $45,720 $25,442 $ 11,574
State......................................... 5,443 3,029 1,594
Foreign....................................... (820) 1,160 (36)
------- ------- --------
50,343 29,631 13,132
------- ------- --------
Deferred:
Federal....................................... 3,924 5,792 6,592
State......................................... 467 690 908
Foreign....................................... -- (58) 1,048
------- ------- --------
4,391 6,424 8,548
------- ------- --------
Change in valuation allowance................... -- -- (61,323)
------- ------- --------
Net income tax provision (benefit).............. $54,734 $36,055 $(39,643)
======= ======= ========
Income tax benefits associated with nonqualified stock options and
disqualifying dispositions of incentive stock options reduced accrued income
taxes by $9.4 million, $4.8 million, and $2.4 million for the years ended
December 31, 2000, 1999, and 1998, respectively. Such benefits were recorded
as an increase to additional paid-in capital and are included in net cash
provided by operating activities in the accompanying consolidated statements
of cash flows.
39
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,
--------------------------
2000 1999 1998
------- ------- --------
Provision at federal rate of 35%................ $50,821 $33,575 $ 16,099
Change in valuation allowance................... -- -- (59,224)
Effective state income taxes.................... 3,872 2,415 1,625
Amortization of nondeductible goodwill.......... 225 235 781
Stock-based employee compensation............... (53) 42 362
Other........................................... (131) (212) 714
------- ------- --------
$54,734 $36,055 $(39,643)
======= ======= ========
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):
2000 1999
------- -------
Current deferred tax assets:
Accrued expenses and reserves............................ $ 3,192 $ 1,794
Deferred revenue......................................... 55 129
Other.................................................... -- 49
------- -------
$ 3,247 $ 1,972
======= =======
Noncurrent deferred tax assets (liabilities):
Purchased research and development....................... $39,373 $42,981
Software................................................. 7,289 7,052
Client contracts and related intangibles................. (2,748) (2,645)
Noncompete agreements.................................... 5,432 6,034
Property and equipment................................... (902) 125
Other.................................................... (1,113) (702)
------- -------
$47,331 $52,845
======= =======
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 an income tax benefit of $39.6
million for 1998. As of December 31, 2000, 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 over the last
several years.
6. 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, 2000, 1999, and 1998,
were approximately $4.3 million, $3.4 million, and $2.9 million, respectively.
40
Deferred Compensation Plan. The Company has a non-qualified deferred
compensation plan for certain key 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
contribution of $6,250 per year, plus a return on the deferred account balance
attributable to the individual participants. As of December 31, 2000 and 1999,
the Company has recorded a liability for this obligation of $1.4 million and
$1.1 million, respectively. The Company's expense for this plan for the years
ended December 31, 2000, 1999, and 1998, was $0.5 million, $0.4 million, and
$0.4 million, respectively. The plan is unfunded.
7. Commitments and Contingencies
Operating Leases. The Company leases certain office and production
facilities and other equipment under operating leases which run through 2010.
The leases generally are renewable and provide for the payment of real estate
taxes and certain other occupancy expenses. Future aggregate minimum lease
payments under these agreements for the years ending December 31 are as
follows: 2001--$8.3 million, 2002--$7.6 million, 2003--$7.2 million, 2004--
$5.8 million, 2005--$5.4 million, thereafter--$18.6 million.
Total rent expense for the years ended December 31, 2000, 1999, and 1998,
was approximately $7.6 million, $5.2 million, and $3.9 million, respectively.
Service Agreements. The Company has service agreements with FDC and its
subsidiaries for data processing services, communication charges and other
related computer services. FDC provides data processing and related computer
services required for the operation of the Company's CCS system and other
products.
During 2000, the Company renegotiated its data processing services agreement
with FDC and its subsidiaries. The new agreement is cancelable only for cause,
and expires June 30, 2005. The previous agreement was scheduled to expire
December 31, 2001. Under the new agreement, the Company is charged a fixed fee
plus a variable fee based on usage and/or actual costs. The total amount paid
under the service agreements for the years ended December 31, 2000, 1999, and
1998, was approximately $23.7 million, $27.1 million, and $22.1 million.
respectively. The Company believes it could obtain data processing and related
computer 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
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.
8. Stockholders' Equity
Common Stock Warrants. As of December 31, 1999, the Company had 3.0 million
Common Stock Warrants (the "Warrants") outstanding to AT&T. During the fourth
quarter of 2000, AT&T exercised its right under the Warrants to purchase 1.0
million shares of the Company's Common Stock at an exercise price of $12 per
share, for a total exercise price of $12.0 million. Immediately following the
exercise of the Warrants, the Company repurchased the 1.0 million shares at
$47.42 per share (an average of the closing price for the five-day trading
period ended October 26, 2000) for a total repurchase price of $47.4 million,
pursuant to the Company's stock repurchase program. As a result, the net cash
outlay paid to AT&T for this transaction was $35.4 million, which was paid by
the Company with available corporate funds. After this transaction, AT&T still
had Warrants to purchase up to 2.0 million additional shares of the Company's
Common Stock, with an exercise price of $12 per share. See Note 11 for
additional discussion of the Warrants.
Stock Repurchase Program. On August 4, 1999, the Company's Board of
Directors approved a stock repurchase program 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. The repurchased shares
are held as treasury shares. The shares repurchased
41
under the program (including the shares repurchased in conjunction with the
Warrant exercise discussed above) are as follows (in thousands, except per
share amounts):
2000 1999 Total
------- ------- -------
Shares repurchased.................................. 1,090 656 1,746
Total amount paid................................... $51,088 $20,242 $71,330
Weighted-average price per share.................... $ 46.87 $ 30.88 $ 40.86
See Note 11 for additional discussion of the stock repurchase program.
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, 2000, 1999, and 1998, the Company repurchased unvested shares of
18,500, zero, and 66,000, respectively, from terminated employees. The shares
repurchased are held as treasury shares. As of December 31, 2000, all shares
were fully vested and no longer subject to the repurchase option. The final
portion of the deferred compensation expense related to these shares was
recognized in 2000. The final balances of the notes receivable from employees,
which were used to finance certain of these stock purchases, were paid during
2000.
9. 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 79,350 options outstanding under the 1995 Plan as
of December 31, 2000, were fully vested.
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 5,409,763 options outstanding under the 1996 Plan as of
December 31, 2000, 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. In May 2000, upon shareholder approval, the
number of shares authorized for issuance under the Director Plan was increased
to 450,000. The 256,000 options outstanding under the Director Plan at
December 31, 2000, vest annually over two to three years.
42
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,
------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------- -------------- --------- -------------- --------- --------------
Outstanding, beginning
of year................ 5,604,822 $ 20.05 6,229,464 $ 17.23 4,152,220 $ 10.43
Granted............... 1,609,900 41.56 731,050 33.85 3,276,000 23.86
Exercised............. (971,494) 13.64 (795,117) 12.63 (540,336) 9.20
Forfeited............. (498,115) 26.73 (560,575) 17.23 (658,420) 13.89
---------- ------- --------- ------- --------- -------
Outstanding, end of
year................... 5,745,113 $ 26.58 5,604,822 $ 20.05 6,229,464 $ 17.23
========== ======= ========= ======= ========= =======
Options exercisable at
year end............... 1,410,440 $ 14.99 1,297,072 $ 12.52 913,774 $ 10.46
========== ======= ========= ======= ========= =======
Weighted average fair
value of options
granted during the
year................... $ 19.14 $ 13.04 $ 10.39
======= ======= =======
Options available for
grant.................. 3,741,890 4,603,675 1,774,150
========== ========= =========
The following table summarizes information about the Company's outstanding
stock options as of December 31, 2000:
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 79,350 4.4 $ 0.64 79,350 $ 0.64
$ 7.50 - $11.06 829,521 5.9 9.15 504,671 9.15
$11.75 - $14.88 414,990 5.9 14.47 312,390 14.46
$16.78 - $23.44 1,000,111 7.3 20.84 409,961 20.71
$23.59 - $29.94 1,523,013 8.0 26.70 25,013 24.42
$30.25 - $39.50 1,280,728 8.6 37.52 79,055 36.21
$40.12 - $60.00 617,400 9.4 47.82 -- --
--------------- --------- --- ------ --------- ------
$ 0.63 - $60.00 5,745,113 7.7 $26.58 1,410,440 $14.99
=============== ========= === ====== ========= ======
In January 2001, the Company granted 1,188,250 and 24,000 options under the
1996 Plan and Director Plan, respectively, at prices that range from $44.06 to
$51.56 per share, with such options vesting over three to four years. These
options are not reflected in the above tables as they were granted subsequent
to December 31, 2000.
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 2000, 1999, and 1998,
respectively, 30,120 shares, 34,352 shares, and 31,374 shares, have been
purchased under the plan for $1.1 million ($24.65 to $47.65 per share), $0.9
million ($18.91 to $37.08 per share) and $0.6 million ($15.62 to $33.58 per
share).
43
Stock-Based Compensation Plans. At December 31, 2000, the Company had four
stock-based compensation plans, as described above. The Company accounts for
these plans in accordance with APB Opinion No. 25, under which no compensation
expense has been recognized in 2000, 1999, and 1998.
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
and net income per share available to common stockholders for 2000, 1999, and
1998 would approximate the pro forma amounts as follows (in thousands, except
per share amounts):
Year Ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
Net income:
As reported....................................... $90,469 $59,874 $85,638
Pro forma......................................... 78,664 52,498 80,710
Diluted net income per common share:
As reported....................................... 1.60 1.10 1.62
Pro forma......................................... 1.39 0.96 1.52
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 2000, 1999, and 1998, respectively: risk-
free interest rates of 6.3%, 5.0%, and 4.9%; dividend yield of zero percent
for all years; expected lives of 4.0 years, 4.1 years, and 4.4 years; and
volatility of 50.0%, 40.0%, and 40.0%.
10. Unaudited Quarterly Financial Data
Quarter Ended
--------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(in thousands, except per share amounts)
2000:
Total revenues.................. $ 92,063 $ 96,062 $102,070 $108,700
Gross margin (exclusive of
depreciation).................. 55,777 59,844 63,712 68,025
Operating income................ 32,989 35,432 37,331 39,530
Income before income taxes...... 32,718 35,281 37,546 39,658
Income tax provision............ (12,409) (13,295) (14,118) (14,912)
Net income available to common
stockholders................... 20,309 21,986 23,428 24,746
Net income available to common
stockholders per share:
Basic.......................... 0.39 0.42 0.45 0.47
Diluted........................ 0.36 0.39 0.41 0.44
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 available to common
stockholders................... 11,582 13,493 16,061 18,738
Net income available to common
stockholders per share:
Basic.......................... 0.22 0.26 0.31 0.36
Diluted........................ 0.21 0.25 0.29 0.34
44
11. Subsequent Events
On February 28, 2001, AT&T exercised its rights under the Warrants to
purchase the remaining 2.0 million shares of the Company's Common Stock at an
exercise price of $12 per share, for a total exercise price of $24.0 million.
Immediately following the exercise of the Warrants, the Company repurchased
the 2.0 million shares at $37.00 per share (approximates the closing price on
February 28, 2001) for a total repurchase price of $74.0 million, pursuant to
the Company's stock repurchase program. As a result, the net cash outlay to be
paid to AT&T for this transaction is $50.0 million. The Company expects to pay
this amount with available corporate funds in March 2001. After this
transaction, AT&T no longer has any warrants or other rights to purchase the
Company's Common Stock.
During February 2001, the Company purchased an additional 0.28 million
shares of its Common Stock on the open market for $11.2 million (weighted
average price of $39.98). The amounts were paid with available corporate
funds. The shares repurchased under the Company's stock repurchase program as
of February 28, 2001, including the 2.0 million shares repurchased as part of
the AT&T Warrant exercise discussed above, totaled 4.03 million shares at a
total cost of $156.5 million (weighted-average price of $38.88 per share).
45
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 26.
(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 48.
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
Form 8-K dated October 2, 2000, under Item 5, Other Events, was filed
with the Securities and Exchange Commission which included a press release
dated September 28, 2000. The press release announced that the Company had
received a demand for arbitration from AT&T Broadband relating to a Master
Subscriber Management System Agreement the companies entered into in 1997.
Form 8-K dated October 11, 2000, under Item 5, Other Events, was filed
with the Securities and Exchange Commission which included a press release
dated October 10, 2000. The press release announced (i) the dismissal with
prejudice of the previously reported demand for arbitration from AT&T and
(ii) the amendment of the Master Subscriber Management System Agreement
between CSG Systems, Inc. and AT&T Broadband.
46
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 30, 2001
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 30, 2001
______________________________________ Directors and Chief
Neal C. Hansen Executive Officer
(Principal Executive
Officer)
/s/ John P. Pogge President, Chief Operating March 30, 2001
______________________________________ Officer and Director
John P. Pogge
/s/ Peter E. Kalan Vice President and Chief March 30, 2001
______________________________________ Financial Officer
Peter E. Kalan (Principal Financial
Officer)
/s/ Randy R. Wiese Vice President and March 30, 2001
______________________________________ Controller (Principal
Randy R. Wiese Accounting Officer)
/s/ George F. Haddix Director March 30, 2001
______________________________________
George F. Haddix
/s/ Royce J. Holland Director March 30, 2001
______________________________________
Royce J. Holland
/s/ Janice Obuchowski Director March 30, 2001
______________________________________
Janice Obuchowski
/s/ Bernard W. Reznicek Director March 30, 2001
______________________________________
Bernard W. Reznicek
/s/ Rockwell A. Schnabel Director March 30, 2001
______________________________________
Rockwell A. Schnabel
/s/ Frank V. Sica Director March 30, 2001
______________________________________
Frank V. Sica
47
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2.19(3)* Restated and Amended CSG Master Subscriber Management System
Agreement between CSG Systems, Inc. and TCI Cable Management
Corporation dated August 10, 1997
2.19A(5)* 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(6)* 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(7) 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(7)* 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(7) 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(7)* 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(8)* 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
2.19H(9)* 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(10)* 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(11)* 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(12)* 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
2.19L(13)* Thirty-Seventh, Fortieth, Forty-Fourth and Forty-Fifth Amendments
to Restated and Amended CSG Master Subscriber Management System
Agreement between CSG Systems, Inc. and TCI Cable Management
Corporation
2.19M(15)* Forty-Ninth Amendment to Restated and Amended CSG Master Subscriber
Management System Agreement between CSG Systems, Inc. and AT&T
Broadband Management Corporation dated October 10, 2000
2.19N* Forty-Sixth, Forty-Eighth, Fiftieth and Fifty-Second Amendments to
Restated and Amended CSG Master Subscriber Management System
Agreement between CSG Systems, Inc. and AT&T Broadband Management
Corporation
48
Exhibit
Number Description
------- -----------
2.20(3) 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(3) Contingent Warrant to Purchase Common Stock between CSG Systems
International, Inc. and TCI Technology Ventures, Inc., dated
September 19, 1997
2.22(3) Royalty Warrant to Purchase Common Stock between CSG Systems
International, Inc. and TCI Technology Ventures, Inc., dated
September 19, 1997
2.23(3) Registration Rights Agreement between CSG Systems International,
Inc. and TCI Technology Ventures, Inc., dated September 19, 1997
2.24(3) 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(4) 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(8) 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
2.27(13) Third Amendment to Loan Agreement among CSG Systems, Inc. and CSG
Systems International, Inc. as co-borrowers, and certain lenders
and Paribas, as Agent, dated January 24, 2000
3.01(1) Restated Certificate of Incorporation of the Company
3.02(2) Restated Bylaws of CSG Systems International, Inc.
3.03(2) 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 CSG Employee Stock Purchase Plan
10.03(10) CSG Systems International, Inc. 1996 Stock Incentive Plan
10.14(8) Employment Agreement with Neal C. Hansen, dated November 17, 1998
10.14A(15) First Amendment to Employment Agreement with Neal C. Hansen, dated
June 30, 2000
10.15(4) 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
10.39(12) CSG Systems, Inc. Wealth Accumulation Plan, as amended November 16,
1999
10.40(14)* Second Amended and Restated Services Agreement between First Data
Technologies, Inc. and CSG Systems, Inc., dated April 1, 2000
10.44(14) CSG Systems International, Inc. Stock Option Plan for Non-Employee
Directors
10.45(8) Employment Agreement with John P. Pogge, dated November 17, 1998
10.46(8) Employment Agreement with Edward Nafus, dated November 17, 1998
10.47(15) Employment Agreement with J. Richard Abramson, dated August 17,
2000 21.01 Subsidiaries of the Company
21.01 Subsidiaries of the Company
23.01 Consent of Arthur Andersen LLP
49
Exhibit
Number Description
------- -----------
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 Quarterly Report on Form 10-Q for the period ended June 30,
1997.
(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on Form 8-K dated October 6, 1997.
(4) 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.
(5) 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.
(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 June 30,
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 September
30, 1998.
(8) 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.
(9) 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.
(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 June 30,
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 September
30, 1999.
(12) 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, 1999.
(13) 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,
2000.
(14) 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,
2000.
(15) 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, 2000.
* 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