<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 47-0783182
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5251 DTC PARKWAY, SUITE 625
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
--- ---
Shares of common stock outstanding at May 9, 1997: 25,483,385.
1
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CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
PAGE NO.
----------
<S> <C> <C>
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996............................................... 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1996................................ 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996....................................... 5
Notes to Condensed Consolidated Financial Statements................ 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 8 - 11
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................... 12
Signatures.......................................................... 13
Index to Exhibits................................................... 14
</TABLE>
2
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS (unaudited)
------
Current Assets:
Cash and cash equivalents............................................................. $ 5,792 $ 6,134
Accounts receivable-
Trade-
Billed, net of allowance of $841 and $819........................................ 32,417 33,141
Unbilled......................................................................... 2,221 5,220
Other................................................................................ 1,629 1,342
Deferred income taxes................................................................. 114 45
Other current assets.................................................................. 2,849 2,574
----------- -----------
Total current assets................................................................. 45,022 48,456
----------- -----------
Property and equipment, net of depreciation of $13,028 and $10,664.................... 14,138 13,093
Investment in discontinued operations................................................. 732 732
Software, net of amortization of $25,904 and $22,924.................................. 13,845 13,629
Noncompete agreements and goodwill, net of amortization of $14,289 and $12,572........ 23,814 25,730
Client contracts and related intangibles, net of amortization of $9,551 and $8,528.... 8,729 9,752
Deferred income taxes................................................................. 2,182 1,356
Other assets.......................................................................... 2,419 2,162
----------- -----------
Total assets........................................................................ $ 110,881 $ 114,910
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt.................................................. $ 10,000 $ 10,000
Customer deposits..................................................................... 6,605 6,450
Trade accounts payable................................................................ 10,884 12,620
Accrued liabilities................................................................... 5,391 8,177
Deferred revenue...................................................................... 5,998 5,384
Accrued income taxes.................................................................. 568 945
Other current liabilities............................................................. 419 450
----------- -----------
Total current liabilities............................................................ 39,865 44,026
----------- -----------
Long-term debt, net of current maturities.............................................. 20,000 22,500
Deferred revenue....................................................................... 8,148 6,420
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;
25,492,332 shares and 25,488,876 shares issued and outstanding....................... 255 255
Additional paid-in capital............................................................ 111,440 111,367
Deferred employee compensation........................................................ (997) (1,207)
Notes receivable from employee stockholders........................................... (861) (861)
Accumulated translation adjustments................................................... 30 573
Accumulated deficit................................................................... (66,999) (68,163)
----------- -----------
Total stockholders' equity........................................................... 42,868 41,964
----------- -----------
Total liabilities and stockholders' equity........................................... $ 110,881 $ 114,910
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
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CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended
--------------------------
March 31, March 31,
1997 1996
---------- ----------
<S> <C> <C>
Total revenues................................................ $ 38,582 $ 26,757
Expenses:
Cost of revenues:
Direct costs................................................ 18,581 12,831
Amortization of acquired software........................... 2,884 2,750
Amortization of client contracts and related intangibles.... 1,023 1,023
---------- ----------
Total cost of revenues.................................. 22,488 16,604
---------- ----------
Gross margin.................................................. 16,094 10,153
---------- ----------
Operating expenses:
Research and development.................................... 4,855 4,556
Selling and marketing....................................... 2,341 1,420
General and administrative:
General and administrative................................. 4,129 3,282
Amortization of noncompete agreements and goodwill......... 1,731 1,420
Stock-based employee compensation.......................... 202 3,277
Depreciation................................................ 1,509 1,190
---------- ----------
Total operating expenses................................ 14,767 15,145
---------- ----------
Operating income (loss)....................................... 1,327 (4,992)
---------- ----------
Other income (expense):
Interest expense............................................ (641) (1,740)
Interest income............................................. 211 229
Other....................................................... 267 -
---------- ----------
Total other............................................. (163) (1,511)
---------- ----------
Income (loss) before income taxes and extraordinary item...... 1,164 (6,503)
Income tax (provision) benefit............................... - -
---------- ----------
Income (loss) before extraordinary item....................... 1,164 (6,503)
Extraordinary loss from early extinguishment of debt......... - (1,260)
---------- ----------
Net income (loss)............................................. $ 1,164 $ (7,763)
========== ==========
Net income (loss) per common and equivalent share:
Income (loss) before extraordinary item...................... $ 0.05 $ (0.28)
Extraordinary loss from early extinguishment of debt......... - (0.05)
---------- ----------
Net income (loss)............................................ $ 0.05 $ (0.33)
========== ==========
Weighted average common and equivalent shares................. 25,489,258 23,448,833
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Three months ended
--------------------
March 31, March 31,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................... $ 1,164 $(7,763)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation...................................................... 1,509 1,190
Amortization...................................................... 5,758 5,384
Stock-based employee compensation................................. 202 3,277
Extraordinary loss from early extinguishment of debt.............. - 1,260
Changes in operating assets and liabilities:
Trade accounts receivable, net................................... 3,566 (773)
Other receivables................................................ (287) 1,153
Deferred income taxes............................................ (895) (613)
Other current and noncurrent assets.............................. (653) (397)
Customer deposits................................................ 155 448
Trade accounts payable and accrued liabilities................... (4,887) 1,923
Deferred revenue................................................. 2,449 2,977
Other current liabilities........................................ (31) (51)
-------- -------
Net cash provided by operating activities....................... 8,050 8,015
-------- -------
Cash flows from investing activities:
Purchases of property and equipment, net............................ (2,540) (732)
Additions to software............................................... (3,196) -
Net investment in discontinued operations........................... - 2,000
-------- -------
Net cash provided by (used in) investing activities............. (5,736) 1,268
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.............................. 87 44,794
Purchase and cancellation of common stock........................... (6) (8)
Payment of dividends for redeemable convertible preferred stock..... - (4,497)
Payments on long-term debt.......................................... (2,500) (45,024)
-------- -------
Net cash used in financing activities........................... (2,419) (4,735)
-------- -------
Effect of exchange rate fluctuations on cash......................... (237) -
-------- -------
Net increase (decrease) in cash and cash equivalents................. (342) 4,548
Cash and cash equivalents, beginning of period....................... 6,134 3,603
-------- -------
Cash and cash equivalents, end of period............................. $ 5,792 $ 8,151
======== =======
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for-
Interest........................................................... $ 532 $ 1,737
Income taxes....................................................... $ 1,272 $ (854)
Supplemental disclosure of noncash financing activities:
During March 1996, the Company converted 8,999,999 shares of redeemable convertible preferred stock
into 17,999,998 shares of common stock.
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements at March 31, 1997, and for the
three months then ended are unaudited and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim period. 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, 1996, filed with the Securities and
Exchange Commission. The results of operations for the three months ended March
31, 1997, are not necessarily indicative of the results for the entire year
ending December 31, 1997.
2. STOCKHOLDERS' EQUITY
The Company completed an initial public offering (IPO) of its common stock in
March 1996. The Company sold 3,335,000 shares of common stock at an initial
public offering price of $15 per share, resulting in net proceeds to the
Company, after deducting underwriting discounts and offering expenses, of
approximately $44,794,000. As of the closing of the IPO, all of the 8,999,999
outstanding shares of redeemable convertible Series A Preferred Stock were
automatically converted into 17,999,998 shares of common stock.
3. NET INCOME PER SHARE
Net income per common and equivalent share is based on the weighted average
number of shares of common stock and common equivalent shares outstanding, which
includes redeemable convertible Series A Preferred Stock prior to the conversion
into common stock in March 1996. Common equivalent shares related to stock
options have been excluded from the weighted average number of shares as the
dilutive effect is not significant.
4. EXTRAORDINARY LOSS
The Company used $40.3 million of the IPO proceeds to repay a portion of
outstanding bank indebtedness (the Indebtedness). Upon repayment of the
Indebtedness, the Company recorded an extraordinary loss of $1.3 million for the
write-off of deferred financing costs.
5. BYTEL ACQUISITION
In June 1996, the Company acquired all of the outstanding capital stock of Bytel
Limited (Bytel), a United Kingdom-based company which provides customer
management software systems to the cable and telecommunications industries in
the United Kingdom. The acquisition was accounted for using the purchase method
of accounting. The Company's condensed consolidated financial statements
include Bytel's results of operations since the acquisition date.
6
<PAGE>
6. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128),
which specifies the computation, presentation and disclosure requirements for
earnings per share (EPS). SFAS No. 128 is effective for periods ending after
December 15, 1997, and requires retroactive restatement of EPS for all prior
periods presented. The statement replaces the current "primary earnings per
share" computation with a "basic earnings per share" and redefines the "dilutive
earnings per share" computation. Adoption of the statement is not expected to
have a significant effect on the Company's reported EPS.
7
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated (in thousands). The
Company acquired Bytel Limited (Bytel) on June 28, 1996. The results of Bytel's
operations for the three months ended March 31, 1997, are included in the
following table and considered in the discussion of the Company's operations
that follow:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
1997 1996
------------------- ---------------------
% OF % OF
AMOUNT REVENUE AMOUNT REVENUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues.................................................... $38,582 100.0% $26,757 100.0%
Expenses:
Cost of revenues:
Direct costs................................................... 18,581 48.2 12,831 48.0
Amortization of acquired software.............................. 2,884 7.5 2,750 10.3
Amortization of client contracts and related intangibles....... 1,023 2.7 1,023 3.8
------- ------- ------- -------
Total cost of revenues.................................... 22,488 58.4 16,604 62.1
------- ------- ------- -------
Gross margin...................................................... 16,094 41.6 10,153 37.9
------- ------- ------- -------
Operating expenses:
Research and development........................................ 4,855 12.6 4,556 17.0
Selling and marketing........................................... 2,341 6.1 1,420 5.3
General and administrative:
General and administrative .................................... 4,129 10.7 3,282 12.3
Amortization of noncompete agreements and goodwill............. 1,731 4.5 1,420 5.3
Stock-based employee compensation.............................. 202 0.5 3,277 12.2
Depreciation.................................................... 1,509 3.9 1,190 4.4
------- ------- ------- -------
Total operating expenses....................................... 14,767 38.3 15,145 56.5
------- ------- ------- -------
Operating income (loss)............................................. 1,327 3.3 (4,992) (18.6)
------- ------- ------- -------
Other income (expense):
Interest expense................................................ (641) (1.7) (1,740) (6.5)
Interest income................................................. 211 0.5 229 0.9
Other........................................................... 267 0.7 - -
------- ------- ------- -------
Total other.................................................... (163) (0.5) (1,511) (5.6)
------- ------- ------- -------
Income (loss) before income taxes and extraordinary item............ 1,164 2.8 (6,503) (24.2)
Income tax (provision) benefit................................... - - - -
------- ------- ------- -------
Income (loss) before extraordinary item............................. 1,164 2.8 (6,503) (24.2)
Extraordinary loss from early extinguishment of debt............. - - (1,260) (4.7)
------- ------- ------- -------
Net income (loss)................................................... $ 1,164 2.8% $(7,763) (28.9)%
======= ======= ======= =======
</TABLE>
8
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Revenues. Total revenues for the three months ended March 31, 1997, increased
44.2% to $38.6 million, from $26.8 million for the three months ended March 31,
1996, due primarily to i) increased revenue from the Company's processing and
related services, and ii) increased revenue from the Company's software and
related product sales and professional consulting services.
Revenues from processing and related services for the three months ended March
31, 1997, increased 15.1% to $30.7 million, from $26.7 million for the three
months ended March 31, 1996. This increase is due primarily to an increase in
the number of customers of the Company's clients which were serviced by the
Company and increased revenue per customer. Customers serviced as of March 31,
1997, and 1996, respectively, were 19.6 million and 18.5 million, an increase of
6.2%. The increase in the number of customers was due primarily to internal
customer growth experienced by existing clients and the addition of new clients.
Revenue per customer increased due to price increases included in client
contracts and increased usage of ancillary services by clients.
Revenues from software and related product sales and professional consulting
services for the three months ended March 31, 1997, were $7.9 million, compared
to $0.1 million for the three months ended March 31, 1996. This increase
relates to the introduction of the Company's new software products and
professional consulting services in early 1996 with continued expansion
throughout 1996, and the inclusion of revenues from Bytel's operations for the
three months ended March 31, 1997, with no comparable amounts included for Bytel
for the first quarter of 1996.
Gross Margin. Gross margin for the three months ended March 31, 1997, increased
58.5% to $16.1 million, from $10.2 million for the three months ended March 31,
1996, due primarily to revenue growth. The gross margin percentage increased to
41.6% for the three months ended March 31, 1997, compared to 37.9% for the three
months ended March 31, 1996. The overall increase in the gross margin
percentage is due primarily to i) the increase in revenues while the amount of
amortization of acquired software and amortization of client contracts and
related intangibles remained approximately the same, and ii) cost controls in
delivering the Company's processing and related services.
Research and Development Expense. Research and development (R&D) expense for
the three months ended March 31, 1997, increased 6.6% to $4.9 million, from $4.6
million for the three months ended March 31, 1996. As a percentage of total
revenues, R&D expense decreased to 12.6% for the three months ended March 31,
1997, from 17.0% for the three months ended March 31, 1996. The Company
capitalized software development costs, related to CSG Phoenix(TM), of
approximately $3.1 million during the three months ended March 31, 1997, which
consisted of $2.8 million of internal development costs and $0.3 million of
purchased software. No software development costs were capitalized during the
three months ended March 31, 1996. As a result, total R&D expenditures (i.e.,
the total R&D costs expensed, plus the capitalized internal development costs)
for the three months ended March 31, 1997, and 1996, were $7.7 million, or 19.9%
of total revenues, and $4.6 million, or 17.0% of total revenues, respectively.
The overall increase in the R&D expenditures is due primarily to continued
efforts on several products which are in development, principally CSG Phoenix,
and to enhancements of the Company's existing products. The increased R&D
expenditures consist primarily of increases in salaries, benefits, and other
programming-related expenses.
Selling and Marketing Expense. Selling and marketing expense for the three
months ended March 31, 1997, increased 64.9% to $2.3 million, from $1.4 million
for the three months ended March 31, 1996. As a percentage of total revenues,
selling and marketing expense increased to 6.1% for the three months ended March
31, 1997, from 5.3% for the three months ended March 31, 1996. The increase in
expense is due primarily to continued growth of the Company's direct sales
force. The Company began building a new direct sales force in mid-1995 and has
continued to expand its sales force since that time.
9
<PAGE>
General and Administrative Expense. General and administrative (G&A) expense
for the three months ended March 31, 1997, increased 25.8% to $4.1 million, from
$3.3 million for the three months ended March 31, 1996. As a percentage of
total revenues, G&A expense decreased to 10.7% for the three months ended March
31, 1997, from 12.3% for the three months ended March 31, 1996. The increase in
expense relates primarily to the continued development of the Company's
management team and related administrative staff, added throughout 1996 and
during the first three months of 1997, to support the Company's growth. The
decrease in G&A expense as a percentage of revenue is due primarily to increased
revenues.
Amortization of Noncompete Agreements and Goodwill. Amortization of noncompete
agreements and goodwill for the three months ended March 31, 1997, increased
21.9% to $1.7 million, from $1.4 million for the three months ended March 31,
1996. The increase in expense relates to amortization of goodwill from the
Bytel acquisition and amortization of an additional noncompete agreement
acquired in April 1996.
Stock-Based Employee Compensation. Stock-based employee compensation of $3.3
million in the three months ended March 31, 1996, relates to purchases of the
Company's common stock through performance stock purchase agreements with
executive officers and key employees. During 1995 and 1994, the Company sold
common stock to executive officers and key employees pursuant to performance
stock agreements. The structure of the performance stock agreements required
"variable" accounting for the related shares until the performance conditions
were removed on October 19, 1995, thereby establishing a measurement date. The
fair value of the stock was estimated by the Company to be $2.75 per share at
that date. Prior to the completion of the Company's initial public offering
(IPO), the deferred compensation was being recognized as stock-based employee
compensation expense on a straight-line basis from the time the shares were
purchased through November 30, 2001. Upon the completion of the IPO, shares
owned by certain executive officers of the Company were no longer subject to the
repurchase option. In addition, the repurchase option for the remaining
performance stock shares decreased to 20% annually over a five-year period,
commencing on the later of an employee's hire date or November 30, 1994. As a
result, approximately $3.2 million of stock-based employee compensation expense
was recorded when the IPO was completed in March 1996. The scheduled
amortization of the stock-based deferred compensation subsequent to March 31,
1997, is approximately $0.1 million per quarter.
Depreciation Expense. Depreciation expense for the three months ended March 31,
1997, increased 26.8% to $1.5 million, from $1.2 million for the three months
ended March 31, 1996. The increase in expense relates to capital expenditures
made throughout 1996 and the first three months of 1997 in support of the
overall growth of the Company.
Operating Income. Operating income for the three months ended March 31, 1997,
was $1.3 million, compared to an operating loss of $5.0 million for the three
months ended March 31, 1996. The increase between years relates to the factors
discussed above.
The Company incurred certain one-time or acquisition-related charges
(Acquisition Charges) in connection with its leveraged buy-out of CSG Systems,
Inc. in November 1994. The Acquisition Charges include amortization of acquired
software, client contracts and related intangibles, noncompete agreement,
goodwill, and stock-based compensation. Operating income for the three months
ended March 31, 1997, and 1996, excluding Acquisition Charges of $5.5 million
and $8.5 million, was $6.8 million or 17.8% of total revenues, and $3.5 million
or 13.0% of total revenues, respectively. See the Company's "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, 1996, for additional discussion regarding the Acquisition Charges
and the impact of such charges on operations.
Interest Expense. Interest expense for the three months ended March 31, 1997,
decreased 63.2% to $0.6 million, from $1.7 million for the three months ended
March 31, 1996, with the decrease attributable to scheduled principal payments
on the Company's long-term debt, the retirement of $40.3 million of long-term
debt with proceeds from the IPO in March 1996, and a decrease in interest rates
as a result of the Company favorably amending its long-term credit facility with
its bank in April 1996.
Extraordinary Loss From Early Extinguishment Of Debt. Upon the repayment of the
$40.3 million of long-term debt with IPO proceeds, the Company recorded an
extraordinary charge of $1.3 million in March 1996, for the write-off of
deferred financing costs attributable to the portion of the long-term debt
repaid.
10
<PAGE>
General
- -------
The Company generates a significant amount of its revenues from Tele-
Communications, Inc.'s (TCI) cable television operations and Primestar direct
broadcast satellite operations (i.e., TCI Satellite Entertainment, Inc.). The
Company's existing contract with TCI for its cable television operations, which
was scheduled to expire December 31, 1996, has been extended automatically by it
terms for one year. TCI has announced it is developing an in-house billing
system for use in its cable television operations, and the Company expects TCI's
in-house system to replace the Company's system in the future. The Company
cannot estimate when TCI's in-house billing solution will be available or the
timing of significant conversions from the Company's system to TCI's in-house
billing solution. In December 1996, CSG signed a new contract with TCI
Satellite Entertainment, Inc. as their exclusive provider of customer management
services including the purchase of CSG Phoenix and CSG VantagePoint(TM).
The Company delivered Version 1.1 of CSG Phoenix, its next-generation customer
management system for the converging communications industries, on March 31,
1997, for testing and integration at customer sites. The Company presently
expects a beta site to be installed in the third quarter of 1997, utilizing
Version 1.2 of CSG Phoenix, which is scheduled to be released to a beta customer
in the second quarter of 1997. The CSG Phoenix system is being developed on a
three-tier client/server, object-oriented architecture and is designed to enable
clients to quickly deploy new convergence services such as voice, video and
data, and to support large customer service sites. The statements regarding
timing of the Company's release of Version 1.2 of CSG Phoenix in the second
quarter of 1997 and the installation of a beta site in the third quarter of 1997
are forward-looking statements. The actual timing is subject to delay due to
the variety of factors inherent in the development and initial implementation of
a new, complex software system. Installation is also subject to factors
relating to the integration of the new system with the client's existing
systems.
Income Taxes
- ------------
At March 31, 1997, management of the Company evaluated its previous operating
results, as well as projections for 1997 and 1998, and concluded that it was
more likely than not that certain of the Company's deferred tax assets would be
realized. Accordingly, the Company has recognized a net deferred tax asset of
$2.3 million. The Company has recorded a valuation allowance of approximately
$23.6 million against the remaining net deferred tax assets since realization of
these future benefits is not sufficiently assured as of March 31, 1997.
The Company intends to analyze the realizability of the net deferred tax assets
at each future quarterly reporting period. The current quarterly results of
operations, as well as the Company's projected results of operations, will
determine the required valuation allowance at the end of each quarter. Based on
its current projections of operating results for 1997 and 1998, the Company
expects to realize additional deferred tax assets in 1997. As a result, the
Company does not expect income tax expense for 1997 to be significant. Due
primarily to differences in the timing of recognition of the amortization of
intangible assets for financial reporting and tax purposes, the Company expects
to pay income taxes in 1997.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 1997, the Company's principal sources of liquidity included cash
and cash equivalents of $5.8 million. The Company also has a revolving bank
line of credit in the amount of $5.0 million of which there were no borrowings
outstanding. The line of credit expires November 30, 2001.
During the three months ended March 31, 1997, the Company generated $8.1 million
in net cash flow from operating activities. Cash generated from these sources
was primarily used to fund capital expenditures of $2.5 million, additions to
software of $3.2 million, and to repay long-term debt of $2.5 million.
The Company believes that cash generated from operations and the amount
available under the revolving bank line of credit will be sufficient to meet its
anticipated cash requirements for operations (including research and development
expenditures), income taxes, debt service, and capital expenditures through the
next twelve months.
11
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Items 1 - 5. None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.01 Statement re: Computation of Per Share Earnings
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
(b) Reports on Form 8-K
None
12
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 13, 1997
CSG SYSTEMS INTERNATIONAL, INC.
/s/ Neal C. Hansen
-------------------------------------------
Neal C. Hansen
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Greg A. Parker
-------------------------------------------
Greg A. Parker
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Randy R. Wiese
-------------------------------------------
Randy R. Wiese
Controller and Principal Accounting Officer
(Principal Accounting Officer)
13
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
11.01 Statement re: Computation of Per Share Earnings
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
14
<PAGE>
Exhibit 11.01
CSG SYSTEMS INTERNATIONAL, INC.
STATEMENT OF NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE
For the three months ended March 31, 1997:
Weighted average common shares outstanding......... 25,489,258
-----------
Shares used in computation......................... 25,489,258
===========
Net income......................................... $ 1,164,000
===========
Net income per common and equivalent share......... $ .05
===========
For the three months ended March 31, 1996:
Weighted average common shares outstanding......... 10,987,296
Common equivalent shares attributable to:
Redeemable convertible Series A Preferred Stock.. 12,461,537
-----------
Shares used in computation......................... 23,448,833
===========
Loss before extraordinary item..................... $(6,503,000)
Extraordinary loss from early extinguishment of
debt............................................. (1,260,000)
-----------
Net loss........................................... $(7,763,000)
===========
Net loss per common and equivalent share:
Before extraordinary item........................ $ (.28)
Extraordinary loss from early extinguishment of
debt........................................... (.05)
-----------
Net loss......................................... $ (.33)
===========
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q as
of March 31 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,792
<SECURITIES> 0
<RECEIVABLES> 37,108
<ALLOWANCES> 841
<INVENTORY> 0
<CURRENT-ASSETS> 45,022
<PP&E> 27,166
<DEPRECIATION> 13,028
<TOTAL-ASSETS> 110,881
<CURRENT-LIABILITIES> 39,865
<BONDS> 20,000
0
0
<COMMON> 255
<OTHER-SE> 42,613
<TOTAL-LIABILITY-AND-EQUITY> 110,881
<SALES> 0
<TOTAL-REVENUES> 38,582
<CGS> 0
<TOTAL-COSTS> 22,488
<OTHER-EXPENSES> 4,855
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 641
<INCOME-PRETAX> 1,164
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,164
<EPS-PRIMARY> .05<F1>
<EPS-DILUTED> 0
<FN>
<F1>EPS is Basic EPS as common stock equivalents dilutive effect is not
significant.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.01
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
CERTAIN CAUTIONARY STATEMENTS AND
RISK FACTORS
CSG Systems International, Inc. and its subsidiaries (collectively, the Company)
or their representatives from time to time may make or may have made certain
forward-looking statements, whether orally or in writing, including without
limitation, any such statements made or to be made in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in its various SEC filings or orally in conferences or
teleconferences. The Company wishes to ensure that such statements are
accompanied by meaningful cautionary statements, so as to ensure to the fullest
extent possible the protections of the safe harbor established in the Private
Securities Litigation Reform Act of 1995.
Accordingly, the forward-looking statements are qualified in their entirety by
reference to and are accompanied by the following meaningful cautionary
statements identifying certain important factors that could cause actual results
to differ materially from those in such forward-looking statements.
This list of factors is likely not exhaustive. The Company operates in a
rapidly changing and evolving business involving the converging communications
markets, and new risk factors will likely emerge. Management cannot predict all
of the important risk factors, nor can it assess the impact, if any, of such
risk factors on the Company's business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
in any forward-looking statements.
Accordingly, there can be no assurance that forward-looking statements will be
accurate indicators of future actual results, and it is likely that actual
results will differ from results projected in forward-looking statements and
that such differences may be material.
The Company has recorded net losses since inception (October 17, 1994) through
December 31, 1996. These net losses have resulted from several factors,
including amortization of intangible assets (acquired software, client contracts
and related intangibles, and noncompete agreements and goodwill), interest
expense, stock-based employee compensation expense, and loss from discontinued
operations. Certain of these factors will continue to affect the Company's
results of operations in the future. While the Company recently reported net
income for the third and fourth quarters of 1996, and the first quarter of 1997,
there can be no assurance that the Company will sustain profitability in the
future.
CCS and related services are expected to provide the substantial majority of the
Company's revenues in the foreseeable future. The market for customer
management systems is characterized by rapid changes in technology and is highly
competitive with respect to the need for timely product innovations and new
product introductions. The Company believes that its future success depends
upon continued market acceptance of its current products, including CCS and
related services, and its ability to enhance its current products and develop
new products that address the increasingly complex and evolving needs of its
clients. In particular, the Company believes that it must respond quickly to
clients' needs for additional functionality and distributed architecture for
data processing. Development projects can be lengthy and are subject to
changing requirements, programming difficulties, and unforeseen factors which
can result in delays. There can be no assurance of continued market acceptance
of the Company's current products or that the Company will be successful in the
timely development of product enhancements or new products that respond to
technological advances or changing client needs.
<PAGE>
CSG Phoenix is the Company's next generation customer care and billing system
for the converging communications markets. The Company is using technologies
and development tools that are new to the Company in CSG Phoenix. In addition,
CSG Phoenix will contain functionality that is new to the Company and will be
offered in a variety of configurations in addition to the Company's existing
service bureau operations. The Company delivered Version 1.1 of CSG Phoenix on
March 31, 1997, for testing and integration at customer sites. The Company
presently expects a beta site to be installed in the third quarter of 1997,
utilizing Version 1.2 of CSG Phoenix, which is scheduled to be released to a
beta customer in the second quarter of 1997. There can be no assurance that
Version 1.2 of CSG Phoenix will be released or installed at a beta site on time,
or that CSG Phoenix will operate in an acceptable manner. The actual timing of
delivery and implementation is subject to delay due to the variety of factors
inherent in the development and initial implementation of a new, complex
software system, which in the case of CSG Phoenix, employs technologies and
development tools which are new to the Company. Implementation is also subject
to factors relating to the integration of the new system with the client's
existing systems. Sales and support of CSG Phoenix will require the Company to
develop new capabilities. The failure of the Company to deliver and support the
CSG Phoenix product successfully and on time could have a material adverse
effect on the financial condition and results of operations of the Company.
Revenues from Time Warner Cable and its affiliated companies (Time Warner) and
revenues from Tele-Communications, Inc. (TCI) each represent a substantial
percentage of the Company's total revenues. The Company's existing contract
with TCI for its cable television operations, which was scheduled to expire
December 31, 1996, has been extended automatically by its terms for one year.
TCI has announced it is developing an in-house billing system for use in its
cable television operations, and the Company expects TCI's in-house system to
replace the Company's system in the future. The Company cannot estimate when
TCI's in-house billing solution will be available or the timing of significant
conversions from the Company's system to TCI's in-house billing solution. Loss
of all or a significant part of the business of either Time Warner or TCI would
have a material adverse effect on the financial condition and results of
operations of the Company.
The Company's quarterly revenues and operating results may fluctuate depending
on various factors, including the timing of executed contracts and the delivery
of contracted services or products, the timing of conversions to the Company's
systems by new and existing clients, the cancellation of the Company's services
and products by existing or new clients and related conversions to other
systems, the hiring of additional staff, new product development and other
expenses, and changes in sales commission policies. No assurance can be given
that operating results will not vary due to these factors. Fluctuations in
quarterly operating results may result in volatility in the market price of the
Company's Common Stock.
The Company's business is concentrated in the cable television industry, making
the Company susceptible to a downturn in that industry. A decrease in the
number of customers served by the Company's clients would result in lower
revenues for the Company. In addition, cable television providers are
consolidating, decreasing the potential number of buyers for the Company's
products and services. Furthermore, there can be no assurance that cable
television providers will be successful in expanding into other segments of the
converging communications markets. There can be no assurance that new entrants
into the cable television market will become clients of the Company. Any
adverse development in the cable television industry could have a material
adverse effect on the financial condition and results of operations of the
Company.
The Company's growth strategy is based in large part on the continuing
convergence and growth of the cable television, Direct Broadcast Satellite
(DBS), telecommunications, and on-line services markets. If these markets fail
<PAGE>
to converge, grow more slowly than anticipated, or if providers in the
converging markets do not accept the Company's products and services, there
could be a material adverse effect on the financial condition and results of
operations of the Company.
The market for the Company's products and services is highly competitive. The
Company directly competes with both independent providers of products and
services and in-house systems developed by existing and potential clients. Many
of the Company's current and potential competitors have significantly greater
financial, marketing, technical, and other competitive resources than the
Company, and many are already operating internationally. There can be no
assurance that the Company will be able to compete successfully with its
existing competitors or with new competitors.
The Company is expanding into new products, services, and markets, which is
placing demands on its managerial and operational resources. The inability to
manage growth could have a material adverse effect on the financial condition
and results of operations of the Company.
Substantially all of the Company's revenues are derived from the sale of
services or products under contracts with its clients. The Company does not
have the option to extend unilaterally the contracts upon expiration of their
terms. The Company's contracts typically do not require clients to make any
minimum purchases, and contracts are cancelable by clients under certain
conditions. The failure of clients to renew or to fully use any contracts, or
the cancellation of contracts, could have a material adverse effect on the
Company's financial condition and results of operations.
The Company's future success depends in large part on the continued service of
its key management, sales, product development, and operational personnel. The
Company is particularly dependent on its executive officers. Only two of those
executive officers are parties to employment agreements with the Company, and
those agreements are terminable by them upon 30 days' notice. The Company
believes that its future success also depends on its ability to attract and
retain highly skilled technical, managerial, and marketing personnel, including,
in particular, additional personnel in the areas of research and development and
technical support. Competition for qualified personnel is intense. The Company
may not be successful in attracting and retaining the personnel it requires,
which could have a material adverse effect on the financial condition and
results of operations of the Company.
The Company relies on a combination of trade secret and copyright laws,
nondisclosure agreements, and other contractual and technical measures to
protect its proprietary rights in its products. There can be no assurance that
these provisions will be adequate to protect its proprietary rights. Although
the Company believes that its intellectual property rights do not infringe upon
the proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company or the Company's
clients.
The Company's business strategy includes a significant commitment to the
marketing of its products and services internationally, and the Company has
begun to acquire and establish operations outside of the U.S. The Company is
subject to certain inherent risks associated with operating internationally.
Risks include product development to meet local requirements, difficulties in
staffing and management, reliance on independent distributors or strategic
alliance partners, fluctuations in foreign currency exchange rates, compliance
with foreign regulatory requirements, variability of foreign economic
conditions, changing restrictions imposed by U.S. export laws, and competition
from U.S.-based companies which have established international operations.
There can be no assurance that the Company will be able to manage successfully
the risks related to selling its products and services in international markets.
The inability to manage these risks successfully would have a material adverse
effect on the financial condition and results of operations of the Company.
