Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

OR

For the transition period from                      to                     

Commission file number 0-27512

CSG SYSTEMS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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)

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 check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES  x    NO  ¨

Shares of common stock outstanding at May 4, 2005: 50,358,708.

Table of Contents

CSG SYSTEMS INTERNATIONAL, INC.

FORM 10-Q For the Quarter Ended March 31, 2005

INDEX

2

Table of Contents

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Table of Contents

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements as of March 31, 2005 and December 31, 2004, and for the three months ended March 31, 2005 and 2004, have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and pursuant to the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the financial position and operating results have been included. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the SEC (the “Company’s 2004 10-K”). The results of operations for the three months ended March 31, 2005, are not necessarily indicative of the expected results for the entire year ending December 31, 2005.

Postage. The Company passes through to its clients the cost of postage that is incurred on behalf of those clients, and typically requires an advance payment on expected postage costs. These advance payments are included in “client deposits” in the accompanying Condensed Consolidated Balance Sheets and are classified as current liabilities regardless of the contract period. The Company nets the cost of postage against the postage reimbursements, and includes the net amount in processing and related services revenues. The total cost of postage incurred on behalf of clients that has been netted against processing and related services revenues for the three months ended March 31, 2005 and 2004 was $45.2 million and $44.0 million, respectively.

Stock-Based Compensation Expense. At March 31, 2005, the Company had five stock-based compensation plans. The Company recorded stock-based compensation expense of $4.3 million and $4.1 million, respectively, for the three months ended March 31, 2005 and 2004.

Because the Company continues to follow Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations (“APB 25”) for all stock-based awards granted prior to January 1, 2003, and follows Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), using the prospective method of transition as outlined in SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure — An Amendment of FASB Statement No. 123” (“SFAS 148”) for stock-based awards granted, modified, or settled on or after January 1, 2003, compensation expense recorded in the Company’s accompanying Condensed Consolidated Statements of Income is less than what would have been recognized if the fair value based method under SFAS 123 had been applied to all awards for all periods. Had compensation expense for the Company’s five stock-based compensation plans been based on the fair value at the grant dates for awards under those plans for all periods, consistent with the methodology of SFAS 123, the Company’s net income and net income per share available to common stockholders for the three months ended March 31, 2005 and 2004, would approximate the pro forma amounts as follows (in thousands, except per share amounts):

6

Table of Contents

Cash and Cash Equivalents. In the first quarter of 2005, the Company reclassified its holdings in auction rate securities from cash equivalents to short-term investments, based on further interpretative guidance on the underlying characteristics of such instruments. Prior period amounts for cash and cash equivalents and short-term investments have been reclassified to conform to the March 31, 2005 presentation. As a result, as of December 31, 2004, March 31, 2004 and December 31, 2003, cash and cash equivalents amounts were decreased and short-term investments amounts were increased by $7.2 million, $5.6 million and $5.0 million, respectively. The change in classification had no impact on the Company’s previously reported current assets, net income, cash flows from operating activities, or changes in stockholders’ equity for any period.

Short-term Investments and Other Financial Instruments. The Company’s balance sheet financial instruments as of March 31, 2005 and December 31, 2004 include cash and cash equivalents, short-term investments, 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. Short-term investments are considered “available-for-sale” in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and thus are stated at fair value in the accompanying Condensed Consolidated Financial Statements. As of March 31, 2005 and December 31, 2004, the fair value of the Company’s long-term debt, based upon quoted market prices, was approximately $206 million and $232 million, respectively. As of March 31, 2005 and December 31, 2004, the fair value of the contingent interest feature of the Company’s long-term debt, considered an embedded derivative, was $0.3 million and $0.1 million, respectively. The Company does not utilize any derivative financial instruments for purposes of managing the market risks related to its financial instruments.

Accounting Pronouncements Issued But Not Yet Effective. In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). This statement is a revision of SFAS 123, and supersedes APB 25 and its related implementation guidance. SFAS 123R establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

Under SFAS 123R, the Company was required to adopt SFAS 123R no later than July 1, 2005. However, on April 14, 2005, the SEC announced the adoption of a new rule that amended the compliance dates for SFAS 123R. As a result, the Company is required to implement SFAS 123R no later than January 1, 2006. However, the new rule also provides that the Company may adopt SFAS 123R earlier. The Company has not determined the date (the “Effective Date”) when it will adopt SFAS 123R. When the Company does adopt SFAS 123R, it expects to use the modified prospective method of transition. Under the modified prospective application, SFAS 123R will apply to new awards and to awards modified, repurchased, or cancelled after the Effective Date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the Effective Date will be recognized as the requisite service is rendered on or after the Effective Date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro forma disclosures under SFAS 123. The Company does not expect the adoption of SFAS 123R to have a significant impact to its consolidated financial statements.

Reclassification. Certain prior period amounts have been reclassified to conform to the March 31, 2005 presentation.

7

Table of Contents

Stock Repurchase Program. The Company has a stock repurchase program, approved by the Board of Directors, authorizing the Company to purchase up to 15 million shares of its common stock from time-to-time as market and business conditions warrant (the “Stock Repurchase Program”). During the first quarter of 2005, the Company repurchased 1.3 million shares of its common stock under the Stock Repurchase Program for $23.0 million (weighted-average price of $17.88 per share). Including these shares, the total shares repurchased under the Stock Repurchase Program since its inception in August 1999 is 10.6 million shares, at a total repurchase price of $275.6 million (a weighted-average price of $25.98 per share.) As of March 31, 2005, the remaining number of shares authorized for repurchase under the Stock Repurchase Program is 4.4 million shares. The Stock Repurchase Program does not have an expiration date. The shares repurchased under the Stock Repurchase Program are being held as treasury shares.

In April 2005, the Company established a formal plan with a financial institution that complies with the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Rule 10b5-1 Plan”) to repurchase shares of the Company’s common stock on the open market. Any shares repurchased under the Rule 10b5-1 Plan are counted towards the 15 million share limit authorized under the Stock Repurchase Program. The Rule 10b5-1 Plan supplements any stock repurchases the Company may decide to purchase under the existing terms of its Stock Repurchase Program. In effect, the Rule 10b5-1 Plan facilitates achieving stock buyback objectives more readily by permitting the execution of trades during periods that would otherwise be prohibited by internal trading policies. The maximum quarterly repurchase limitation established by the Company under the Rule 10b5-1 Plan is $15 million. Subsequent to March 31, 2005 through May 6, 2005, the Company has repurchased approximately 113,000 shares under the Stock Repurchase Program at a total purchase price of approximately $2.0 million (a weighted-average price of $17.64 per share).

Stock Repurchases for Tax Withholdings. In addition to the above mentioned stock repurchases and outside of the Stock Repurchase Program, during the first quarter of 2005, the Company repurchased for $0.8 million and then cancelled approximately 45,000 shares of common stock from an executive officer in connection with minimum tax withholding requirements resulting from the vesting of restricted stock under the Company’s stock incentive plans.

Stock Based Award Grants. In January 2005, the Company granted 325,000 shares of restricted stock at no cost to key members of executive management at a market value on date of grant of $17.48 per share. The shares vest at various increments over two to four years. Certain shares of the restricted stock become fully vested upon a change in control of the Company and certain shares have acceleration of vesting provisions related to termination of employment. There are no restrictions on these shares other than the passage of time.

In February 2005, the Company granted approximately 288,000 shares of restricted stock and approximately 22,000 stock options to key members of management. The restricted stock was granted at no cost to the employees at a market value on date of grant of $17.23 per share. The stock options were granted with exercise prices ranging from $17.23 to $17.74 per share. The equity awards vest over four years and have no restrictions placed upon them other than the passage of time.

In March 2005, the Company granted 70,000 shares of restricted stock at no cost to key members of executive management at a market value on date of grant of $16.04 per share. The restricted stock awards will vest ratably over three years from the date of grant and have no restrictions placed upon them other than the passage of time. The restricted stock awards have acceleration of vesting provisions upon an involuntary termination of employment without cause after a change of control.

8

Table of Contents

Modifications to Stock Based Awards. During the first quarter of 2005, the Company modified the terms of approximately 70,000 shares of unvested restricted stock, and 75,000 unvested stock options held by key members of executive management. The terms of the restricted stock awards were modified to include a provision which allows for full vesting of any unvested restricted stock upon involuntary termination of employment without cause. Unless such an event occurs, the restricted stock will continue to vest as set forth in the original terms of the agreements. The terms of the stock option awards were modified to accelerate vesting of such awards to January 1, 2006 upon continuous employment with the Company to such date.

Proposed Stock Incentive Plan. On February 24, 2005, the Company’s Board of Directors adopted, subject to the approval of the Company’s stockholders, the 2005 Stock Incentive Plan (the “2005 Plan”). On May 27, 2005, the Company will hold its annual meeting of stockholders, at which time the stockholders will vote on the proposed 2005 Plan. The 2005 Plan will replace one of the Company’s existing stock incentive plans, the 1996 Stock Incentive Plan (the “1996 Plan”). If the 2005 Plan is approved by the Company’s stockholders and becomes effective, no further grants may be made under the 1996 Plan, but any stock awards which are outstanding under the 1996 Plan will remain in effect in accordance with their respective terms. If the Company’s stockholders do not approve the 2005 Plan, the 1996 Plan will remain in effect until, by its terms, it terminates for purposes of further grants on December 31, 2005. Under the proposed 2005 Plan, shares may be granted to officers and other key employees of the Company and its subsidiaries and to non-employee directors of the Company in the form of stock options, stock appreciation rights, performance unit awards, restricted stock awards, or stock bonus awards. The aggregate number of shares of common stock which would be available for issuance pursuant to the 2005 Plan would be 12.4 million, which may be authorized and unissued shares or treasury shares. Shares granted under the 2005 Plan in the form of a performance unit award, restricted stock award, or stock bonus award would be counted toward the aggregate number of shares of common stock available for issuance under the 2005 Plan as two shares for every one share granted or issued in payment of such award. At March 31, 2005, 4,892,861 shares of the Company’s common stock were available for grants under the 1996 Plan.

Calculation of Earnings Per Common Share. Earnings per common share (“EPS”) has been computed in accordance with SFAS No. 128, “Earnings Per Share”. Basic EPS is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding during the period (the denominator). Diluted EPS is consistent with the calculation of basic EPS while considering the effect of potentially dilutive common shares outstanding during the period. Unvested shares of restricted stock are not included in the basic EPS calculation. Basic and diluted EPS are presented on the face of the Company’s Condensed Consolidated Statements of Income.

No reconciliation of the basic and diluted EPS numerators is necessary for the three months ended March 31, 2005 and 2004, as net income is used as the numerator for each period. The reconciliation of the EPS denominators is included in the following table (in thousands).

Potentially dilutive common shares related to stock options and unvested restricted stock of 1.4 million and 2.0 million for the three months ended March 31, 2005 and 2004, respectively, are excluded in calculating diluted EPS as their effect is anti-dilutive.

The Company calculates the dilution related to the Convertible Debt Securities using the “treasury stock” method. Under the treasury stock method, the Company has experienced no dilution related to the Convertible Debt Securities since their issuance in June 2004, as the Company’s average stock price has not exceeded the current

9

Table of Contents

effective conversion price of $26.77 per share during any period. In future periods, the Convertible Debt Securities will impact the Company’s diluted earnings per share calculation only in those periods in which the Company’s average stock price exceeds the current effective conversion price of $26.77 per share.

The Company’s components of comprehensive income were as follows (in thousands):

The Company serves its clients through its two operating segments: the Broadband Services Division (the “Broadband Division”) and the Global Software Services Division (the “GSS Division”). During the first quarter of 2005, the Company reorganized certain components of its operating segments as a result of changes in the Company’s management and internal reporting structure. The reorganization consisted primarily of moving the plaNet Consulting (“plaNet”) division, including the Integrated Customer Management System (“ICMS”) assets acquired by the Company in 2002 from IBM, from the GSS Division to the Broadband Division. PlaNet was acquired in 2001 and its current business model includes providing professional and consulting services to Broadband Division clients and managing the ICMS service bureau business. The reorganization was done after evaluating the business plans and relationship of plaNet with the Broadband Division, along with how the plaNet business has evolved and how it is expected to continue developing a business model based more on recurring revenues. The reorganization resulted in approximately $6.6 million of revenue and $9.2 million of segment operating expenses moving from the GSS Division to the Broadband Division in the three months ended March 31, 2005, and $5.4 million of revenue and $8.1 million of segment operating expenses moving from the GSS Division to the Broadband Division in the three months ended March 31, 2004.

The Company’s operating segment information and corporate overhead costs, reflecting this reorganization, are presented below (in thousands, except percentages). Information for the three months ended March 31, 2004 has been restated to conform to the new reporting structure.

10

Table of Contents

Reconciling information between reportable segment contribution margin and the Company’s consolidated totals is as follows (in thousands):

Primarily all of the $0.7 million restructuring charges recorded in the three months ended March 31, 2005 related to the GSS Division. Of the $2.2 million restructuring charges recorded in the three months ended March 31, 2004,

11

Table of Contents

$0.3 million related to the Broadband Division, $1.2 million related to the GSS Division, and $0.7 million related to Corporate.

The Company’s long-term debt as of March 31, 2005 and December 31, 2004 consists of the Convertible Debt Securities. As of March 31, 2005: (i) none of the contingent conversion features have been achieved, and thus, the Convertible Debt Securities are not convertible by the holders at this time; and (ii) the Company is in compliance with the provisions of the bond indenture and the registration rights agreement related to the Convertible Debt Securities.

As of March 31, 2005: the Company (i) had made no borrowings under its $100 million 2004 Revolving Credit Facility; (ii) was in compliance with the financial ratio and other covenants of the 2004 Revolving Credit Facility; and (iii) had the entire $100 million of the Revolving Credit Facility available to be drawn upon.

Reorganization of Reporting Structure for Goodwill Impairment Assessment. In conjunction with the Company’s change in reporting structure for its operating segments as discussed in Note 6 above, the Company changed the components of its reporting units for purposes of its goodwill impairment assessments under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Previously, the plaNet component was aggregated with the GSS Division and considered one reporting unit under the GSS Division. As a result of this reorganization, the plaNet component is now aggregated with the Broadband Division and considered one reporting unit under the Broadband Division as these components are considered to have similar economic characteristics. As a result, $19.3 million of goodwill was moved from the GSS Division reporting unit to the Broadband Division reporting unit during the first quarter of 2005. The $19.3 million represents the historical carrying value of goodwill related to the plaNet and ICMS businesses.

The changes in the carrying amount of goodwill by reporting unit for the three months ended March 31, 2005 was as follows (in thousands):

12

Table of Contents

Other Intangible Assets. The Company’s intangible assets subject to amortization consist of client contracts and software. As of March 31, 2005 and December 31, 2004 the carrying values of these assets were as follows (in thousands):

The aggregate amortization related to intangible assets for the three months ended March 31, 2005 and 2004 was $6.8 million and $5.6 million, respectively. Based on the December 31, 2004 net carrying value of these intangible assets, the estimated aggregate amortization for each of the five succeeding fiscal years ending December 31 are: 2005 – $26.5 million; 2006 – $23.6 million; 2007 – $15.6 million; 2008 – $9.4 million; and 2009 – zero.

Carrying Value of the GSS Division’s Intangible Assets. As of March 31, 2005, there was approximately $18 million in net intangible assets (primarily software) and approximately $198 million of goodwill that was attributable to the GSS Division, which included the assets from the Kenan Business and Davinci acquisitions. Key drivers of the value assigned to these acquisitions are the global telecommunications industry client base and the software assets acquired. To date, the GSS Division has not achieved the financial performance that the Company had originally anticipated due to many factors, including the economic downtown experienced within the global telecommunications industry since the Company acquired these assets. The Company’s current business plan anticipates substantial revenue and earnings growth for the GSS Division over the next several years. The Company will continue to monitor the carrying value of the GSS Division’s goodwill and other long-lived intangible assets as it executes on its business plan to achieve this revenue and earnings growth. The Company expects to perform the GSS Division goodwill impairment test (the Company’s annual required test) in the third quarter of 2005, unless events occur which would require an analysis earlier than that date. If the Company fails to execute to its business plan (due to market conditions or other business reasons), and as a result, the Company materially revises its GSS Division financial projections, it is reasonably possible that a review for impairment of the GSS Division’s goodwill and/or related long-lived intangible assets in the future may indicate that these assets are impaired, and the amount of impairment could be substantial.

Carrying Value of Broadband Division’s Intangible Assets. As of March 31, 2005, the Broadband Division had approximately $52 million in net intangible assets (primarily client contracts). Of this net intangible asset amount, approximately $42 million relates to the Comcast Contract. In addition, at March 31, 2005, the Broadband Division had approximately $20 million of goodwill, which included assets from the ICMS and plaNet Consulting acquisitions.

Cost Reduction Initiatives and Restructuring Charges. Since the third quarter of 2002, the Company has implemented several cost reduction initiatives, mainly due to the economic decline in the global telecommunications industry and the uncertainty in the timing and the extent of any economic turnaround within the industry, and due to the reduction in revenues resulting from the Comcast arbitration ruling received in October 2003. As a result of these cost reduction initiatives, the Company has recorded restructuring charges related to involuntary employee terminations and various facility abandonments. The accounting for facility abandonments requires significant judgments in determining the restructuring charges, primarily related to the assumptions regarding the timing and the amount of any potential sublease arrangements for the abandoned facilities. The Company continually evaluates its assumptions, and adjusts the related facility abandonment reserves based on the revised assumptions at that time. In addition, the Company continually evaluates ways to reduce its operating expenses through new restructuring opportunities, including utilization of its workforce and current operating facilities.

During the three months ended March 31, 2005 and 2004, the Company recorded restructuring charges of $0.7 million and $2.2 million, respectively, related to its cost reduction initiatives. The restructuring costs have been reflected as a separate line item on the accompanying Condensed Consolidated Statements of Income. The components of the restructuring charges are as follows (in thousands):

13

Table of Contents

Restructuring Reserves. The activity in the business restructuring reserves during the three months ended March 31, 2005 is as follows (in thousands):

Of the $6.7 million business restructuring reserve balance as of March 31, 2005, $5.1 million was included in current liabilities and $1.6 million was included in non-current liabilities. As of March 31, 2005, the present value of the estimated proceeds from any sublease agreements used in the calculation of the business restructuring reserves was approximately $13 million, of which approximately $4 million related to future sublease proceeds from signed noncancelable sublease agreements.

Executive Retirement Benefits. In December 2004, the Company announced its Chairman of the Board of Directors (the “Chairman”) and then Chief Executive Officer (“CEO”) would retire on June 30, 2005. In consideration for certain changes to the Chairman and CEO’s employment agreement and for post-termination consulting services to be provided, the Company agreed to pay the Chairman and CEO a total of $9.6 million, $5.6 million which will be paid on January 2, 2006, $2.0 million of which will be paid on July 1, 2006, and $2.0 million of which will be paid on January 2, 2007. The Company will record expense of $9.0 million related to his retirement package over the related service period, which began in December 2004 and ends upon his retirement on June 30, 2005. Approximately $0.5 million of this expense was recorded in the fourth quarter of 2004, approximately $4.2 million was recorded in the first quarter of 2005, and approximately $4.3 million will be recorded in the second quarter of 2005. The remainder of the $0.6 million expense will be recorded over the period from the retirement date through the final payment date of January 2007.

Product Warranties. The Company generally warrants that its products and services will conform to published specifications, or to specifications provided in an individual client arrangement, as applicable. The typical warranty period is 90 days from delivery of the product or service. The typical remedy for breach of warranty is to correct or replace any defective deliverable, and if not possible or practical, the Company will accept the return of the defective deliverable and refund the amount paid to the Company under the client arrangement that is allocable to the defective deliverable. Historically, the Company has incurred minimal warranty costs, and as a result, does not maintain a warranty reserve.

Product Indemnifications. The Company’s software arrangements generally include a product indemnification provision that will indemnify and defend a client in actions brought against the client that claim the Company’s products infringe upon a copyright, trade secret, or valid patent. Historically, the Company has not incurred any significant costs related to product indemnification claims, and as a result, does not maintain a reserve for such exposure.

Contingent Consideration. Contingent consideration represents an arrangement to provide additional consideration in a business combination to the seller if contractually specified conditions related to the acquired entity are achieved. In the Davinci Business Acquisition, which closed in December 2002, the stock purchase agreement included contingent purchase provisions providing the sellers of Davinci the opportunity to receive additional

14

Table of Contents

purchase price amounts in 2003 through 2006. During 2005 and 2006, the sellers of Davinci are eligible to receive contingent purchase price amounts of up to $1.8 million. Any contingent purchase price amounts will be recorded as additional purchase price when the events associated with the contingencies occur. As of March 31, 2005 the Company had not accrued any amount for the 2005 portion of the contingent consideration as the outcome of the contingency is not determinable beyond a reasonable doubt.

Claims for Company Non-performance. The Company’s arrangements with its clients typically cap the Company’s liability for breach to a specified amount of the direct damages incurred by the client resulting from the breach. From time-to-time, the Company’s arrangements may also include provisions for possible liquidated damages or other financial remedies for non-performance by the Company, or in the case of certain of the Company’s out-sourced customer care and billing solutions, provisions for damages related to service level performance requirements. The service level performance requirements typically relate to system availability and timeliness of service delivery. As of March 31, 2005, the Company believes it had adequate reserves to cover any reasonably anticipated exposure as a result of the Company’s nonperformance for any past or current arrangements with its clients.

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, the Company is not presently a party to any material pending or threatened legal proceedings.

15

Table of Contents

CSG SYSTEMS INTERNATIONAL, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(in thousands, except per share amounts and percentages)