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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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (I.R.S. EMPLOYER
OF 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)
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. [X]
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 March 14, 1997 was $142,362,744.
Shares of common stock outstanding at March 14, 1997: 25,489,822
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS ANNUAL MEETING OF
STOCKHOLDERS TO BE FILED ON OR PRIOR TO APRIL 30, 1997, ARE INCORPORATED BY
REFERENCE INTO PART III OF THE FORM 10-K.
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CSG SYSTEMS INTERNATIONAL, INC.
1996 FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 8
Item 3. Legal Proceedings................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders............... 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 10
Item 6. Selected Financial Data........................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13
Item 8. Financial Statements and Supplementary Data....................... 21
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 55
PART III
Item 10. Directors and Executive Officers of the Registrant................ 55
Item 11. Executive Compensation............................................ 55
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 55
Item 13. Certain Relationships and Related Transactions.................... 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K......................................................... 55
Signatures................................................................. 57
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ITEM 1. BUSINESS
GENERAL
CSG Systems International, Inc. (the Company or CSG) was formed in October
1994 and acquired all of the outstanding capital stock of Cable Services
Group, Inc. from First Data Corporation (FDC) on November 30, 1994 (the
Acquisition). The Company did not have any substantive operations from
inception (October 17, 1994) through the Acquisition. Subsequent to the
Acquisition, Cable Services Group, Inc.'s name was changed to CSG Systems,
Inc. (CSG Systems). From its inception in 1982 until the Acquisition, CSG
Systems was a division or subsidiary of FDC. On June 28, 1996, the Company
acquired all of the outstanding shares of Bytel Limited (Bytel). Bytel is a
United Kingdom company which provides customer management software and related
services to the cable and telecommunications industries in the United Kingdom.
The Company's financial statements and financial information included herein
include Bytel's results of operations since the acquisition date. References
in this Item 1 to the Company include CSG Systems and Bytel through which the
Company conducts its operations.
The Company's principal executive offices are located at 5251 DTC Parkway,
Suite 625, Englewood, Colorado 80111, and the telephone number at that address
is (303) 796-2850. The Company's common stock is traded over the counter on
the National Market under the NASDAQ symbol "CSGS".
COMPANY OVERVIEW
The Company provides customer management solutions for the converging
communications markets. These markets include the cable television, direct
broadcast satellite (DBS), telecommunications, and on-line services
industries. The Company offers its clients a full range of processing,
software, and professional services which automate customer management
functions, including billing, sales support, order processing, invoice
calculation and production, management reporting, and customer analysis for
target marketing.
The Company's business is concentrated in the U.S. within the cable
television, DBS, and on-line services industries. During 1996, the Company
derived 76.6% of its revenues from companies in the U.S. cable television
industry, including six of the ten largest service providers. The Company's
U.S. clients also include four Regional Bell Operating Companies (RBOCs), two
DBS service providers, and an on-line services company. At December 31, 1996,
the Company was servicing client sites having an aggregate of 19.2 million
customers in the U.S., compared to 18.0 million customers serviced as of
December 31, 1995. The Company generated revenue of $132.3 million in 1996
compared to $96.4 million in 1995, an increase of 37.2%.
During 1996, the Company expanded its operations internationally, primarily
through its acquisition of Bytel. Bytel was established in 1992 and, as one of
the leading providers of customer care services in the United Kingdom, Bytel
provides customer management solutions to business and residential telephony
and cable television providers serving a total of approximately 850,000
customers, 65% of whom receive multiple services. During 1996, the Company
generated 8% of its total revenues from international sources.
CUSTOMER MANAGEMENT SYSTEMS
Convergence and growing competition are increasing the complexity and cost
of managing the interaction between communications service providers and their
customers. Customer management systems are software-based processing systems
which coordinate all aspects of the customer's interaction with a service
provider, from initial setup and provisioning, to service activity monitoring,
through billing and accounts receivable management. These systems have evolved
differently within various segments of the converging markets.
The majority of cable television, DBS, and wireless service providers have
elected to outsource billing, customer management, and related functions
because of the significant level of technological expertise and capital
resources required to develop and implement such systems successfully. The
growing complexity of communication services, the manner in which they are
packaged and priced, and the increasing regionalization
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of customer management support has led service providers to demand enhanced
flexibility and functionality from their customer management systems. Service
providers want open systems-based customer management solutions which will
integrate with their corporate management information systems, thus enabling
service providers to use data generated from customer interaction for
operational and other strategic purposes such as marketing and sales.
THE CSG SOLUTION
The Company's primary processing product, Communications Control System
(CCS(TM)), delivers a complete set of customer service functions, ranging from
sales support, order processing, scheduling, inventory control, trouble calls,
and communications with the headend, through invoice calculation and
production to management reporting, as well as the customer information
necessary for target marketing. The Company has developed and is developing
new software products and services to enhance the functionality of its current
products and to offer new customer management solutions to its clients to meet
the needs of the converging communications markets.
CSG SERVICES AND PRODUCTS
The Company has three main business lines serving the converging
communications markets: processing and related services (offered in a service
bureau environment); software products; and professional services.
Processing and Related Services
- -------------------------------
Processing fees are typically billed based on the number of a client's
customers serviced; ancillary services are typically billed on a per
transaction basis; and customized print and mail services are billed on a
usage basis. Typically, the Company signs multi-year processing contracts with
its clients which include provisions for annual price increases. The Company's
primary processing and related services products are as follows:
CCS and Related Products. CCS is a customer management system used primarily
by clients in the cable television and DBS industries. The primary purpose of
CCS is to provide the Company's clients with a complete set of customer
management and information services, including enrollment of new customers,
event ordering, scheduling of on-site video service installations and repairs,
customer service support, and billing. Designed for high volume transaction
processing, CCS is offered as a service bureau application, with clients
accessing it through a telecommunications network via terminals or personal
computers. The Company maintains all records and files for its clients and
performs statement processing and invoice mailing in conjunction with the
other services. The Company provides a wide variety of ancillary services to
its clients, such as addressability support, pay-per-view, and microfiche. The
CCS system offers flexible reporting capabilities and interfaces with all
major vendors so clients can utilize pay-per-view, automated number
identification and audio response units.
For the years ended December 31, 1996, 1995 and 1994, the Company generated
77.3%, 84.7%, and 80.1%, respectively, of its total revenues from CCS and
related services and software products.
CableMAX. The Company also supports a personal computer based customer
management system, CableMAX, that has functionality similar to that of CCS,
but on a more basic level suitable for smaller cable systems. CableMAX is
targeted at cable sites with less than 2,500 subscribers.
Financial Services. CSG offers a comprehensive set of financial services
(e.g., credit card processing, electronic funds transfer, automated refund
check processing, electronic lockbox service, etc.) designed to improve
operational efficiencies by saving employee time and improving a client's cash
flow.
Statement Printing and Mailing. The Company provides statement printing and
mailing services for all of its CCS and CableMAX clients, and will offer this
service in connection with its CSG Phoenix(TM) product. The Company also
provides specialized printing and mailing for convergence clients not on CSG's
systems and for customers in other industries. The Company's statement
processing center currently prints and mails in excess of an average of 20
million pieces per month and handles multiple billing cycles for all clients.
The Company offers
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its clients a number of marketing services based on information contained in
the CCS customer database, including insert design and printing, direct
mailing, and data downloads used to support market research.
Enhanced Statement Presentation(TM) (ESP(TM)). This product enables clients
to customize all aspects of their billing statements, create a unique
identity, and build a stronger link to the customer. ESP enables clients to
send specialized messages or coupons on monthly bills, depending on buying
patterns, payment histories, and other customer specific information.
Software Products Currently Available
-------------------------------------
The Company licenses its software products under both perpetual and multi-
year term licenses. The Company's available software products include the
following:
ACSR(TM) and related modules. Advanced Customer Service Representative(TM)
(ACSR) is a client/server-based front end to the CCS product that employs a
graphical user interface. ACSR features include a customizable reference
library, easy navigation through pull-down items and an icon toolbar, e-mail
and a news bulletin board, and pop-up windows and pull-down menus. ACSR runs
on a local area network at the client's service center, which is connected to
the CCS mainframe. Customer Interaction Tracking(TM) (CIT(TM)) is an add-on
module to ACSR which allows customer service representatives, using a
relational database management system, to track and recall automatically all
interaction and activity with customers. ACSR Telephony is an add-on module to
ACSR which provides clients with an integrated customer management system for
billing and servicing telephony customers independently or in conjunction with
other business lines.
CSG Vantage(TM). CSG Vantage is a software and services product used in
conjunction with CCS. Data is maintained by the Company in a specially
designed database which is updated daily from CCS. Clients are provided with
an ad hoc query and reporting tool that runs on local personal computers to
access detailed information stored in the database allowing clients to analyze
operations, identify trends, and target markets.
CSG VantagePoint(TM). CSG VantagePoint is the Company's enterprise-wide data
warehouse product which can be licensed for use at the client's own facility.
The software product combines information from multiple operational systems
(e.g., CCS, other billing providers, customer support, CSG Phoenix, etc.) and
enhances that data with selected demographic, psychographic and survey data
that may be obtained from outside vendors or collected by the client, into a
single database structure. The database structure facilitates the analysis and
identifications of the demographic, psychographic and transactional parameters
of the client and non-client bases. The product offers a modular approach,
enabling a provider to select the applications most appropriate for their
individual situation.
CSG.web(TM). CSG.web provides clients with a secure World Wide Web (WWW)
interactive interface for its client's customers. CSG.web enables customers to
upgrade their services, order pay-per-view events, view information regarding
available services, and view and pay their statements on-line via the WWW.
CSG.web is incorporated into the client's web site, running on their web
server, which is connected to the CCS mainframe.
SMS. Bytel's SMS product provides a full range of business support software
solutions for the cable television and telecommunications industries,
primarily in the United Kingdom. The product's functionality includes customer
care, tariffing, provisioning and activation, addressability, collections,
equipment inventory, call record processing, rating, dispatch, trouble
tickets, mediation, billing, fault management, sales and marketing, and
management reporting.
Software Maintenance and Support
--------------------------------
The Company provides maintenance services on all of its software products.
Maintenance is billed annually and is typically based upon a percentage of the
software license fee paid by the customer. Virtually all new software
customers purchase maintenance services. Maintenance is typically sold for
multi-year periods in
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conjunction with the software license. Maintenance services typically consist
of enhancements and updates to the software products, as well as telephone
support concerning the operation of the programs.
Software Products in Development
--------------------------------
CSG Phoenix. The Company is developing its next generation customer
management system to meet the changing needs of service providers competing in
the converging communications markets. CSG Phoenix uses a three-tier
client/server architecture, composed of the graphical user interface, the
business logic, and the database. CSG Phoenix uses an open systems approach
including a UNIX operating system, C and C++ programming languages, APIs, and
object-oriented design, analysis, and implementation. CSG Phoenix will support
various languages, currencies and regulatory environments to address
convergence opportunities internationally.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for additional discussion of CSG Phoenix development.
Professional Services
---------------------
The Company formed the Advanced Business Solutions (ABS) group in mid-1995
to address the unique needs of clients through specialized services such as
technical consulting, custom application development, business process
definition, project management, decision support systems, training, software
and systems integration, data warehousing, and network analysis, design and
implementation. ABS supports clients in implementing the Company's solutions
and enables clients to take advantage of the full range of functionality
offered by the Company's products and services.
CLIENTS
The Company's business is concentrated in the U.S. within the cable
television, DBS and on-line services industries. Some of the Company's largest
clients in their relevant geographic and industry markets are as follows:
United States:
Cable Television Clients RBOCs (video services) DBS
- ------------------------ ---------------------- ---
Comcast Cable Ameritech New Media Comcast Cable
Communications Enterprises Communications
Continental Cablevision, Pacific Bell Video Echostar Satellite
Inc. Services Corporation
Century Communications SBC Services, Inc. TCI Satellite
Corp. US WEST Communications, Entertainment, Inc.
Falcon Holding Group, Inc. Time Warner
L.P. Programming Co.
FrontierVision Operating
Partners, L.P.
Greater Media
Cablevision, Inc.
Intermedia Partners I, High-Speed Data Services On-Line Services
L.P. ------------------------ ----------------
MediaOne, Inc. Time Warner Cable (Road Prodigy Services Corp.
Tele-Communications, Runner)
Inc. (TCI) Cablevision Systems
Time Warner Cable Corp. (Optimum)
TKR Cable Company
International:
- --------------
A2000 Holding, N.V. Foxtel Management Pty
Bell Canada Limited
Bell Cablemedia, plc Scottish Telecom
Cabletel TeleWest
Eurobell
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During the years ended December 31, 1996, 1995, and 1994, revenues from Time
Warner Cable and its affiliated companies represented approximately 22.9%,
27.9% and 27.3% of total revenues, and revenues from TCI represented
approximately 25.9%, 25.2% and 23.0% of total revenues, respectively. The
Company has separate processing agreements with multiple affiliates of Time
Warner Cable and provides products and services to them under separately
negotiated and executed contracts. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for additional discussion
regarding significant customers.
CLIENT AND PRODUCT SUPPORT
The Company's clients typically rely on CSG for ongoing support and training
needs relating to the Company's products. As of December 31, 1996, the client
and product support group consisted of 222 employees, or approximately one-
fourth of the Company's total employees. The Company's client support includes
a 24-hour-a-day, seven-day-a-week help desk.
SALES AND MARKETING
The Company has assembled a direct sales and sales support organization. The
market for the Company's products and services is concentrated, with each
existing and potential client representing multiple revenue opportunities. 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. In order to enhance its sales and marketing efforts, the
Company has hired account managers, sales support engineers, and product sales
professionals from the cable and telecommunication industries with experience
in selling large client/server and relational database systems. Sales
territories are divided into geographic regions within the United States,
Europe, Latin America and the Pacific Rim.
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 maintain its
competitive position in the marketplace.
In developing new products, the Company works closely with clients and
leading technology vendors to determine product requirements. For example, the
Company works closely with IBM and Oracle to help ensure compatibility with
new operating system releases and evolutionary changes to hardware and
software. Clients often provide additional information on product and
operational requirements and serve as beta test participants.
The Company's research and development staff consisted of 213 employees as
of December 31, 1996, compared to 195 as of December 31, 1995. The Company's
total research and development expense, excluding purchased research and
development, was $20.2 million, $14.3 million, and $8.7 million for the years
ended December 31, 1996, 1995, and 1994, or 15.3%, 14.8%, and 10.4% 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 management 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 USCS International, Inc. (USCS),
Cincinnati Bell Information Systems (CBIS), a major cellular billing vendor,
which acquired Information Systems Development (ISD), 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.
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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
research and development effort, and price.
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of trade secrets and copyright laws,
license agreements, non-disclosure and other contractual provisions, and
technical measures to protect its proprietary rights. The Company has no
patents. 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. 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. The Company also incorporates
via licenses or reselling arrangements a variety of third party software
products that provide specialized functionality within its own software
products.
In December 1996, CSG settled claims for indemnification against FDC arising
from CSG's acquisition from FDC of CSG Systems. The claims related to certain
patents held by Ronald A. Katz Technology Licensing Partnership L.P. (RAKTL)
which allegedly were infringed by the use of certain CSG products. The terms
of the settlement were not material to CSG. In connection with the settlement,
CSG entered into a non-exclusive patent license agreement with RAKTL, the
terms of which are not expected by CSG to have a material effect on its
business or future results of operations.
EMPLOYEES
As of December 31, 1996, the Company had a total of 892 employees, of whom
78 were engaged in administration, 40 in sales and marketing, 132 in systems
and programming, 213 in research and development, 222 in client and product
support, 30 professional services consultants, and 177 in statement
production. 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.
FDC DATA PROCESSING FACILITY
The Company outsources to FDC certain data processing and related services
required for operation of the CCS system. The Company's proprietary software
is run in FDC's facility to obtain the necessary mainframe computer capacity
and support without making the substantial capital investment that would be
necessary for the Company to provide this capacity directly. The Company's
clients are connected to the FDC facility through a combination of private and
commercially provided networks. FDC provides the services pursuant to a
recently renewed five year agreement. The Company believes it could obtain
data processing services from alternative sources, if necessary. See Note 8 to
the Company's Consolidated Financial Statements for additional discussion.
ITEM 2. PROPERTIES
The Company leases five facilities, including those leases entered into
subsequent to December 31, 1996, totaling approximately 70,000 square feet in
Denver, Colorado and surrounding communities. The Company utilizes these
facilities primarily for i) corporate headquarters, ii) sales and marketing
activities, iii) business offices for its professional consultants, and iv)
certain research and development activities. The leases for these facilities
expire in the years 1997 through 2004.
The Company leases three facilities totaling approximately 172,000 square
feet in Omaha, Nebraska. The Company utilizes these facilities primarily for
i) client services and product support, ii) systems and
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programming activities, iii) research and development activities, iv)
statement production and mailing, and v) general and administrative functions.
The leases for these facilities expire in the years 1998 through 2007.
The Company leases office space in Slough, Berkshire, in the United Kingdom
for its U.K. operations. The lease for this facility expires in 2002.
The Company believes that its facilities are adequate for its current needs
and that additional suitable space will be available as required. The Company
also believes that it will be able to extend leases as they terminate. See
Note 8 to the Company's Consolidated Financial Statements for information
regarding the Company's obligations under its facilities leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. In the opinion
of the Company's management, after consultation with legal counsel, the
Company is not presently a party to any material pending or threatened legal
proceedings except as further described below.
In October 1996, a former senior vice president of CSG Systems filed a
lawsuit against the Company and certain of its officers in the District Court
of Arapahoe County, Colorado. The suit claims that certain amendments to stock
agreements between the plaintiff and the Company are unenforceable, and that
the plaintiff's rights were otherwise violated in connection with those
amendments. The plaintiff is seeking damages of approximately $1.8 million,
and in addition, seeks to have such damages trebled under certain Colorado
statutes that the plaintiff claims are applicable. The Company denies the
allegations and intends to vigorously defend the lawsuit at all stages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter 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.
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HIGH LOW
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1996
First quarter............................................... $25 1/2 $20 1/2
Second quarter.............................................. 37 1/4 22 3/8
Third quarter............................................... 26 1/4 19 1/2
Fourth quarter.............................................. 21 3/8 14 3/8
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On March 14, 1997, the last sale price of the Company's common stock as
reported by NASDAQ/NMS was $19.00 per share. There were 306 holders of record
of the Company's common stock as of March 14, 1997.
DIVIDENDS
The Company has not declared or paid cash dividends on its common stock
since its incorporation.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the audited
financial statements of the Company and CSG Systems, Inc., formerly Cable
Services Group, Inc. (the Predecessor). 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 and the Predecessor's Consolidated Financial
Statements. The information below is not necessarily indicative of the results
of future operations.
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COMPANY(1)(2) PREDECESSOR
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ONE MONTH 11 MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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STATEMENTS OF OPERATIONS DATA:
Revenues:
Processing and related services............. $ 113,422 $ 96,343 $ 7,757 $76,081 $75,578 $71,258
Software license and maintenance fees....... 14,736 57 -- -- -- --
Professional services....................... 4,139 4 -- -- -- --
----------- ----------- ----------- ------- ------- -------
Total revenues............................ 132,297 96,404 7,757 76,081 75,578 71,258
----------- ----------- ----------- ------- ------- -------
Expenses:
Cost of revenues:
Cost of processing and related services:
Direct costs.............................. 52,027 46,670 3,647 34,977 34,503 34,883
Amortization of acquired software(5)...... 11,003 11,000 917 -- 2 97
Amortization of client contracts and
related intangibles(5)................... 4,092 4,092 341 1,594 1,518 1,324
----------- ----------- ----------- ------- ------- -------
Total cost of processing and related
services................................ 67,122 61,762 4,905 36,571 36,023 36,304
Cost of software license and maintenance
fees...................................... 5,040 -- -- -- -- --
Cost of professional services.............. 2,083 -- -- -- -- --
----------- ----------- ----------- ------- ------- -------
Total cost of revenues................... 74,245 61,762 4,905 36,571 36,023 36,304
----------- ----------- ----------- ------- ------- -------
Gross margin................................. 58,052 34,642 2,852 39,510 39,555 34,954
----------- ----------- ----------- ------- ------- -------
Operating expenses:
Research and development.................... 20,206 14,278 1,044 7,680 5,591 3,269
Charge for purchased research and
development(5)............................. -- -- 40,953 -- -- --
Selling and marketing....................... 8,213 3,770 293 3,054 2,012 1,681
General and administrative:
General and administrative................. 13,702 11,406 3,073 9,461 11,431 11,064
Amortization of goodwill and other
intangibles(5)............................ 6,392 5,680 547 826 1,052 1,052
Stock-based employee compensation(5)....... 3,570 841 -- -- -- --
Depreciation................................ 5,121 5,687 433 3,520 3,847 4,115
----------- ----------- ----------- ------- ------- -------
Total operating expenses................. 57,204 41,662 46,343 24,541 23,933 21,181
----------- ----------- ----------- ------- ------- -------
Operating income (loss)...................... 848 (7,020) (43,491) 14,969 15,622 13,773
----------- ----------- ----------- ------- ------- -------
Other income (expense):
Interest expense........................... (4,168) (9,070) (769) (1,067) (1,941) (2,883)
Interest income............................ 844 663 39 227 205 226
----------- ----------- ----------- ------- ------- -------
Total other.............................. (3,324) (8,407) (730) (840) (1,736) (2,657)
----------- ----------- ----------- ------- ------- -------
Income (loss) before income taxes,
extraordinary item and discontinued
operations.................................. (2,476) (15,427) (44,221) 14,129 13,886 11,116
Income tax (provision) benefit.............. -- -- 3,757 (5,519) (5,539) (4,389)
----------- ----------- ----------- ------- ------- -------
Income (loss) before extraordinary item and
discontinued operations..................... (2,476) (15,427) (40,464) 8,610 8,347 6,727
Extraordinary loss from early extinguishment
of debt(3)................................. (1,260) -- -- -- -- --
----------- ----------- ----------- ------- ------- -------
Income (loss) from continuing operations..... (3,736) (15,427) (40,464) 8,610 8,347 6,727
Discontinued operations(4):
Loss from operations........................ -- (3,093) (239) -- -- --
Loss from disposition....................... -- (660) -- -- -- --
----------- ----------- ----------- ------- ------- -------
Total loss from discontinued operations.. -- (3,753) (239) -- -- --
----------- ----------- ----------- ------- ------- -------
Net income (loss)............................ $ (3,736) $ (19,180) $ (40,703) $ 8,610 $ 8,347 $ 6,727
=========== =========== =========== ======= ======= =======
Net loss per common and equivalent share(8):
Loss before extraordinary item and
discontinued operations.................... $ (0.10) $ (0.69) $ (1.80)
Extraordinary loss from early extinguishment
of debt.................................... (0.05) -- --
Loss from discontinued operations........... -- (0.17) (0.01)
----------- ----------- -----------
Net loss.................................... $ (0.15) $ (0.86) $ (1.81)
=========== =========== ===========
Weighted average common and equivalent
shares...................................... 24,988,244 22,494,748 22,494,748
=========== =========== ===========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
COMPANY(1)(2) PREDECESSOR
-------------------------------------- --------------------------------------
ONE MONTH 11 MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1994 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OTHER OPERATIONAL DATA:
Number of client's
customers served(7)... 19,212 17,975 16,435 16,347 15,410 15,266
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 6,134 $ 3,603 $ 6,650 $ 22 $ 61 $ 24
Working Capital........ 4,430 2,359 4,681 8,356 7,570 10,457
Total assets........... 114,910 105,553 130,160 65,695 64,298 69,483
Long-term
obligations(3)(6)..... 32,500 85,068 95,000 10,438 16,375 27,784
Redeemable convertible
preferred stock(3).... -- 62,985 59,363 -- -- --
Stockholders' equity
(deficit)(3).......... 41,964 (61,988) (40,429) 43,031 35,980 31,133
</TABLE>
- --------
(1) The Company was formed in October 1994 and acquired all of the outstanding
capital stock of the Predecessor from FDC on November 30, 1994 (the
Acquisition). The Company did not have any substantive operations prior to
the Acquisition. The Company's Consolidated Financial Statements include
the accounts of the Predecessor since November 30, 1994. The statements of
operations data after November 30, 1994, are not comparable to data for
prior periods due to the effects of the Acquisition. The Acquisition was
accounted for as a purchase and 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. See Note 3 to the
Company's Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for
additional discussion.
(2) On June 28, 1996, the Company acquired all of the outstanding capital stock
of Bytel Limited (Bytel). The acquisition was accounted for using the
purchase method of accounting. The Company's Consolidated Financial
Statements include Bytel's results of operations since the acquisition
date. See Note 3 to the Company's Consolidated Financial Statements for
additional discussion.
(3) 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 a price
of $15 per share, resulting in net proceeds to the Company, after deducting
the underwriting discount and offering expenses, of $44.8 million. The net
proceeds from the IPO 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. As of the closing of the IPO, all of the 8,999,999
outstanding shares of Redeemable Convertible Preferred Stock were
automatically converted into 17,999,998 shares of common stock, at which
time all accrued dividends were paid. Upon repayment of the long-term debt,
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. See Notes 4 and 5 to the Company's Consolidated Financial
Statements for additional discussion.
(4) Contemporaneously with the 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 and now
carries its remaining investment under the cost method of accounting. The
loss from discontinued operations in 1995 and 1994 of $3.8 million and $0.2
million, respectively, reflects Anasazi's operating loss and loss on
disposition as of and for the eight months ended August 31, 1995, and the
operating loss for the one month ended December 31, 1994. Anasazi's results
of operations subsequent to August 31, 1995, are not included in the
Company's results of operations. See Note 9 to the Company's Consolidated
Financial Statements for additional discussion.
(5) These charges after November 30, 1994, are principally the result of
certain one-time or Acquisition-related expenses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(6) The Company's debt was incurred as part of the Acquisition. See Note 5 to
the Company's Consolidated Financial Statements for additional discussion.
The long-term debt prior to the Acquisition represents an intercompany loan
from FDC.
(7) This represents the number of customers of the Company's clients which were
serviced by the Company as of the end of the period indicated.
(8) Net loss per common and equivalent share and the shares used in the per
share computation have been computed on the basis described in Note 2 to
the Company's Consolidated Financial Statements.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Acquisition. CSG Systems International, Inc. (the Company or CSG) was
formed in October 1994 and acquired all of the outstanding capital stock of
Cable Services Group, Inc. from First Data Corporation (FDC) on November 30,
1994 (the Acquisition). The Company did not have any substantive operations
since inception (October 17, 1994) through the Acquisition. Subsequent to the
Acquisition, Cable Services Group, Inc.'s name was changed to CSG Systems,
Inc. (CSG Systems). From its inception in 1982 until the Acquisition, CSG
Systems was a division or subsidiary of FDC. The Company acquired CSG Systems
for approximately $137 million in cash and accounted for the Acquisition using
the purchase method of accounting. As a result of the Acquisition, the Company
incurred certain one-time or acquisition-related charges. These acquisition-
related charges included an immediate charge of $40.9 million as of the
Acquisition date for purchased research and development which had not yet
reached technological feasibility, as well as periodic amortization of
acquired software, client contracts and related intangibles, noncompete
agreement, goodwill and stock-based employee compensation. These expenses are
hereafter referred to as the "Acquisition Charges". The Acquisition Charges
totaled $24.4 million, $21.6 million, and $42.8 million for the years ended
December 31, 1996 and 1995, and the period from inception (October 17, 1994)
through December 31, 1994, respectively. See Notes 3 and 10 to the Company's
Consolidated Financial Statements for additional information regarding the
Acquisition and Acquisition Charges.
Public Offering. 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 a price of $15 per share, resulting in net proceeds to the Company,
after deducting the underwriting discount and offering expenses, of
approximately $44.8 million. The net proceeds from the IPO 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. As of the closing of the IPO, all
of the 8,999,999 outstanding shares of Redeemable Convertible Preferred Stock
were automatically converted into 17,999,998 shares of common stock, at which
time all accrued dividends were paid. Upon repayment of the long-term debt,
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. In conjunction with the repayment of the long-term debt, the Company
reduced the interest rates on its remaining long-term debt by favorably
amending its credit facility with its bank in April 1996. The substantial
repayment of long-term debt as well as the reduced interest rates in April
1996 was the primary reason for the decrease in interest expense from $9.1
million in 1995 to $4.2 million in 1996. See Notes 4 and 5 to the Company's
Consolidated Financial Statements for additional information regarding the
Company's Redeemable Convertible Preferred Stock and long-term debt.
Discontinued Operations. Contemporaneously with the Acquisition, the Company
purchased from FDC all of the outstanding capital stock of Anasazi Inc.
(Anasazi) for $6 million cash. Anasazi provides central reservation systems
and services for the hospitality and travel industries. On August 31, 1995,
the Company completed a substantial divestiture of Anasazi and now carries its
remaining investment under the cost method of accounting. The loss from
discontinued operations in 1995 and 1994 of $3.8 million and $0.2 million,
respectively, reflects Anasazi's operating loss and loss on disposition as of
and for the eight months ended August 31, 1995, and the operating loss for the
one month ended December 31, 1994. Anasazi's results of operations subsequent
to August 31, 1995, are not included in the Company's results of operations.
The carrying value of the Company's investment in Anasazi as of December 31,
1996, consisting of convertible preferred stock and stock warrants of Anasazi,
was $0.7 million. See Note 9 to the Company's Consolidated Financial
Statements for additional information regarding discontinued operations.
Impact of Acquisition Charges and Other Nonrecurring Charges. As discussed
above, the Company has incurred Acquisition Charges and other one-time,
nonrecurring charges for extraordinary loss on early extinguishment of debt
and loss from discontinued operations, which are reflected in the Company's
historical results of operations. The total of these expenses were $25.7
million, $25.4 million and $43.0 million for the years ended 1996 and 1995,
and the period from inception (October 17, 1994) through December 31, 1994,
respectively. The Company's pro forma results of operations excluding these
items is shown in the following table. In addition to the exclusion of these
expenses from the calculation, the pro forma results of operations
13
<PAGE>
were computed using an effective income tax rate of 38%. The shares used in
the calculation of pro forma earnings per common and equivalent share for 1996
include the weighted average equivalent shares from stock options on a primary
basis.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
FOR THE YEAR (OCTOBER 17, 1994)
ENDED DECEMBER 31, THROUGH
----------------------------- DECEMBER, 31
1996 1995 1994
-------------- -------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
PRO FORMA RESULTS OF
OPERATIONS:
Operating income (loss)...... $ 25,194 $ 14,593 $ (733)
Income (loss) before income
taxes....................... 21,870 6,186 (1,463)
Net income (loss)............ 13,559 3,835 (907)
Earnings (loss) per common
and equivalent share........ 0.54 0.17 (0.04)
Weighted average common and
equivalent shares........... 25,294 22,495 22,495
</TABLE>
The Company's pro forma earnings before interest, income taxes, depreciation
and amortization (EBITDA) was $31.0 million, $20.3 million, and $20.6 million
for the years ended 1996, 1995 and 1994, respectively. The Company's pro forma
calculation of EBITDA also excludes the charges related to the above mentioned
expenses for purchased research and development, extraordinary loss on early
extinguishment of debt and loss from discontinued operations. The 1994 EBITDA
combines the Company's EBITDA for the one month ended December 31, 1994 and
CSG Systems' EBITDA for the eleven months ended November 30, 1994, without
adjustment. EBITDA is not intended to represent cash flows for the periods.
Bytel Limited. On June 28, 1996, the Company acquired all of the outstanding
shares of Bytel Limited (Bytel) for $3.1 million in cash and assumption of
certain liabilities of $1.6 million. The acquisition was accounted for using
the purchase method of accounting. The cost in excess of the fair value of the
net tangible assets acquired of $4.2 million was allocated to goodwill and is
being amortized over seven years on a straight-line basis. The Company's
Consolidated Financial Statements include Bytel's results of operations since
the acquisition date. Bytel is a United Kingdom company which provides
customer management software and related services to the cable and
telecommunications industries in the United Kingdom.
Revenues. The Company provides customer management solutions, encompassing
processing and related services, software products and professional services,
for the converging cable television, telecommunications, direct broadcast
satellite (DBS), and on-line services industries. The Company's products and
services automate the full spectrum of billing and customer services
functions, including sales support and order processing, invoice calculation
and production, and management reporting and market analysis. The Company's
revenues are derived principally from processing and related services, which
represented 85.8% and 99.9% of the Company's total revenues for 1996 and 1995,
respectively. Processing and related services consist of processing fees,
ancillary services and certain customized print and mail services. Processing
fees are typically billed based on the number of a client's customers
serviced, ancillary services are typically billed on a per transaction basis,
and customized print and mail services are billed on a usage basis. Typically,
the Company signs multi-year processing contracts with its clients which
include provisions for annual price increases. The Company's processing and
related services are derived principally from its Communications Control
System (CCS(TM)) product and ancillary services to CCS.
Although the Company believes that the majority of its revenues will
continue to come from processing and related services over the next several
years, the Company has developed new software products and professional
services. The software products include, among others, Advanced Customer
Service Representative(TM) (ACSR(TM)), ACSR Telephony, CSG Vantage(TM), and
CSG VantagePoint(TM). Revenue from these new software products and
professional services, including revenue from the acquired software products
and related services of Bytel, were $18.9 million, or 14.2% of total revenues,
for the year ended December 31, 1996, compared to $0.1 million for the year
ended December 31, 1995. See "Business" on page 3 for additional discussion of
the Company's products and services.
14
<PAGE>
RESULTS OF OPERATIONS (IN THOUSANDS)
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated. The Company's results
of operations include CSG Systems' results of operations since the
Acquisition. For purposes of the following analysis, CSG Systems' results of
operations for the eleven months ended November 30, 1994, have been combined
with the Company's results of operations for the one month ended December 31,
1994, by adding the corresponding items without adjustment. This computation
was done to permit useful comparison between the aggregated twelve months
ended December 31, 1996, 1995 and 1994. The results of Bytel's operations for
the six months ended December 31, 1996, are included in the following table
and considered in the discussion of the Company's operations that follow:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- ------- -------- ------- -------- -------
(COMBINED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Processing and related
services.............. $113,422 85.8% $ 96,343 99.9% $ 83,838 100.0%
Software license and
maintenance fees...... 14,736 11.1 57 0.1 -- --
Professional services.. 4,139 3.1 4 -- -- --
-------- ----- -------- ----- -------- ------
Total revenues....... 132,297 100.0 96,404 100.0 83,838 100.0
-------- ----- -------- ----- -------- ------
Expenses:
Cost of revenues:
Cost of processing and
related services:
Direct costs.......... 52,027 39.3 46,670 48.4 38,624 46.1
Amortization of
acquired software.... 11,003 8.3 11,000 11.4 917 1.1
Amortization of
client contracts and
related
intangibles.......... 4,092 3.1 4,092 4.2 1,935 2.3
-------- ----- -------- ----- -------- ------
Total cost of
processing and
related services.... 67,122 50.7 61,762 64.0 41,476 49.5
Cost of software
license and
maintenance fees...... 5,040 3.8 -- -- -- --
Cost of professional
services.............. 2,083 1.6 -- -- -- --
-------- ----- -------- ----- -------- ------
Total cost of
revenues............ 74,245 56.1 61,762 64.0 41,476 49.5
-------- ----- -------- ----- -------- ------
Gross margin........... 58,052 43.9 34,642 36.0 42,362 50.5
-------- ----- -------- ----- -------- ------
Operating expenses:
Research and
development........... 20,206 15.3 14,278 14.8 8,724 10.4
Charge for purchased
research and
development........... -- -- -- -- 40,953 48.8
Selling and
marketing............. 8,213 6.2 3,770 3.9 3,347 4.0
General and
administrative:
General and
administrative....... 13,702 10.4 11,406 11.8 12,534 15.0
Amortization of
noncompete
agreements and
goodwill............. 6,392 4.8 5,680 5.9 1,373 1.6
Stock-based employee
compensation......... 3,570 2.7 841 0.9 -- --
Depreciation........... 5,121 3.9 5,687 5.9 3,953 4.7
-------- ----- -------- ----- -------- ------
Total operating
expenses............ 57,204 43.3 41,662 43.2 70,884 84.5
-------- ----- -------- ----- -------- ------
Operating income
(loss)................. 848 0.6 (7,020) (7.2) (28,522) (34.0)
-------- ----- -------- ----- -------- ------
Other income (expense):
Interest expense....... (4,168) (3.1) (9,070) (9.4) (1,836) (2.2)
Interest income........ 844 0.6 663 0.7 266 0.3
-------- ----- -------- ----- -------- ------
Total other.......... (3,324) (2.5) (8,407) (8.7) (1,570) (1.9)
-------- ----- -------- ----- -------- ------
Loss before income
taxes, extraordinary
item and discontinued
operations............. (2,476) (1.9) (15,427) (15.9) (30,092) (35.9)
Income tax provision... -- -- -- -- (1,762) (2.1)
-------- ----- -------- ----- -------- ------
Loss before
extraordinary item and
discontinued
operations............. (2,476) (1.9) (15,427) (15.9) (31,854) (38.0)
Extraordinary loss from
early extinguishment of
debt................... (1,260) (0.9) -- -- -- --
-------- ----- -------- ----- -------- ------
Loss from continuing
operations............. (3,736) (2.8) (15,427) (15.9) (31,854) (38.0)
-------- ----- -------- ----- -------- ------
Discontinued operations:
Loss from operations... -- -- (3,093) (3.2) (239) (0.3)
Loss from disposition.. -- -- (660) (0.7) -- --
-------- ----- -------- ----- -------- ------
Total loss from
discontinued
operations.......... -- -- (3,753) (3.9) (239) (0.3)
-------- ----- -------- ----- -------- ------
Net loss................ $ (3,736) (2.8%) $(19,180) (19.8%) $(32,093) (38.3%)
======== ===== ======== ===== ======== ======
</TABLE>
15
<PAGE>
TWELVE MONTHS ENDED DECEMBER 31, 1996 AND 1995
Revenues. Total revenues in 1996 increased 37.2% to $132.3 million, from
$96.4 million in 1995, due primarily to i) increased revenue from the
Company's existing processing and related ancillary services, and ii)
increased revenue from the Company's new software products and professional
services.
Processing and related services revenue in 1996 increased 17.7% to $113.4
million, from $96.3 million in 1995, due primarily to an increased number of
customers of the Company's clients which were serviced by the Company and
increased revenue per customer. Customers serviced as of December 31, 1996 and
1995, were 19.2 million and 18.0 million, respectively, an increase of 6.9%.
The increase in the number of customers serviced was due primarily to internal
customer growth experienced by existing clients and the addition of new
clients. Revenue per customer increased due to annual price increases included
in client contracts and increased usage of ancillary services by existing
clients.
Revenue from the Company's new software products, primarily ACSR and CSG
VantagePoint, and professional services, as well as revenue from the software
products and related services of Bytel, were $18.9 million in 1996 compared to
$0.1 million in 1995.
Gross Margin. Gross margin in 1996 increased 67.6% to $58.1 million, from
$34.6 million in 1995, due primarily to revenue growth. The gross margin
percentage increased to 43.9% in 1996, compared to 36.0% in 1995. The overall
increase in the gross margin percentage is due primarily to i) an increase in
the gross margin percentage for processing and related services, which
resulted primarily from annual price increases included in client contracts,
tight cost controls in delivering these services, increased usage of higher-
margined ancillary services by existing customers, and the increased leverage
from the larger revenue base in relation to the amortization of acquired
software and amortization of client contracts and related intangibles recorded
in 1996, and ii) a favorable change in revenue mix which included more higher-
margined software products during 1996 than 1995. The Company's gross margin
percentage for 1996 and 1995, excluding Acquisition Charges of $15.1 million
for both years, was 55.3% and 51.6%, respectively.
Research and Development Expense. Research and development expense in 1996
increased 41.5% to $20.2 million, from $14.3 million in 1995, due primarily to
increased development efforts on several new products which the Company
developed in 1996 or is currently developing, principally CSG Phoenix(TM), and
to enhancements of the Company's existing products. The increase in expense
consists primarily of increases in salaries, benefits, and other programming-
related expenses. The Company intends to continue to increase its research and
development expenditures. The Company capitalized software development costs
of approximately $3.1 million in 1996, which consisted of $2.5 million of
internal costs and $0.6 million of purchased software. Costs capitalized in
1996 related to CSG Phoenix, ACSR Telephony, CSG.web(TM) and CSG VantagePoint.
No software development costs were capitalized during 1995.
Selling and Marketing Expense. Selling and marketing expense in 1996
increased 117.9% to $8.2 million, from $3.8 million in 1995. As a percentage
of revenues, selling and marketing expense increased to 6.2% in 1996, compared
to 3.9% in 1995. The increase in expense is due primarily to a realignment of
the Company's sales force. Subsequent to the Acquisition, a substantial
portion of the previous sales force was terminated during the three months
ended March 31, 1995, and senior management focused on sales responsibilities
in 1995. The Company began building a new direct sales force in mid-1995 and
continued to expand its sales force throughout 1996.
General and Administrative Expense. General and administrative (G&A) expense
in 1996 increased 20.1% to $13.7 million, from $11.4 million in 1995. As a
percentage of revenues, G&A expense decreased to 10.4% in 1996, compared to
11.8% in 1995. The increase in expense relates primarily to the development of
the Company's management team and to related administrative staff added during
1996 and 1995 to support the Company's growth. The decrease in G&A expense as
a percentage of revenue is due primarily to increased leverage from the larger
revenue base in relation to the level of G&A expenses incurred.
16
<PAGE>
Amortization of Noncompete Agreements and Goodwill. Amortization of
noncompete agreements and goodwill in 1996 increased 12.5% to $6.4 million,
from $5.7 million in 1995. 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. 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. At
that date, the Company recognized total deferred compensation of $5.8 million
which represented the difference between the price paid by the employees and
the estimated fair value of the stock at October 19, 1995. 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 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
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
percent 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. Stock-based employee compensation expense for the
years ended December 31, 1996 and 1995, was $3.6 million and $0.8 million,
respectively. Deferred compensation of $1.2 million as of December 31, 1996,
is reflected as a component of stockholders' equity in the Company's
Consolidated Financial Statements. Amortization of the stock-based deferred
compensation subsequent to 1996 will be approximately $0.4 million per year.
Interest Expense. Interest expense in 1996 decreased 54.0% to $4.2 million,
from $9.1 million in 1995, 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.
Discontinued Operations. The loss of $3.8 million in 1995, relates to the
Company's investment in Anasazi which was disposed of in August 1995.
TWELVE MONTHS ENDED DECEMBER 31, 1995 AND 1994
Revenues. Total revenues in 1995 increased 15.0% to $96.4 million, from
$83.8 million in 1994, due primarily to an increased number of customers of
the Company's clients which were serviced by the Company and increased revenue
per customer. Customers serviced as of December 31, 1995 and 1994, were 18.0
million and 16.4 million, respectively, an increase of 9.4%. 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 annual price increases included in client contracts
and increased usage of ancillary services and customized print and mail
services by existing clients.
Gross Margin. Gross margin in 1995 decreased 18.2% to $34.6 million, from
$42.4 million in 1994. The gross margin percentage decreased to 36.0% in 1995,
compared to 50.5% in 1994. These decreases are due primarily to i) increased
direct costs as a percentage of revenues, and ii) increased amortization of
acquired software and amortization of client contracts and related
intangibles. The Company's gross margin percentage, excluding Acquisition
Charges of $15.1 million and $1.3 million for 1995 and 1994, was 51.6% and
52.0%, respectively.
17
<PAGE>
As a percentage of revenues, direct costs of processing and related services
increased to 48.4% in 1995, compared to 46.1% in 1994. This increase is due
primarily to the increased cost of services per customer, which resulted
primarily from increased paper costs, increased data processing and related
costs, increases in employee salaries and benefits, and the inclusion of costs
of conversion for certain clients.
The increase in amortization of acquired software and amortization of client
contracts and related intangibles in 1995, compared to 1994, relates primarily
to the portion of the Acquisition purchase price allocated to these
intangibles, as 1994 includes only one month of amortization compared to a
full twelve months for 1995.
Research and Development Expense. Research and development expense in 1995
increased 63.7% to $14.3 million, from $8.7 million in 1994, due primarily to
development of CSG Phoenix, ACSR and related products, and to enhancements of
the Company's existing products. The increase consists primarily of increases
in salaries, benefits, and other programming-related expenses. No software
development costs were capitalized during 1995 or 1994.
Charge for Purchased Research and Development. A one-time charge of $40.9
million was taken in December 1994 for the portion of the Acquisition purchase
price allocated to purchased research and development, related primarily to
CSG Phoenix and ACSR, which had not reached technological feasibility as of
the Acquisition date.
Selling and Marketing Expense. Selling and marketing expense in 1995
increased 12.6% to $3.8 million, from $3.3 million in 1994. As a percentage of
revenues, selling and marketing expense decreased to 3.9% in 1995, compared to
4.0% in 1994. The increase in expense is due primarily to a realignment of the
Company's sales force. Subsequent to the Acquisition, a substantial portion of
the previous sales force was terminated, and senior management focused on
sales responsibilities in 1995. The Company began building a new direct sales
force in mid-1995 and has added staff since that time.
General and Administrative Expense. G&A expense in 1995 decreased 9.0% to
$11.4 million, from $12.5 million in 1994. As a percentage of revenues, G&A
expense decreased to 11.8% in 1995, compared to 15.0% in 1994. These decreases
relate primarily to the elimination of corporate overhead charges and other
costs which existed prior to the Acquisition.
Amortization of Noncompete Agreement and Goodwill. Amortization of
noncompete agreement and goodwill in 1995 increased 313.7% to $5.7 million,
from $1.4 million in 1994, due primarily to the portion of the Acquisition
purchase price allocated to a noncompete agreement and goodwill, as 1994
includes only one month of amortization compared to a full twelve months for
1995.
Stock-Based Employee Compensation. Stock-based employee compensation of $0.8
million in 1995 relates to purchases of the Company's common stock by
executive officers and key employees, as discussed above.
Depreciation Expense. Depreciation expense in 1995 increased 43.9% to $5.7
million, from $4.0 million in 1994. As a percentage of revenues, depreciation
expense increased to 5.9% in 1995, compared to 4.7% in 1994. These increases
are due primarily to the portion of the Acquisition purchase price allocated
to fixed assets and depreciation from capital expenditures incurred in 1995 in
support of research and development efforts and the overall growth of the
Company.
Interest Expense. Interest expense in 1995 increased by 394.0% to $9.1
million, from $1.8 million in 1994, with the increase attributable to interest
on the Company's long-term debt incurred as a result of the Acquisition.
Income tax expense. Income tax provision decreased to zero in 1995, from
$1.8 million in 1994, as the Company had income in 1994 before the Acquisition
and did not have income in 1995. No income tax benefit
18
<PAGE>
for the Company's net loss was recorded for 1995, as realization of future
benefits was not sufficiently assured as of December 31, 1995.
Discontinued Operations. The loss of $3.8 million and $0.2 million from
discontinued operations in 1995 and 1994, respectively, relates to the
Company's investment in Anasazi, which was disposed of in August 1995.
GENERAL
Significant Customers. The Company has two significant clients, Time Warner
and Tele-Communications, Inc. (TCI). Time Warner accounted for $30.3 million
or 22.9% of total revenues for 1996, and $26.9 million or 27.9% of total
revenues in 1995. TCI accounted for $34.3 million or 25.9% of total revenues
in 1996, and $24.3 million or 25.2% of total revenues for 1995. The TCI
amounts include revenue from both its cable television and Primestar DBS
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 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. 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.
CSG Phoenix. Release Version 0.7 of CSG Phoenix, which is the Company's next
generation customer management system for the converging communications
industries, was delivered to two customers in December 1996 for testing and to
facilitate their implementation planning activities. Release Version 1.1,
which contains additional functionality for convergence including telephony,
but does not contain certain functionality related to statement processing, is
scheduled to be delivered by the end of March 1997 for testing and integration
at customer sites. Release Version 1.2, which will include additional
functionality originally scheduled for Release Version 1.0, is scheduled to be
delivered to customer sites in the second quarter 1997. The Company presently
expects a beta site to be installed in the third 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
delivery of CSG Phoenix 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. Although the Company incurred a net loss in 1996, the Company
expects to pay U.S income taxes for 1996, due primarily to differences in the
timing of recognition of the amortization of intangible assets for financial
reporting and tax purposes. Based on its projections, the Company expects to
pay U.S. income taxes for 1997. Bytel has an operating loss carryforward of
approximately $1.1 million as of December 31, 1996, which has no expiration
date. Based on this, the Company does not expect Bytel to pay any significant
United Kingdom taxes for 1997.
At December 31, 1996, management of the Company evaluated its 1995 and 1996
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 $1.4 million. The Company has recorded a valuation
allowance of approximately $24.0 million against the remaining
19
<PAGE>
net deferred tax assets since realization of these future benefits is not
sufficiently assured as of December 31, 1996.
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's principal sources of liquidity
included cash and cash equivalents of $6.1 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 December 31, 2000.
During 1996, the Company generated $29.1 million in net cash flow from
operating activities and received a $2.0 million principal payment on a note
receivable from Anasazi. Cash generated from these sources was used to fund
capital expenditures of $8.2 million, additions to software of $3.6 million,
acquisitions of $4.9 million and to repay long-term debt of $12.3 million.
Also, 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 $44.8 million. The net proceeds from the IPO 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. As of the closing of the IPO, all
of the 8,999,999 outstanding shares of Redeemable Convertible Preferred Stock
were automatically converted into 17,999,998 shares of common stock, at which
time the accrued dividends became payable. In conjunction with the $40.3
million repayment of long-term debt, the Company decreased the interest rates
on its long-term debt by favorably amending its credit facility with its bank
in April 1996.
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 anticipated capital
expenditures through the next twelve months.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CSG SYSTEMS INTERNATIONAL, INC.
Report of Independent Public Accountants................................. 22
Consolidated Balance Sheets as of December 31, 1996 and 1995............. 23
Consolidated Statements of Operations for the Years Ended December 31,
1996 and 1995, and the Period From Inception (October 17, 1994) Through
December 31, 1994....................................................... 24
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996 and 1995, and the Period From Inception (October 17,
1994) Through December 31, 1994......................................... 25
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996 and 1995, and the Period from Inception (October 17, 1994) Through
December 31, 1994....................................................... 26
Notes to Consolidated Financial Statements............................... 27
CABLE SERVICES GROUP, INC.
Report of Independent Public Accountants................................. 45
Consolidated Balance Sheet as of November 30, 1994....................... 46
Consolidated Statement of Income for the Eleven Months Ended November 30,
1994.................................................................... 47
Consolidated Statement of Stockholder's Equity for the Eleven Months
Ended November 30, 1994................................................. 48
Consolidated Statement of Cash Flows for the Eleven Months Ended November
30, 1994................................................................ 49
Notes to Consolidated Financial Statements............................... 50
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
CSG Systems International, Inc.:
We have audited the accompanying consolidated balance sheets of CSG Systems
International, Inc., a Delaware corporation, and Subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for years ended December 31, 1996 and
1995, and the period from inception (October 17, 1994) through December 31,
1994. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the results of
their operations and their cash flows for the years ended December 31, 1996
and 1995, and the period from inception (October 17, 1994) through December
31, 1994, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Omaha, Nebraska
January 27, 1997
22
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 6,134 $ 3,603
Accounts receivable-
Trade-
Billed, net of allowance of $819 and $521................ 33,141 22,400
Unbilled................................................. 5,220 803
Other.................................................. 1,342 1,925
Deferred income taxes..................................... 45 --
Other current assets...................................... 2,574 585
-------- --------
Total current assets................................... 48,456 29,316
-------- --------
Property and equipment, net................................ 13,093 9,881
Investment in discontinued operations...................... 732 2,732
Software, net.............................................. 13,629 21,083
Noncompete agreements and goodwill, net.................... 25,730 25,657
Client contracts and related intangibles, net.............. 9,752 13,846
Deferred income taxes...................................... 1,356 --
Other assets............................................... 2,162 3,038
-------- --------
Total assets........................................... $114,910 $105,553
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt...................... $ 10,000 $ 10,000
Customer deposits......................................... 6,450 5,505
Trade accounts payable.................................... 12,620 6,110
Accrued liabilities....................................... 8,177 4,421
Deferred revenue.......................................... 5,384 622
Accrued income taxes...................................... 945 --
Other current liabilities................................. 450 299
-------- --------
Total current liabilities.............................. 44,026 26,957
-------- --------
Long-term debt, net of current maturities.................. 22,500 75,068
Deferred revenue........................................... 6,420 2,531
Commitments and contingencies (Note 8)
Redeemable convertible preferred stock, par value $.01 per
share; zero shares and 9,500,000 shares authorized; zero
shares and 8,999,999 shares issued and outstanding........ -- 62,985
Stockholders' equity (deficit):
Preferred stock, par value $.01 per share; 10,000,000
shares and zero shares authorized; zero shares issued and
outstanding.............................................. -- --
Common stock, par value $.01 per share; 100,000,000 shares
and 50,000,000 shares authorized; 2,890,522 shares and
18,256,998 shares reserved for redeemable convertible
preferred stock, employee stock purchase plan and stock
incentive plans; 25,488,876 shares and 4,243,000 shares
issued and outstanding................................... 255 42
Additional paid-in capital................................ 111,367 7,720
Deferred employee compensation............................ (1,207) (4,968)
Notes receivable from employee stockholders............... (861) (976)
Accumulated translation adjustments....................... 573 --
Accumulated deficit....................................... (68,163) (63,806)
-------- --------
Total stockholders' equity (deficit)................... 41,964 (61,988)
-------- --------
Total liabilities and stockholders' equity............. $114,910 $105,553
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(OCTOBER 17,
1994)
YEAR ENDED DECEMBER 31, THROUGH
------------------------ DECEMBER 31,
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Processing and related services....... $ 113,422 $ 96,343 $ 7,757
Software license and maintenance
fees................................. 14,736 57 --
Professional services................. 4,139 4 --
----------- ----------- ----------
Total revenues...................... 132,297 96,404 7,757
Expenses:
Cost of revenues:
Cost of processing and related
services:
Direct costs......................... 52,027 46,670 3,647
Amortization of acquired software.... 11,003 11,000 917
Amortization of client contracts and
related intangibles................. 4,092 4,092 341
----------- ----------- ----------
Total cost of processing and related
services........................... 67,122 61,762 4,905
Cost of software license and
maintenance fees..................... 5,040 -- --
Cost of professional services......... 2,083 -- --
----------- ----------- ----------
Total cost of revenues.............. 74,245 61,762 4,905
----------- ----------- ----------
Gross margin.......................... 58,052 34,642 2,852
----------- ----------- ----------
Operating expenses:
Research and development.............. 20,206 14,278 1,044
Charge for purchased research and
development.......................... -- -- 40,953
Selling and marketing................. 8,213 3,770 293
General and administrative:
General and administrative........... 13,702 11,406 3,073
Amortization of noncompete
agreements and goodwill............. 6,392 5,680 547
Stock-based employee compensation.... 3,570 841 --
Depreciation.......................... 5,121 5,687 433
----------- ----------- ----------
Total operating expenses............ 57,204 41,662 46,343
----------- ----------- ----------
Operating income (loss)................ 848 (7,020) (43,491)
----------- ----------- ----------
Other income (expense):
Interest expense...................... (4,168) (9,070) (769)
Interest income....................... 844 663 39
----------- ----------- ----------
Total other......................... (3,324) (8,407) (730)
----------- ----------- ----------
Loss before income taxes, extraordinary
item and discontinued operations...... (2,476) (15,427) (44,221)
Income tax benefit.................... -- -- 3,757
----------- ----------- ----------
Loss before extraordinary item and
discontinued operations............... (2,476) (15,427) (40,464)
Extraordinary loss from early
extinguishment of debt................ (1,260) -- --
----------- ----------- ----------
Loss from continuing operations........ (3,736) (15,427) (40,464)
----------- ----------- ----------
Discontinued operations:
Loss from operations.................. -- (3,093) (239)
Loss from disposition................. -- (660) --
----------- ----------- ----------
Total loss from discontinued
operations......................... -- (3,753) (239)
----------- ----------- ----------
Net loss............................... $ (3,736) $ (19,180) $ (40,703)
=========== =========== ==========
Net loss per common and equivalent
share:
Loss before extraordinary item and
discontinued operations.............. $ (0.10) $ (0.69) $ (1.80)
Extraordinary loss from early
extinguishment of debt............... (0.05) -- --
Loss from discontinued operations..... -- (0.17) (0.01)
----------- ----------- ----------
Net loss.............................. $ (0.15) $ (0.86) $ (1.81)
=========== =========== ==========
Weighted average common and equivalent
shares................................ 24,988,244 22,494,748 22,494,748
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995,
AND THE PERIOD FROM INCEPTION (OCTOBER 17, 1994) TO DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
ADDITIONAL DEFERRED FROM ACCUMULATED STOCKHOLDERS'
PREFERRED COMMON PAID-IN EMPLOYEE EMPLOYEE TRANSLATION ACCUMULATED EQUITY
STOCK STOCK CAPITAL COMPENSATION STOCKHOLDERS ADJUSTMENTS DEFICIT (DEFICIT)
--------- ------ ---------- ------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 17,
1994................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of 2,587,500
shares of common stock
for cash ($.22 per
share)................. -- 26 549 -- -- -- -- 575
Accretion of redeemable
convertible preferred
stock.................. -- -- -- -- -- -- (4) (4)
Accrued dividends on
redeemable convertible
preferred stock........ -- -- -- -- -- -- (297) (297)
Net loss................ -- -- -- -- -- -- (40,703) (40,703)
----- ----- -------- ------- ----- ----- -------- -------
Balance, December 31,
1994................... -- 26 549 -- -- -- (41,004) (40,429)
Issuance of 1,655,500
shares of common stock
under employee stock
purchase plan (ranging
from $.22 to $4.25 per
share)................. -- 16 7,171 (5,809) (976) -- -- 402
Amortization of deferred
stock-based employee
compensation expense... -- -- -- 841 -- -- -- 841
Accretion of redeemable
convertible preferred
stock.................. -- -- -- -- -- -- (36) (36)
Accrued dividends on
redeemable convertible
preferred stock........ -- -- -- -- -- -- (3,586) (3,586)
Net loss................ -- -- -- -- -- -- (19,180) (19,180)
----- ----- -------- ------- ----- ----- -------- -------
Balance, December 31,
1995................... -- 42 7,720 (4,968) (976) -- (63,806) (61,988)
Issuance of 3,335,000
shares of common stock
for cash pursuant to
initial public
offering, net of
issuance costs ($13.43
per share)............. -- 33 44,761 -- -- -- -- 44,794
Accrued dividends on
redeemable convertible
preferred stock........ -- -- -- -- -- -- (614) (614)
Conversion of 8,999,999
shares of redeemable
convertible preferred
stock into 17,999,998
shares of common
stock.................. -- 180 58,929 -- -- -- -- 59,109
Amortization of deferred
stock-based employee
compensation expense... -- -- -- 3,570 -- -- -- 3,570
Purchase and
cancellation of 105,600
shares of common stock
(ranging from $.22 per
share to $.45 per
share)................. -- -- (221) 191 5 -- -- (25)
Issuance of 5,925 shares
of common stock as
compensation ($15 per
share)................. -- -- 89 -- -- -- -- 89
Exercise of stock
options for 4,800
shares of common stock
(ranging from $1.25 per
share to $3.25 per
share)................. -- -- 6 -- -- -- -- 6
Employee purchase of
5,753 shares of common
stock pursuant to
employee stock purchase
plan (ranging from
$13.07 per share to
$17.19 per share)...... -- -- 83 -- -- -- -- 83
Accretion of redeemable
convertible preferred
stock.................. -- -- -- -- -- -- (7) (7)
Payment of note
receivable from
employee stockholder... -- -- -- -- 110 -- -- 110
Translation
adjustments............ -- -- -- -- -- 573 -- 573
Net loss................ -- -- -- -- -- -- (3,736) (3,736)
----- ----- -------- ------- ----- ----- -------- -------
Balance, December 31,
1996................... $ -- $ 255 $111,367 $(1,207) $(861) $ 573 $(68,163) $41,964
===== ===== ======== ======= ===== ===== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(OCTOBER 17,
YEAR ENDED 1994)
DECEMBER 31, THROUGH
------------------ DECEMBER 31,
1996 1995 1994
-------- -------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (3,736) $(19,180) $ (40,703)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities--
Depreciation................................. 5,121 5,687 433
Amortization................................. 22,180 21,686 1,805
Income tax benefit........................... -- -- (3,757)
Purchased research and development........... -- -- 40,953
Stock-based employee compensation............ 3,570 841 --
Extraordinary loss from early extinguishment
of debt..................................... 1,260 -- --
Loss from discontinued operations............ -- 3,753 239
Changes in operating assets and liabilities:
Trade accounts receivable, net.............. (12,673) (3,265) (937)
Other receivables........................... 583 157 (2,055)
Deferred income taxes....................... (1,401) -- --
Other current and noncurrent assets......... (2,968) (117) (294)
Customer deposits........................... 945 977 --
Trade accounts payable and accrued
liabilities................................ 7,447 (1,565) 3,711
Deferred revenue............................ 8,651 2,800 6
Other current liabilities................... 151 3 95
-------- -------- ---------
Net cash provided by (used in) operating
activities................................ 29,130 11,777 (504)
-------- -------- ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash
acquired.................................... (4,918) -- (137,013)
Purchases of property and equipment, net..... (8,181) (5,202) (238)
Additions to software........................ (3,553) -- --
Net investment in discontinued operations.... 2,000 (92) (6,632)
-------- -------- ---------
Net cash used in investing activities...... (14,652) (5,294) (143,883)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock....... 44,883 402 575
Proceeds from issuance of redeemable
convertible preferred stock................. -- -- 59,062
Payment of note receivable from employee
stockholder................................. 110 -- --
Purchase and cancellation of common stock.... (25) -- --
Payment of dividends for redeemable
convertible preferred stock................. (4,497) -- --
Proceeds from long-term debt and revolving
credit facility............................. -- -- 95,351
Payments on long-term debt and revolving
credit facility............................. (52,568) (9,932) (351)
Deferred financing costs..................... -- -- (3,600)
-------- -------- ---------
Net cash provided by (used in) financing
activities................................ (12,097) (9,530) 151,037
-------- -------- ---------
Effect of exchange rate fluctuations on cash.. 150 -- --
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 2,531 (3,047) 6,650
Cash and cash equivalents, beginning of
period....................................... 3,603 6,650 --
-------- -------- ---------
Cash and cash equivalents, end of period...... $ 6,134 $ 3,603 $ 6,650
======== ======== =========
Supplemental disclosures of cash flow
information:
Cash paid (received) during the period for-
Interest.................................... $ 4,000 $ 8,463 $ --
Income taxes................................ $ (655) $ 1,176 $ --
</TABLE>
Supplemental disclosure of noncash financing activities:
During 1996, the Company converted 8,999,999 shares of redeemable convertible
preferred stock into 17,999,998 shares of common stock.
During 1995, the Company issued common stock in connection with an employee
stock purchase plan and received full recourse promissory notes from
employees totaling $976.
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
CSG Systems International, Inc. (the Company or CSG) was formed on October
17, 1994, for the purpose of acquiring all of the outstanding capital stock of
Cable Services Group, Inc. from First Data Corporation (FDC). The Company
acquired all of the outstanding shares of Cable Services Group, Inc. on
November 30, 1994 (the Acquisition) (Note 3). Subsequent to the Acquisition,
Cable Services Group, Inc.'s name was changed to CSG Systems, Inc. (CSG
Systems). The Company did not have any substantive operations prior to the
acquisition of Cable Services Group, Inc. Contemporaneously with the
Acquisition, the Company purchased all of the outstanding capital stock of
Anasazi Inc. (Anasazi) (Note 9). On June 28, 1996, the Company purchased all
of the outstanding shares of Bytel Limited (Bytel) (Note 3).
The Company provides customer management solutions, encompassing processing
and related services, software products and professional services, for the
converging cable television, direct broadcast satellite, telecommunications
and on-line services industries. The Company's products and services automate
the full spectrum of billing and customer services functions, including sales
support and order processing, invoice calculation and production, and
management reporting and market analysis.
The Company derived approximately 77.3 percent, 84.7 percent, and 77.2
percent of its total revenues in the years ended December 31, 1996 and 1995,
and the period from inception (October 17, 1994) through December 31, 1994,
respectively, from its core product, Communications Control System (CCS(TM))
and related products and ancillary services.
CSG has two significant clients which, in the aggregate, contributed
approximately 48.8 percent, 53.1 percent, and 54.2 percent of total revenues
for the years ended December 31, 1996 and 1995, and the period from inception
(October 17, 1994) through December 31, 1994, respectively. The largest single
client contributed approximately 25.9 percent, 27.9 percent and 31.5 percent
of total revenues for the years ended December 31, 1996 and 1995, and the
period from inception (October 17, 1994) through December 31, 1994,
respectively.
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 $44.8 million. As of the closing of the IPO, all of the
8,999,999 outstanding shares of Redeemable Convertible Series A Preferred
Stock (Redeemable Convertible Preferred Stock) were automatically converted
into 17,999,998 shares of common stock. The Company used IPO proceeds to repay
$40.3 million of outstanding bank indebtedness (Note 5) and to pay $4.5
million of accrued dividends on the Redeemable Convertible Preferred Stock
(Note 4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and CSG Systems since the acquisition of CSG Systems by the
Company on November 30, 1994, and the accounts of Bytel since June 28, 1996.
All material intercompany accounts and transactions have been eliminated.
Use of Estimates in Preparation of Consolidated Financial Statements
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
27
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Revenue Recognition
Processing and related services are recognized as the services are
performed. Processing fees are typically billed based on the number of
client's customers serviced, ancillary services are typically billed on a per
transaction basis, and certain customized print and mail services are billed
on a usage basis. Software license fees consist of both one-time perpetual
licenses and term licenses. Perpetual license fees are typically recognized
upon shipment, depending upon the nature and extent of the installation
services, if any, to be provided by the Company. Term license fees and
maintenance fees are recognized ratably over the contract term. Professional
services are recognized as the related services are performed.
Payments received for revenues not yet recognized are reflected as deferred
revenue in the accompanying consolidated balance sheets.
Property and Equipment
Property and equipment are recorded at cost and are depreciated over their
estimated useful lives ranging from two to ten years. Depreciation is computed
using the straight-line method.
Property and equipment at December 31 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Computer equipment..................................... $ 15,546 $10,827
Leasehold improvements................................. 1,205 1,055
Operating equipment.................................... 4,156 2,048
Furniture and equipment................................ 1,971 1,674
Construction in process................................ 857 --
Other.................................................. 22 36
-------- -------
23,757 15,640
Less--accumulated depreciation......................... (10,664) (5,759)
-------- -------
Property and equipment, net............................ $ 13,093 $ 9,881
======== =======
</TABLE>
Software
Software at December 31 consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Acquired software........................................ $ 33,422 $ 33,000
Internally developed software............................ 3,131 --
-------- --------
36,553 33,000
Less--accumulated amortization........................... (22,924) (11,917)
-------- --------
Software, net............................................ $ 13,629 $ 21,083
======== ========
</TABLE>
Acquired software resulted from the Acquisition and is stated at cost.
28
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company capitalizes certain software development costs when the
resulting products reach technological feasibility and begins amortization of
such costs upon the general availability of the products for licensing.
Capitalized costs of $3.1 million for 1996 include $2.5 million of internal
development costs and $0.6 million of purchased software.
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 (a) the ratio of
current gross revenue for a product to the total of current and anticipated
gross revenue for the product or (b) the straight-line method over the
remaining estimated economic life of the product. Currently, estimated lives
of two to three years are used in the calculation of amortization.
Noncompete Agreements and Goodwill
Noncompete agreements and goodwill as of December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Noncompete agreements...................................... $26,812 $25,000
Goodwill................................................... 11,490 6,812
------- -------
38,302 31,812
Less-accumulated amortization.............................. (12,572) (6,155)
------- -------
Noncompete agreements and goodwill, net.................. $25,730 $25,657
======= =======
</TABLE>
The noncompete agreements resulted from acquisitions and are being amortized
on a straight-line basis over the terms of the agreements, ranging from three
to five years. Goodwill resulted from acquisitions and is being amortized over
seven to ten years on a straight-line basis (Note 3).
Client Contracts and Related Intangibles
Client contracts and client conversion methodologies resulted from the
Acquisition and are being amortized over their estimated lives of five and
three years, respectively. As of December 31, 1996 and 1995, accumulated
amortization for these items was $8.5 million and $4.4 million, respectively.
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. When factors indicate that these assets should
be evaluated for possible impairment, the Company uses an estimate of the
Company's undiscounted future cash flows over the remaining life of these
assets in measuring whether these assets are realizable. No adjustments to the
carrying value of these assets or their estimated lives have been made since
the inception of the Company.
29
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial Instruments with Market Risk and Concentrations of Credit Risk
In the normal course of business, the Company is exposed to credit risk
resulting from the possibility that a loss may occur from the failure of
another party to perform according to the terms of a contract. The Company
regularly monitors credit risk exposures and takes steps to mitigate the
likelihood of these exposures resulting in a loss. The primary counterparties
to the Company's accounts receivable and sources of the Company's revenues
consist of cable television providers throughout the United States.
Translation of Foreign Currency
The Company's foreign subsidiary, Bytel, uses the British pound as its
functional currency. Bytel's 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 as a component of
stockholders' equity. Transaction gains and losses related to intercompany
accounts are not material and are included in the determination of net loss.
Net Loss Per Common and Equivalent Share
Net loss per common and equivalent share for the year ended December 31,
1996, is based on the weighted average number of shares of common stock and
common equivalent shares related to Redeemable Convertible Preferred Stock.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, all shares and options issued prior to 1996 have been treated as if they
were outstanding for all periods presented, including periods in which the
effect is antidilutive.
Increase in Authorized Shares and Stock Split
In January 1996, the Company completed a two-for-one stock split of its
common stock effected as a stock dividend. Accordingly, all share and per
share amounts have been retroactively adjusted. In March 1996, the Company
amended its Certificate of Incorporation to increase the number of authorized
shares of common stock to 100,000,000 and to authorize 10,000,000 shares of
preferred stock.
Reclassification
Certain December 31, 1995, amounts have been reclassified to conform to the
December 31, 1996, presentation.
3. ACQUISITIONS
On November 30, 1994, the Company acquired all of the outstanding capital
stock of CSG Systems for approximately $137 million in cash. The Acquisition
was funded primarily from proceeds from the issuance of common and preferred
stock (Note 4) and long-term debt (Note 5).
30
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The acquisition of CSG Systems was recorded using the purchase method of
accounting. Of the $137 million purchase price, $13 million was allocated to
net tangible assets, with property and equipment of $10.2 million being the
primary component. The cost in excess of the fair value of the net tangible
assets was allocated to the following intangible assets (in thousands):
<TABLE>
<CAPTION>
ASSET LIFE
AMOUNT (YEARS)
-------- ----------
<S> <C> <C>
Purchased research and development....................... $ 40,953 --
Acquired software........................................ 33,000 3
Noncompete agreement and goodwill:
Noncompete agreement................................... 25,000 5
Goodwill............................................... 6,812 10
Client contracts and related intangibles:
Client contracts....................................... 15,000 5
Client conversion methodologies........................ 3,280 3
--------
$124,045
========
</TABLE>
Purchased research and development represents research and development of
software technologies which had not reached technological feasibility as of
the Acquisition date. Purchased research and development was charged to
operations as of the Acquisition date.
Acquired software represents the value assigned to existing software
products, the noncompete agreement is with FDC and has a five-year term,
client contracts represent the value assigned to existing client contracts as
of the Acquisition date, and client conversion methodologies represent the
value assigned to documented conversion methods, systems, materials and
procedures that enable the Company to efficiently convert clients to the
Company's systems.
The following represents the unaudited pro forma results of operations for
the year ended December 31, 1994, as if the Acquisition had occurred on
January 1, 1994 (in thousands, except per share amounts):
<TABLE>
<S> <C>
Total revenues................................................. $ 83,838
Loss from continuing operations................................ (53,706)
Pro forma loss from continuing operations per common and
equivalent share.............................................. $ (2.39)
</TABLE>
On June 28, 1996, the Company acquired all of the outstanding shares of
Bytel for approximately $3.1 million in cash and assumption of certain
liabilities of $1.6 million (the Bytel Acquisition). The Bytel Acquisition was
recorded using the purchase method of accounting. The cost in excess of the
fair value of the net tangible assets acquired of $4.2 million was allocated
to goodwill. Bytel is a United Kingdom company which provides customer
management software to the cable and telecommunications industries in the
United Kingdom.
31
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents the unaudited pro forma results of operations as if
the Bytel Acquisition had occurred on January 1 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Total revenues......................................... $136,536 $105,275
Loss before extraordinary item and discontinued
operations............................................ (3,850) (17,660)
Pro forma loss before extraordinary item and
discontinued operations per common and equivalent
share................................................. (.15) (.79)
</TABLE>
The pro forma financial information shown above does not purport to be
indicative of results of operations that would have occurred had the
acquisitions taken place at the beginning of the periods presented or of the
future results of operations.
4. PREFERRED STOCK
The following table represents the Redeemable Convertible Preferred Stock
activity (in thousands, except share and per share amounts):
<TABLE>
<S> <C>
Balance, at inception (October 17, 1994)......................... $ --
Issuance of 8,999,999 shares for cash ($6.56 per share)........ 59,062
Accretion...................................................... 4
Accrued dividends.............................................. 297
--------
Balance, December 31, 1994....................................... 59,363
Accretion...................................................... 36
Accrued dividends.............................................. 3,586
--------
Balance, December 31, 1995....................................... 62,985
Accretion...................................................... 7
Accrued dividends.............................................. 614
Payment of accrued dividends................................... (4,497)
Conversion into 17,999,998 shares of common stock.............. (59,109)
--------
Balance, December 31, 1996....................................... $ --
========
</TABLE>
All Redeemable Convertible Preferred Stock converted into 17,999,998 shares
of the Company's common stock upon completion of the IPO.
In conjunction with the Acquisition (Note 3), the Company sold for cash
8,999,999 shares of Redeemable Convertible Preferred Stock with a par value of
$.01 per share. Total proceeds, net of issuance costs of $0.4 million, were
$59.1 million ($6.56 per share).
The holders of Redeemable Convertible Preferred Stock were entitled to vote
on all matters and were entitled to the number of votes equivalent to the
number of shares of common stock into which such shares of Redeemable
Convertible Preferred Stock were converted.
Prior to completion of the IPO, the holders of the outstanding shares of
Redeemable Convertible Preferred Stock were entitled to receive cumulative
annual dividends of $.3967 per share, prior to any dividends being paid on the
Company's common stock. No dividends or other distributions could be made with
respect to the Company's common stock until all accrued dividends on
Redeemable Convertible Preferred Stock were paid. As
32
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of December 31, 1995 and 1994, the Company had not declared any dividends on
Redeemable Convertible Preferred Stock. Cumulative accrued undeclared
dividends on Redeemable Convertible Preferred Stock as of December 31, 1995
and 1994, were approximately $3.9 million and $0.3 million, respectively. Upon
completion of the IPO and the resulting conversion into common stock, the
Company paid dividends on the Redeemable Convertible Preferred Stock of $4.5
million.
Prior to completion of the IPO, the Company was required to redeem
Redeemable Convertible Preferred Stock on November 30, 2005. The redemption
price was payable in cash and was equal to $6.61 per share plus any accrued
and unpaid dividends. The excess of the redemption value over the carrying
value was being accreted through periodic charges to accumulated deficit over
the life of the issue.
5. DEBT
The Acquisition discussed in Note 3 was partially funded with debt placed
through a $100.0 million loan agreement with a bank. The loan agreement
consisted of two term loans, one in the amount of $50.0 million (Tranche A
Loan) and one in the amount of $45.0 million (Tranche B Loan), and a Revolving
Credit Facility in the amount of $5.0 million. The loan agreement was
collateralized by substantially all of the Company's assets and CSG System's
common stock. As of December 31, 1995, the accompanying consolidated balance
sheet included $2.6 million of deferred financing costs related to this loan
agreement which were being amortized to interest expense over the term of the
loan agreement using a method which approximated the effective interest rate
method. Interest rates under the loan agreement were based on an adjusted
LIBOR rate or the bank's prime rate and were chosen at the option of the
Company.
In conjunction with the IPO, the Company refinanced its loan agreement with
its bank. The Company repaid approximately $40.6 million of the Tranche A and
Tranche B Loans, principally with IPO proceeds. The remaining balance of the
Tranche A and Tranche B Loans was refinanced with a single $40.0 million term
note with the bank (the New Loan Agreement). In conjunction with the payment
of the Tranche A and Tranche B Loans, the Company recorded an extraordinary
loss of $1.3 million for the write-off of deferred financing costs. The
Company did not recognize any income tax benefit related to the extraordinary
loss. As of December 31, 1996, the accompanying consolidated balance sheet
included $0.9 million of deferred financing costs which are being amortized to
interest expense over the term of the New Loan Agreement using a method which
approximates the effective interest rate method. Under the New Loan Agreement,
the Company retained its $5.0 million Revolving Credit Facility. The Company
pays an annual commitment fee of .375 percent on its unused Revolving Credit
Facility. Interest rates under the New Loan Agreement for both the term loan
and Revolving Credit Facility are based on an adjusted LIBOR rate or the
bank's prime rate and are chosen at the option of the Company. The New Loan
Agreement is collateralized by substantially all of the Company's assets and
CSG System's common stock.
The carrying amount of the Company's long-term debt approximates fair value
due to its variable interest rates.
33
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt as of December 31 consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Bank Loan due December 31, 2000, quarterly principal
payments
ranging from $1.6 to $2.5 million, interest at adjusted
LIBOR
plus 1.0 percent (6.375 percent at December 31, 1996).. $ 32,500 $ --
Tranche A Loan, originally due November 30, 1999,
quarterly principal payments ranging from $2.5 to $3.1
million, interest at adjusted LIBOR plus 2.5 percent
(ranging from 8.25 percent to 8.4375 percent at
December 31, 1995), paid in full in 1996............... -- 41,293
Tranche B Loan, originally due November 30, 2001,
quarterly principal payments ranging from $1.3 to $5.0
million scheduled to begin
February 28, 1999, at adjusted LIBOR plus 3 percent
(8.9735 percent
at December 31, 1995), paid in full in 1996............ -- 43,775
Revolving Credit Facility, due December 31, 2000,
interest at adjusted LIBOR plus 1.0 percent (6.375
percent at December 31, 1996).......................... -- --
-------- --------
32,500 85,068
Less-current portion.................................... (10,000) (10,000)
-------- --------
Long-term debt, net of current maturities............... $ 22,500 $ 75,068
======== ========
</TABLE>
The Company was required to make early payments on Tranche A and Tranche B
Loans upon the receipt of certain funds. During the years ended December 31,
1996 and 1995, respectively, the Company made early payments on Tranche A and
Tranche B Loans of $2.0 million and $2.4 million.
There were no outstanding borrowings on the Revolving Credit Facility during
the years ended December 31, 1996 and 1995. Maximum borrowings under the
Revolving Credit Facility for the period from inception (October 17, 1994)
through December 31, 1994, were $0.4 million. The average outstanding
borrowings and the average interest rate during the period from inception
(October 17, 1994) through December 31, 1994, were $0.2 million and 9.75
percent, respectively. The Company's ability to borrow under the Revolving
Credit Facility is subject to maintenance of certain levels of eligible
receivables. At December 31, 1996, all of the $5.0 million Revolving Credit
Facility was available to the Company.
Interest expense for the years ended December 31, 1996 and 1995, and the
period from inception (October 17, 1994) through December 31, 1994, includes
amortization of deferred financing costs of approximately $0.6 million, $0.9
million and $0.1 million, respectively.
The New Loan Agreement, as amended, requires maintenance of certain
financial ratios and contains other restrictive covenants, including
restrictions on intercompany dividends and advances from CSG Systems, a fixed
charge coverage ratio and limitations on the amount of annual capital
expenditures. As of December 31, 1996, 1995 and 1994, the Company was in
compliance with all covenants or had received the appropriate waivers from its
bank.
34
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996, scheduled maturities of the New Loan Agreement for
each of the years ending December 31 are (in thousands):
<TABLE>
<S> <C>
1997............................................................. $10,000
1998............................................................. 8,000
1999............................................................. 8,000
2000............................................................. 6,500
-------
$32,500
=======
</TABLE>
6. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." SFAS 109 is an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events which have been recognized in the Company's
consolidated financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events other
than enactment of or changes in the tax law or rates.
Income tax provision (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
YEAR ENDED (OCTOBER 17, 1994)
DECEMBER 31, THROUGH
-------------- DECEMBER 31,
1996 1995 1994
------ ------ ------------------
<S> <C> <C> <C>
Current:
Federal................................. $1,225 $ 249 $ --
State................................... 230 47 --
------ ------ --------
1,455 296 --
------ ------ --------
Deferred:
Federal................................. (1,882) (6,329) (15,849)
State................................... (353) (1,188) (2,975)
------ ------ --------
(2,235) (7,517) (18,824)
------ ------ --------
Increase in valuation allowance......... 780 7,221 15,067
------ ------ --------
Net income tax benefit.................. $ -- $ -- $ (3,757)
====== ====== ========
</TABLE>
35
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between the income tax benefit computed at the statutory
federal income tax rate and the financial statement benefit for income taxes
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
YEAR ENDED (OCTOBER 17, 1994)
DECEMBER 31, THROUGH
---------------- DECEMBER 31,
1996 1995 1994
------- ------- ------------------
<S> <C> <C> <C>
Benefit at federal rate of 34
percent.............................. $(1,270) $(6,521) $(15,116)
Losses with no current benefit........ 1,149 5,962 11,325
Basis differences from acquisition.... (1,346) -- --
Amortization of nondeductible
goodwill............................. 231 227 19
Stock-based employee compensation..... 1,214 286 --
Other................................. 22 46 15
------- ------- --------
$ -- $ -- $ (3,757)
======= ======= ========
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Current deferred tax assets:
Accrued expenses and reserves............................ $ 744 $ 1,599
Valuation allowance...................................... (699) (1,599)
------- -------
$ 45 $ --
======= =======
Noncurrent deferred tax assets (liabilities):
Purchased research and development....................... $13,040 $14,042
Software................................................. 4,743 2,275
Investment in discontinued operations.................... 2,053 2,053
Client contracts and related intangibles................. 1,766 631
Noncompete agreements.................................... 2,467 1,057
Property and equipment................................... (262) 139
Other.................................................... 883 492
------- -------
24,690 20,689
Valuation allowance...................................... (23,334) (20,689)
------- -------
$ 1,356 $ --
======= =======
</TABLE>
As part of the Bytel Acquisition, the Company acquired certain net deferred
tax assets and established a valuation allowance of approximately $1.0 million
against those net deferred tax assets as of the acquisition date. As of
December 31, 1996, Bytel has a United Kingdom operating loss carry forward of
approximately $1.1 million which has no expiration date.
At December 31, 1996, management evaluated its 1996 and 1995 operating
results, as well as projections for 1997 and 1998 and concluded that it was
more likely than not that certain of the deferred tax assets would be
realized. Accordingly, the Company has recognized a deferred tax asset of $1.4
million. The Company has recorded a valuation allowance against the remaining
deferred tax assets since realization of these future benefits is not
sufficiently assured as of December 31, 1996.
36
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. EMPLOYEE RETIREMENT BENEFIT PLANS
Defined Benefit Retirement Plan
Certain employees of the Company participated in FDC's U.S. defined benefit
pension plan prior to November 30, 1994. At that time, the employees'
participation in the plan was terminated. Pursuant to the Acquisition, the
obligation to fund the employees' accrued benefits through November 30, 1994,
is solely the obligation of FDC. Effective December 1, 1994, the Company
established a replacement plan for these employees which provided for service
credit effective as of that date. No new participants were allowed to enter
this plan after December 1, 1994.
Benefits under the plan are based on years of service and the employees'
compensation during employment. Contributions to the plan are determined by an
independent actuary on the basis of periodic valuations using the projected
unit cost method. The Company's general funding policy is to contribute
annually the maximum amount that can be deducted for income tax purposes. The
periodic pension expense for the period from inception (October 17, 1994)
through December 31, 1994, was not significant. The components of net periodic
pension expense for the years ended December 31, 1996 and 1995, respectively,
are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service cost benefits earned during the year..................... $168 $129
Interest costs on projected benefit obligation................... 61 56
Actual return on plan assets..................................... (28) --
Net amortization and deferral.................................... 46 37
---- ----
Net periodic pension expense..................................... $247 $222
==== ====
</TABLE>
The following table summarizes the funded status of the plan and the related
amounts recognized in the Company's consolidated balance sheets as of December
31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested...................................................... $(263) $(121)
Non-vested.................................................. (11) (9)
----- -----
Total accumulated benefit obligation........................ (274) (130)
Impact of future salary increases........................... (669) (581)
----- -----
Projected benefit obligation................................ (943) (711)
Fair value of plan assets................................... 255 230
----- -----
Projected benefit obligation in excess of plan assets....... (688) (481)
Unrecognized net gain....................................... (4) --
Unrecognized net transition liability....................... 454 490
----- -----
Net pension asset (liability) recognized in the Company's
consolidated
balance sheets............................................. $(238) $ 9
===== =====
</TABLE>
The most significant actuarial assumptions used in 1996 and 1995 in
determining the pension expense and funded status of the plan are as follows:
<TABLE>
<S> <C>
Discount rate for valuing liabilities............................... 8.5%
Expected long-term rate of return of assets......................... 8.5%
Rate of increase in future compensation levels...................... 5.0%
Cost-of-living adjustment........................................... 3.0%
</TABLE>
37
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Incentive Savings Plan
The Company sponsors a defined contribution plan covering substantially all
employees of the Company. Participants may contribute up to 15 percent 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, 1996 and 1995, and the period
from inception (October 17, 1994) through December 31, 1994, were
approximately $1.5 million, $1.3 million and $0.1 million, respectively.
Deferred Compensation Plan
The Company established a non-qualified deferred compensation plan during
1996 for certain Company executives which allows the participants to defer a
portion of their annual compensation. The Company provides a 25 percent
matching contribution of the participant's deferral, up to a maximum of $6,250
per year. The Company also credits the participant's deferred account with a
specified rate of return on an annual basis. The Company records the
actuarially-determined present value of the vested obligations expected to be
paid under the plan. As of December 31, 1996, the Company had recorded a
liability of $113,000 for this obligation. The Company's expense for this plan
for the year ended December 31, 1996, which includes Company contributions and
interest expense, was $16,000.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain office and production facilities under operating
leases which run through 2007. Future aggregate minimum lease payments under
these agreements for the years ending December 31, including those leases
entered into subsequent to December 31, 1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................. $ 2,593
1998............................................................. 2,819
1999............................................................. 2,590
2000............................................................. 2,529
2001............................................................. 2,439
Thereafter....................................................... 7,853
-------
$20,823
=======
</TABLE>
Total rent expense for the years ended December 31, 1996 and 1995, and the
period from inception (October 17, 1994) through December 31, 1994, was
approximately $1.9 million, $1.8 million and $0.1 million, respectively.
Service Agreements
The Company has service agreements with FDC and subsidiaries for data
processing services, communication charges and other related services. FDC
provides data processing and related services required for the operation of
the Company's CCS System.
Prior to 1997, the Company was charged a usage-base fee per customer for
data processing and related services. The other services were charged based on
usage and/or actual costs. The total amount paid under the
38
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
service agreements for the years ended December 31, 1996 and 1995, and the
period from inception (October 17, 1994) through December 31, 1994, was
approximately $19.6 million, $16.9 million and $1.3 million, respectively.
Effective January 1, 1997, the Company renegotiated its services agreement
with FDC and its subsidiaries. The new agreement expires December 31, 2001,
and is cancelable at the Company's option with a) notice of six months any
time after January 1, 2000, and b) payment of a termination fee equal to 20
percent of the fees paid in the twelve months preceding the notification of
termination. Under the new agreement, the Company is charged based on usage
and/or actual costs, and is subject to certain limitations as to the amount of
increases or decreases in usage between years. The costs to be incurred under
the new agreement are not expected to differ significantly from the previous
agreement.
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 future results of
operations.
In December 1996, CSG settled claims for indemnification against FDC arising
from CSG's acquisition from FDC of CSG Systems. The claims related to certain
patents held by Ronald A. Katz Technology Licensing Partnership L.P. (RAKTL)
which allegedly were infringed by the use of certain CSG products. The terms
of the settlement were not material to CSG. In connection with the settlement,
CSG entered into a non-exclusive patent license agreement with RAKTL, the
terms of which are not expected by CSG to have a material effect on its
business or future results of operations.
9. DISCONTINUED OPERATIONS
The Company purchased all of the outstanding capital stock of Anasazi on
November 30, 1994, for $6 million in cash. Anasazi provides central
reservation systems and services for the hospitality and travel industry. On
August 31, 1995, the company completed a tax-free reorganization of Anasazi.
Stockholders of the Company purchased a controlling interest in Anasazi as
part of the reorganization. As part of the reorganization, the Company
received $2.0 million cash, surrendered all of its ownership rights in
Anasazi's common stock and forgave a portion of a note receivable from
Anasazi. In return for such consideration, the Company received a $2.7 million
note receivable and shares of convertible preferred stock representing less
than a 20 percent ownership interest in Anasazi. Interest on the note
receivable was based on the prime interest rate and was being received
monthly. The principal amount of the note was due August 1998. In January
1996, the Company received a $2.0 million principal payment on this note,
reducing the principal balance of the note to $0.7 million. The proceeds from
this payment were used to reduce the Company's indebtedness under its loan
agreement. In June 1996, the Company converted the remaining $0.7 million note
balance into convertible preferred stock and stock warrants of Anasazi.
The Company has accounted for the reorganization as discontinued operations.
As a result, the loss from discontinued operations included in the
consolidated statements consists of the net losses of Anasazi prior to
September 1, 1995, and the loss on the disposition in August 1995. Revenues
from Anasazi's operations for the eight months ended August 31, 1995, and the
one month ended December 31, 1994, were $5.8 million and $0.6 million,
respectively. The Company did not recognize any income tax benefit related to
the loss from discontinued operations.
39
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company accounts for its continuing investment in Anasazi after August
31, 1995, under the cost method of accounting. The carrying value of the
Company's investment in Anasazi as of December 31, 1996, consisting of the
convertible preferred stock and stock warrants of Anasazi, was $0.7 million.
10. COMMON STOCK
In connection with its formation, the Company reserved 4,500,000 shares of
common stock for sale to executive officers and other employees of the
Company. At the time of the Acquisition, the Company sold 2,587,500 shares of
common stock to executive officers for $575,000 in cash ($.22 per share):
1,150,000 shares under stock purchase agreements and 1,437,500 shares under
performance stock purchase agreements. Of the remaining reserved shares,
1,655,500 shares were reserved for sale under the Company's Employee Stock
Purchase Plan, and 257,000 shares were reserved for issuance under the
Company's 1995 Incentive Stock Plan (Note 11). The following table represents
the activity for common stock of the Company acquired under employee stock
purchase agreements since inception (October 17, 1994) through December 31,
1996:
<TABLE>
<CAPTION>
STOCK
PURCHASE RESTRICTED
AGREEMENT STOCK PERFORMANCE TOTAL
SHARES SHARES STOCK SHARES SHARES
--------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Shares outstanding, inception
(October 17, 1994).............. -- -- -- --
Shares issued during the
period........................ 1,150,000 -- 1,437,500 2,587,500
--------- ------- --------- ---------
Shares outstanding, December 31,
1994............................ 1,150,000 -- 1,437,500 2,587,500
Shares issued during the year.. -- 593,000 1,062,500 1,655,500
--------- ------- --------- ---------
Shares outstanding, December 31,
1995............................ 1,150,000 593,000 2,500,000 4,243,000
Shares repurchased and canceled
in 1996....................... -- (25,600) (80,000) (105,600)
--------- ------- --------- ---------
Shares outstanding, December 31,
1996............................ 1,150,000 567,400 2,420,000 4,137,400
========= ======= ========= =========
Shares subject to repurchase,
December 31, 1996............... -- 293,200 664,100 957,300
========= ======= ========= =========
</TABLE>
The 1,437,500 shares purchased under the performance stock purchase
agreements for the period from inception (October 17, 1994) through December
31, 1994, were subject to a repurchase option of the Company at $.005 per
share, exercisable upon termination of employment with the Company. These
shares were originally scheduled to be released from the repurchase option not
later than November 30, 2001. Upon completion of the IPO, these shares were no
longer subject to the repurchase option.
Employee Stock Purchase Plan
The Company reserved 1,655,500 shares of common stock for sale to certain
employees pursuant to the Employee Stock Purchase Plan (the Plan). During the
year ended December 31, 1995, the Company sold 1,655,500 shares of common
stock under the Plan for $1,378,000 (ranging from $.22 to $4.25 per share),
consisting of $402,000 cash and $976,000 in full recourse promissory notes. Of
the shares sold, 593,000 shares were sold under restricted stock agreements
(Restricted Stock) and 1,062,500 shares were sold under performance stock
agreements.
Restricted Stock. The Restricted Stock shares are subject to certain
conditions and restrictions as prescribed by the Restricted Stock
agreements. The Company has the option to repurchase the shares upon
termination of employment, for the greater of the original purchase price
or book value, as defined, depending upon the termination circumstances.
These shares were scheduled to be released from the repurchase option not
later than November 30, 2001. Upon completion of the IPO, 160,000 shares
owned
40
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
by certain executive officers were no longer subject to the repurchase
option. In addition, the repurchase option for the remaining number of
shares decreased to 20 percent annually over a five-year period, commencing
on the later of an employee's hire date or November 30, 1994. During 1996,
the Company repurchased 25,600 unvested shares from terminated employees
for $6,000 (ranging from $.22 to $.45 per share).
Performance Stock. The shares sold under performance stock agreements are
subject to certain conditions and restrictions as prescribed by the
agreements. The Company has the option to repurchase the shares for the
original purchase price upon termination of employment. These shares were
scheduled to be released from the repurchase option not later than November
30, 2001. Upon completion of the IPO, the repurchase option for these
shares decreased to 20 percent annually over a five-year period, commencing
on the later of an employee's hire date or November 30, 1994. During 1996,
the Company repurchased 80,000 unvested shares from terminated employees
for $19,000 (ranging from $.22 to $.45 per share).
Certain Company employees financed a portion of their common stock purchases
under the Plan with full recourse promissory notes. The notes accrue interest
at seven percent annually and have terms of approximately five years. As of
December 31, 1996, the outstanding balance of the promissory notes is
approximately $861,000 and is reflected as a component of stockholders'
equity.
Stock-Based Employee Compensation Expense
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. At that
date, the Company recognized total deferred compensation of $5.8 million which
represents the difference between the price paid by the employees and the
estimated fair value of the stock at October 19, 1995. 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 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 completion of
the IPO, 1,437,500 of performance stock 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 percent 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 in the month the IPO was completed. Stock-based employee compensation
expense for the years ended December 31, 1996 and 1995, was $3.6 million and
$0.8 million, respectively. Deferred compensation of $1.2 million as of
December 31, 1996, is reflected as a component of stockholders' equity.
Amortization of the stock-based deferred compensation subsequent to 1996 will
be approximately $0.4 million per year.
11. STOCK-BASED COMPENSATION PLANS
Stock Incentive Plans
During 1995, the Company adopted the Incentive Stock Plan (the 1995 Plan)
whereby 257,000 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 stock options are granted at prices set by the Board of Directors or a
Committee of the Board (the Board), provided the minimum exercise price is no
less than the fair market value of the Company's common stock at the date of
the grant. The term of the outstanding options is 10 years. The 224,350
options outstanding under the 1995 Plan at December 31, 1996, vest annually
over five years.
During 1996, the Company adopted the 1996 Stock Incentive Plan (the 1996
Plan) whereby 2,400,000 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.
41
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1996, the Company granted 5,925 unrestricted stock bonus awards to
various employees at no cost under the 1996 Plan. The Company recorded
compensation expense of $89,000 ($15 per share) upon the grant of the stock
bonus awards.
During 1996, the Company granted stock options under the 1996 Plan. Stock
options under the 1996 Plan are granted at prices set by the Board, provided
the minimum exercise price is no less than the fair market value of the
Company's common stock at the date of the grant. The term of the outstanding
options is 10 years. The vesting periods of the options are determined under
the discretion of the Board. For the 1,210,380 options outstanding under the
1996 plan at December 31, 1996, 100,000 options vest annually over three years
with the remaining shares vesting annually over five years.
A summary of the stock options issued under the 1996 Plan and 1995 Plan and
changes during the years ending December 31 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995
------------------- ----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year............ 251,750 $ 1.35 -- $ --
Granted................................. 1,223,380 21.78 251,750 1.35
Exercised............................... (4,800) 1.33 -- --
Forfeited............................... (35,600) 7.36 -- --
--------- ------ ------- -----
Outstanding, end of year.................. 1,434,730 $18.62 251,750 $1.35
========= ====== ======= =====
Options exercisable at year-end........... 42,150 --
========= =======
Weighted-average fair value of options
granted during the year.................. $ 9.77 $ .30
========= =======
</TABLE>
The following table summarizes information about the Company's stock options
as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- --------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.25--$3.75 224,350 8.65 $ 1.36 42,150 $1.36
$15.00--$22.125 762,000 9.50 17.51 -- --
$28.75--$29.875 448,380 9.34 29.15 -- --
--------- ---- ------ ------ -----
$1.25--$29.875 1,434,730 9.31 $18.62 42,150 $1.36
========= ==== ====== ====== =====
</TABLE>
In January 1997, the Company granted 573,500 options at $19.375 per share
under the 1996 Plan which vest annually over 4 years. These options are not
reflected in the above tables as they were granted subsequent to December 31,
1996.
Employee Stock Purchase Plan
During 1996, the Company adopted the 1996 Employee Stock Purchase Plan
whereby 250,000 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
42
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the purchase period. Purchases are made at the end of each month. During
1996, 5,753 shares have been purchased under the plan for $83,000 ($13.07 to
$17.19 per share.)
Stock-Based Compensation Plans
At December 31, 1996, the Company had three stock-based compensation plans,
as described above. The Company accounts for these plans under APB Opinion No.
25, under which no compensation expense has been recognized in 1996 or 1995,
except for the $89,000 recognized in 1996 for the 5,925 shares granted as stock
bonus awards under the 1996 Plan, as discussed above.
Had compensation expense for the Company's three stock-based compensation
plans been based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", the Company's
net loss and net loss per common and equivalent share for 1996 and 1995 would
approximate the pro forma amounts as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Net loss:
As reported............................................ $(3,736) $(19,180)
Pro forma.............................................. (4,649) (19,184)
Net loss per common and equivalent share:
As reported............................................ (.15) (.86)
Pro forma.............................................. (.19) (.86)
</TABLE>
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 1996 and 1995, respectively: risk-free
interest rates of 6.1 percent and 6.3 percent; dividend yield of zero percent
for both years; expected lives of 5.0 and 4.0 years; and volatility of 40.0
percent and zero percent. Consistent with SFAS 123, the Company assumed zero
volatility for all options granted prior to the date the Company qualified as a
public entity.
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 applies only to 1996 and 1995, and
additional awards in future years are anticipated.
43
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. UNAUDITED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996:
Operating revenues................. $26,757 $30,431 $35,320 $39,789
Gross margin....................... 10,153 12,288 15,722 19,889
Operating income (loss)............ (4,992) (82) 1,541 4,381
Income (loss) before extraordinary
item.............................. (6,503) (696) 948 3,775
Net income (loss).................. (7,763) (696) 948 3,775
Earnings (loss) per common and
equivalent share:
Income (loss) before extraordinary
item............................. (.28) (.03) .04 .15
Net income (loss)................. (.33) (.03) .04 .15
1995:
Operating revenues................. $22,844 $24,092 $23,789 $25,679
Gross margin....................... 7,710 8,763 8,633 9,536
Operating loss..................... (1,044) (910) (2,160) (2,906)
Loss from continuing operations.... (3,302) (3,010) (4,236) (4,879)
Net loss........................... (4,453) (3,949) (5,899) (4,879)
Loss per common and equivalent
share:
Loss from continuing operations... (.15) (.14) (.19) (.22)
Net loss.......................... (.20) (.18) (.26) (.22)
</TABLE>
The first quarter of 1996 includes a $3.2 million nonrecurring charge to
record stock-based compensation expense for certain employees vesting in their
performance stock purchase agreements effective with the closing of the IPO.
See Note 10 for additional discussion. In addition, the first quarter of 1996
includes a $1.3 million extraordinary charge for early extinguishment of debt.
See Note 5 for additional discussion.
During the fourth quarter of 1996, the Company recorded a reduction in
operating expenses of approximately $1.4 million related to favorable pricing
adjustments for processing services previously recorded as expense ratably
over the first three quarters of 1996.
During the first three quarters of 1995, the Company had losses from
discontinued operations of $1.2 million, $0.9 million and $1.7 million,
respectively. See Note 9 for additional discussion.
44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Cable Services Group, Inc.:
We have audited the accompanying consolidated balance sheet of Cable
Services Group, Inc. as of November 30, 1994, and the related consolidated
statements of income, stockholder's equity and cash flows for the eleven
months ended November 30, 1994. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Cable Services Group, Inc. as of November 30, 1994, and the consolidated
results of its operations and its cash flows for the eleven months ended
November 30, 1994, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Omaha, Nebraska
December 22, 1995
45
<PAGE>
CABLE SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash................................................................. $ 22
Accounts receivable, net of allowance of $217........................ 17,779
Deferred income taxes................................................ 680
Other current assets................................................. 1,328
-------
Total current assets............................................... 19,809
-------
Equipment and furniture, at cost, net.................................. 6,248
Goodwill, net of accumulated amortization of $6,852.................... 32,118
Other intangibles, net of accumulated amortization of $5,130........... 7,393
Other assets........................................................... 127
-------
$65,695
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Customer deposits.................................................... $ 4,583
Trade accounts payable............................................... 3,983
Accrued employee-related liabilities................................. 1,454
Intercompany payables--FDC and subsidiaries, net..................... 465
Other accrued liabilities............................................ 621
Deferred revenue..................................................... 347
-------
Total current liabilities.......................................... 11,453
-------
Deferred income taxes.................................................. 773
Intercompany loan--FDC................................................. 10,438
Commitments and contingencies (Note 6)
Stockholder's Equity:
Common stock, par value $1.00 per share, authorized, issued and
outstanding 10 shares............................................... --
Additional paid-in capital........................................... 29,515
Retained earnings.................................................... 13,516
-------
Total stockholder's equity......................................... 43,031
-------
$65,695
=======
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
46
<PAGE>
CABLE SERVICES GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Total revenue.......................................................... $76,081
Expenses:
Cost of revenues:
Cost of services................................................... 34,977
Amortization of client contracts and related intangibles........... 1,594
-------
Total cost of revenues............................................. 36,571
-------
Gross margin........................................................... 39,510
-------
Operating expenses:
Research and development............................................. 7,680
Selling and marketing................................................ 3,054
General and administrative:
General and administrative.......................................... 9,461
Amortization of goodwill............................................ 826
Depreciation......................................................... 3,520
-------
Total operating expenses........................................... 24,541
-------
Operating income....................................................... 14,969
-------
Other income (expense):
Interest expense paid to FDC......................................... (1,067)
Interest income...................................................... 227
-------
Total other........................................................ (840)
-------
Income before income taxes............................................. 14,129
Income tax provision................................................. (5,519)
-------
Net income............................................................. $ 8,610
=======
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
47
<PAGE>
CABLE SERVICES GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- -------
<S> <C> <C> <C> <C>
Balance, at January 1, 1994................ $ -- $27,633 $ 8,347 $35,980
Net income............................... -- -- 8,610 8,610
Cash dividends........................... -- -- (3,441) (3,441)
Capital contribution..................... -- 1,882 -- 1,882
----- ------- ------- -------
Balance, at November 30, 1994.............. $ -- $29,515 $13,516 $43,031
===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
48
<PAGE>
CABLE SERVICES GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1994
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income........................................................... $ 8,610
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 3,520
Amortization........................................................ 2,420
Changes in operating assets and liabilities:
Accounts receivable, net........................................... (2,476)
Deferred income taxes.............................................. 557
Other current and noncurrent assets................................ (410)
Customer deposits.................................................. 224
Trade accounts payable and accrued liabilities..................... 1,813
Intercompany payables-FDC and subsidiaries, net.................... (1,078)
Deferred revenue................................................... 46
-------
Net cash provided by operating activities......................... 13,226
-------
Cash flows from investing activities:
Payments for other intangibles...................................... (1,974)
Purchase of equipment and furniture, net............................ (3,795)
-------
Net cash used in investing activities............................. (5,769)
-------
Cash flows from financing activities:
Net decrease in intercompany loan-FDC............................... (5,937)
Dividends paid to FDC............................................... (3,441)
Capital contribution from FDC....................................... 1,882
-------
Net cash used in financing activities............................. (7,496)
-------
Net decrease in cash and cash equivalents............................. (39)
Cash and cash equivalents, at beginning of period..................... 61
-------
Cash and cash equivalents, at end of period........................... $ 22
=======
Supplemental cash flow information:
Income taxes paid to FDC............................................ $ 5,700
Interest paid to FDC................................................ $ 1,067
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
49
<PAGE>
CABLE SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Cable Services Group, Inc. (the Company or CSG), was a wholly owned
subsidiary of First Data Resources Inc. (FDR) which is a wholly owned
subsidiary of First Data Corporation (FDC).
Prior to January 1, 1994, the Company operated as a division of FDR (Cable
Division) and IntelliTEK Computer Corporation (IntelliTEK) operated as a
wholly owned subsidiary of FDR. Effective January 1, 1994, the newly created
legal entity of CSG issued common stock to FDR in exchange for the net assets
of the Cable Division and IntelliTEK. This transaction was accounted for in a
manner similar to the pooling-of-interests method whereby the historical
accounts have been combined effective January 1, 1994. Accordingly, the
accompanying financial statements have been prepared to reflect the accounts
of CSG and IntelliTEK on a consolidated basis. The Company believes there were
no material costs incurred on behalf of the Company by its parent company
which have not been reflected in the accompanying consolidated financial
statements.
FDC sold the Company to CSG Systems International, Inc. effective November
30, 1994 (the Acquisition).
The Company provides billing and customer management solutions, encompassing
processing services, software products and other services, for the converging
cable television, direct broadcast satellite, telecommunications and on-line
services industries. The Company's offerings automate the full spectrum of
billing and customer services functions, including sales support and order
processing, invoice calculation and production, and management reporting and
market analysis.
The Company had two significant customers which, in the aggregate,
contributed approximately 39 percent of the Company's consolidated revenues
for the eleven months ended November 30, 1994. The largest single client
contributed approximately 23 percent of the Company's consolidated revenues
for the eleven months ended November 30, 1994.
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 the contract. The Company
regularly monitors credit risk exposures and takes steps to mitigate the
likelihood of these exposures resulting in a loss. The primary counterparties
to the Company's accounts receivable and sources of the Company's revenues
consist of cable television providers in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
CSG and IntelliTEK. All material intercompany accounts and transactions have
been eliminated.
Equipment and Furniture
Equipment and furniture are depreciated over their estimated useful lives
ranging from three to eight years. Depreciation is computed using the
straight-line method.
Equipment and furniture at November 30, 1994, consists of the following (in
thousands):
<TABLE>
<S> <C>
Computer and operating equipment................................. $ 16,944
Leasehold improvements........................................... 1,625
Furniture and fixtures........................................... 5,430
--------
23,999
Less accumulated depreciation.................................... (17,751)
--------
Equipment and furniture, net..................................... $ 6,248
========
</TABLE>
50
<PAGE>
CABLE SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill and Other Intangibles
Goodwill represents the excess of purchase price over tangible and other
identifiable assets acquired less liabilities assumed arising primarily from
the 1988 acquisition of IntelliTEK and, to a lesser extent, the 1985
acquisition of Gill Management Services, Inc. and is being amortized over an
estimated useful life of 40 years.
Other intangible assets consist principally of rights to provide processing
services to clients. These costs are amortized as a percentage of expected
revenue over the length of the contract or benefit period, typically 3 to 10
years, and are included in amortization of client contracts and related
intangibles in the accompanying consolidated statements of income.
Software Development Costs
Internal costs of computer software development are expensed as incurred.
Revenue Recognition
The Company's revenues are derived principally from processing fees from its
core product, Communications Control System (CCS(TM)), services ancillary to
CCS, and customized print and mail services. Processing and related services
are recognized as the services are performed. Processing fees are typically
billed based on the number of customers serviced, ancillary services are
typically billed on a per transaction basis, and certain customized print and
mail services are billed on a usage basis.
Payments received for revenues not yet recognized are reflected as deferred
revenue in the accompanying consolidated balance sheet.
3. RELATED-PARTY TRANSACTIONS
Interest expense in the consolidated statements of income represents
interest paid on an intercompany loan from FDC. The loan bears interest at an
annually adjusted floating rate (8.25 percent for the eleven months ended
November 30, 1994) reflective of FDC's cost of external debt and is repaid
based upon available cash flows of the Company.
The Company has entered into various transactions with FDC and its
subsidiaries. The following table lists fees paid by the Company to FDC and
its subsidiaries for the eleven months ended November 30, 1994 (in thousands):
<TABLE>
<S> <C>
Data processing and related services.............................. $12,513
Communications.................................................... 4,726
Professional and administrative services.......................... 2,982
Equipment maintenance and other................................... 930
Benefits and incentives........................................... 1,036
</TABLE>
The Company is charged a usage-based fee per customer for data processing
and related services. The other expenses are charged based on usage and/or
actual costs. Management does not believe that had the Company been operating
other than as an affiliate of FDC, there would have been a material impact on
net income.
51
<PAGE>
CABLE SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." SFAS 109 is an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events which have been recognized in the Company's
consolidated financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events other
than enactment of or changes in the tax law or rates.
The taxable income of the Company is included in the consolidated U.S.
federal income tax return of FDC. Under an agreement with FDC, the provision
for income taxes and tax benefits is determined by the Company on a stand-
alone basis. Current income taxes are remitted to, and benefits received from,
FDC.
The provision for income taxes for the eleven months ended November 30,
1994, consists of the following (in thousands):
<TABLE>
<S> <C>
Federal............................................................. $5,199
State and local..................................................... 320
------
Total............................................................. $5,519
======
</TABLE>
Deferred income taxes result from the recognition of temporary differences.
Temporary differences are differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in differences between income for tax purposes and income for financial
statement purposes in future years. The provision for income taxes for the
eleven months ended November 30, 1994, consists of the following (in
thousands):
<TABLE>
<S> <C>
Current............................................................. $5,360
Deferred............................................................ 159
------
Total............................................................. $5,519
======
</TABLE>
The Company's net deferred tax assets (liabilities) consist of the following
as of November 30, 1994 (in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Deferred revenue............................................... $ 45
Other liabilities.............................................. 1,058
-------
Total deferred tax assets.................................... 1,103
Valuation allowance............................................ --
-------
Deferred tax assets, net of valuation allowance.............. 1,103
-------
Deferred tax liabilities:
Depreciation and amortization.................................. (1,147)
Other liabilities.............................................. (49)
-------
Total deferred tax liabilities............................... (1,196)
-------
Net deferred tax liabilities..................................... $ (93)
=======
</TABLE>
Cash payments to FDC for net income taxes during the eleven months ended
November 30, 1994, were $5.7 million. Included in intercompany payables-FDC
and subsidiaries, net at November 30, 1994, was an income tax receivable from
FDC for $1.1 million.
52
<PAGE>
CABLE SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rate to income tax expense for the
eleven months ended November 30, 1994, consists of the following (in
thousands):
<TABLE>
<S> <C>
Tax at U.S. statutory rate (35 percent)............................ $4,945
Increases in taxes resulting from:
State and local taxes, net of federal income tax benefit......... 208
Amortization of goodwill......................................... 311
All other........................................................ 55
------
$5,519
======
</TABLE>
5. EMPLOYEE BENEFIT PLANS
Defined Benefit Retirement Plan
Eligible employees of the Company participate in FDC's U.S. defined benefit
pension plan that covers substantially all full-time employees of FDC and its
participating subsidiaries. Net pension costs for the eleven months ended
November 30, 1994, were approximately $265,000.
Incentive Savings Plan
FDC has an incentive savings plan which allows eligible employees of FDC and
its subsidiaries to contribute a percentage of their compensation and provides
for certain matching and service related contributions. The Company's matching
and service related contributions associated with the plan for the eleven
months ended November 30, 1994, were approximately $617,000.
Long-Term Incentive Plan
Certain of the Company's officers, key employees and other individuals
participate in the First Data Corporation 1992 Long-Term Incentive Plan (the
1992 Plan). Awards under the 1992 Plan may be in the form of stock options,
stock appreciation rights, restricted stock, performance grants and other
types of awards that the Compensation and Benefits Committee of FDC's Board of
Directors deems to be consistent with the purposes of the 1992 Plan. FDC
options granted to the Company's employees are generally at a price equivalent
to the fair market value at the date of grant. As of November 30, 1994, FDC
terminated the Company's employees participation in the plan. FDC settled all
outstanding awards with the Company's employees at that time.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases
FDC and the Company lease certain office and production facilities under
cancelable and noncancelable agreements. Total rent expense was $1.1 million
for the eleven months ended November 30, 1994.
In July 1994, the Company entered into a noncancelable sublease agreement
with FDR for an office facility. The lease began August 1995 and extends
through 2007 with a minimum annual rental commitment of 1.0 million. This
lease replaces all prior office facility lease commitments.
At November 30, 1994, given effect of the new lease discussed above, the
minimum aggregate rental commitment under all noncancelable leases was (in
thousands): 1995, $1,092; 1996, $1,182; 1997, $1,182; 1998, $1,182; 1999,
$1,182; and $7,948 for years thereafter. Most leases contain standard renewal
clauses.
53
<PAGE>
CABLE SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Legal Proceedings
The Company is involved in litigation primarily arising in the normal course
of its business. In the opinion of management, the Company's recovery or
liability, if any, under any pending litigation, would not materially affect
its financial condition or operations.
54
<PAGE>
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 is incorporated herein by reference.
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 Financial Statements on page 21.
(2) Financial Statement Schedules:
Index to Consolidated Financial Statement Schedules
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CSG Systems International, Inc.
Report of Independent Public Accountants.......................... 58
Schedule II--Valuation and Qualifying Accounts.................... 59
Cable Services Group, Inc.
Report of Independent Public Accountants.......................... 60
Schedule II--Valuation and Qualifying Accounts.................... 61
</TABLE>
(3) Exhibits
Exhibits are listed in the Exhibit Index on page 62.
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 July 9, 1996, as amended by Form 8-K(A) filed on
September 9, 1996, and Form 8-K(A) Amendment No. 2 filed on September
25, 1996, under Item 2, Acquisition or Disposition of
55
<PAGE>
Assets, was filed with the Securities and Exchange Commission reporting
the acquisition of the capital stock of Bytel Limited. The financial
statements included in the Form 8-K(A) were as follows:
Financial statements for Bytel Limited as at and for the year ended
30 April 1996.
Pro forma combined financial statements for CSG Systems
International, Inc. and Bytel Limited for the year and six months ended
December 31, 1995, and June 30, 1996, respectively.
56
<PAGE>
SIGNATURES
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 CHAIRMAN OF THE
BOARD AND CHIEF EXECUTIVE OFFICER
Date: March 31, 1997
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 March 31, 1997
- ------------------------------------ Board, Chief
NEAL C. HANSEN Executive Officer
/s/ George F. Haddix, Ph.D. President and March 31, 1997
- ------------------------------------ Director
GEORGE F. HADDIX, PH.D.
/s/ David I. Brenner Executive Vice March 31, 1997
- ------------------------------------ President, Chief
DAVID I. BRENNER Financial Officer
/s/ Randy R. Wiese Controller, March 31, 1997
- ------------------------------------ Principal
RANDY R. WIESE Accounting Officer
* Director March 31, 1997
- ------------------------------------
ROYCE J. HOLLAND
* Director March 31, 1997
- ------------------------------------
BERNARD W. REZNICEK
* Director March 31, 1997
- ------------------------------------
ROCKWELL A. SCHNABEL
* Director March 31, 1997
- ------------------------------------
FRANK V. SICA
* By: /s/ David I. Brenner
------------------------
DAVID I. BRENNER
ATTORNEY-IN-FACT
57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE OF
CSG SYSTEMS INTERNATIONAL, INC.
To the Board of Directors of CSG
Systems International, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of CSG Systems International, Inc. and
Subsidiaries included in this Form 10-K and have issued our report thereon
dated January 27, 1997. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule of
CSG Systems International, Inc. listed in Item 14 of Part IV of this 10-K is
the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Omaha, Nebraska
January 27, 1997
58
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
FOR THE YEAR ENDED (OCTOBER 17,
DECEMBER 31, 1994) THROUGH
-------------------- DECEMBER 31,
1996 1995 1994
--------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period............... $ 521 $ 457 $--
Acquisition of businesses.................. 101 -- 217
Additions charged to expense............... 319 310 257
Reductions................................. (122) (246) (17)
--------- --------- ----
Balance, end of period..................... $ 819 $ 521 $457
========= ========= ====
</TABLE>
59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE OF
CABLE SERVICES GROUP, INC.
To the Board of Directors of
Cable Services Group, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Cable Services Group, Inc. included in
this Form 10-K and have issued our report thereon dated December 22, 1995. Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of Cable Services Group, Inc. listed
in Item 14 of Part IV of this 10-K is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Omaha, Nebraska
December 22, 1995
60
<PAGE>
CABLE SERVICES GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Eleven months ended
November 30, 1994...... $390 $-- $-- ($173) $217
</TABLE>
61
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.01(1) Agreement of Merger among CSG Systems International, Inc., CSG
Acquisition Corporation, Cable Services Group, Inc. and First Data
Resources Inc., dated October 26, 1994
2.02(1) Agreement of Merger among CSG Systems International, Inc., Anasazi
Acquisition Corporation, Anasazi Inc. and First Data Corporation,
dated November 29, 1994
2.03(1) Amendment Agreement between First Data Corporation, First Data
Resources Inc., CSG Systems International, Inc., CSG Systems, Inc.
and Anasazi Inc., dated April 27, 1995
2.04(1) Pre-Merger Loan Agreement among CSG Acquisition Corporation, certain
lenders, and Banque Paribas, as Agent, dated November 30, 1994
2.05(3) Amended and Restated Loan Agreement among CSG Systems, Inc., certain
lenders, and Banque Paribas, as Agent, dated April 26, 1996
2.06(1) Anasazi Inc. Series A and B Preferred Stock Purchase Agreement among
Anasazi Inc. and each of the purchasers listed on the Schedule of
Purchasers attached thereto, dated August 31, 1995
2.07(1) Founder Stock Purchase Agreement between CSG Systems International,
Inc. and Neal C. Hansen, dated November 30, 1994
2.08(1) Founder Stock Purchase Agreement between CSG Systems International,
Inc. and George Haddix, dated November 30, 1994
2.09(1) Founder Performance Stock Purchase Agreement between CSG Systems
International, Inc. and Neal C. Hansen, dated November 30, 1994, and
first and second amendments thereto
2.10(1) Founder Performance Stock Purchase Agreement between CSG Systems
International, Inc. and George Haddix, dated November 30, 1994, and
first and second amendments thereto
2.11(1) Series A Preferred Stock Purchase Agreement among CSG Systems
International, Inc. and the purchasers listed on the Schedule of
Purchasers attached thereto, dated November 30, 1994
2.12(1) Stockholders Agreement among CSG Systems International, Inc. and each
of the investors listed on the Schedule of Investors attached
thereto, dated November 30, 1994
2.13(1) Stockholders Agreement among Anasazi Inc. and each of the investors
listed on the Schedule of Investors attached thereto, dated August
31, 1995
2.14(1) Swap Transaction Cap letter agreements dated December 16, 1994
2.15(1) Consent and Limited Waiver dated as of January 4, 1996, by and among
CSG Systems, Inc., the Company, and Banque Paribas, as Agent
2.16(2) Share Purchase Agreement among Cray Systems Ltd., Digital Equipment
Company Ltd. and CSG Systems International, Inc. dated June 28, 1996
2.17(2) Administration and Development Services Agreement between Cray
Systems Ltd. and Bytel Limited dated June 28, 1996
2.18(4) First Amendment and Limited Waiver, dated August 14, 1996, to the
Amended and Restated Loan Agreement among CSG Systems, Inc., certain
lenders and Banque Paribas, as Agent
3.01(1) Restated Certificate of Incorporation of the Company
3.02(1) Restated Bylaws of the Company
4.01(1) Form of Common Stock Certificate
10.01(1) CSG Systems International, Inc. 1995 Incentive Stock Plan
10.02(1) CSG Employee Stock Purchase Plan
10.03(1) CSG Systems International, Inc. 1996 Stock Incentive Plan
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.04(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and George Haddix, dated August 17, 1995, and
first amendment thereto
10.05(1) Employee Restricted Stock Purchase Agreement between CSG Systems
International, Inc. and John P. Pogge, dated March 6, 1995
10.06(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and John P. Pogge, dated March 6, 1995, and
first and second amendments thereto
10.07(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and John P. Pogge, dated May 16, 1995, and
first and second amendments thereto
10.08(1) Employee Restricted Stock Purchase Agreement between CSG Systems
International, Inc. and David I. Brenner, dated February 14, 1995
10.09(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and David I. Brenner, dated February 14, 1995,
and first and second amendments thereto
10.10(1) Employee Performance Stock Purchase Agreement between CSG Systems
International, Inc. and David I. Brenner, dated May 16, 1995, and
first and second amendments thereto
10.11(1) Registration Rights Agreement among CSG Systems International, Inc.
and the purchasers listed on the Schedule of Purchasers attached
thereto, dated November 30, 1994
10.12(1) Guaranty by CSG Systems International, Inc. in favor of certain
lenders and Banque Paribas, as Agent, dated November 30, 1994
10.13(1) Registration Rights Agreement among Anasazi Inc. and the purchasers
listed on the Schedule of Purchasers attached thereto, dated August
31, 1995
10.14(1) Employment Agreement with Neal C. Hansen
10.15(1) Employment Agreement with George F. Haddix
10.16(1) Indemnification Agreements between CSG Systems International, Inc.
and its directors and certain officers
10.17(1) Lease, Assignment and Acceptance of Lease, Assignment and Assumption
of Lease, and First Amendment to Lease respecting facility at 2525
North 117th Avenue, Omaha, Nebraska
10.18(1) Lease, Assignment and Assumption of Leases, and Lease Amendment
respecting facility at 14301 Chandler Road, Omaha, Nebraska
10.19(1) Lease and Sublease respecting facility at 4949 Pearl East Circle,
Boulder, Colorado
10.20(1) Lease and Sublease respecting facility at 5251 DTC Parkway,
Englewood, Colorado
10.21(1)* Services Agreement between First Data Technologies, Inc. and Cable
Services Group, Inc., dated October 26, 1994
10.22(1)* Subscriber Billing Service Agreement between First Data Resources
Inc. and TCI Cable Management Corporation, dated April 29, 1992,
and Addendum to the Subscriber Billing Service Agreement, dated
April 8, 1994
10.23(1)* Subscriber Billing Service Agreement between Paragon Communications
and First Data Resources Inc. dated January 1, 1989, and the first
amendment thereto, and Consent to Assignment and Delegation
10.24(1)* Subscriber Billing Service Agreement between Time Warner Cable and
First Data Resources Inc. dated October 27, 1993, and first and
second amendments thereto
10.25(1)* Subscriber Billing Service Agreement between American Cablevision of
Coronado and First Data Resources Inc. dated January 5, 1990, and
the first amendment thereto
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.26(1)* Subscriber Billing Service Agreement between Southwestern Cable TV
and First Data Resources Inc. dated October 1, 1985, and amendments
thereto
10.27(1)* Subscriber Billing Service Agreement between First Data Resources
Inc. and Manhattan Cable Television, Inc. dated September 25, 1991
10.28(1)* Subscriber Billing Service Agreement between First Data Resources
Inc. and Cablevision Industries Corporation, and addenda one, two
and three thereto
10.29(1)* Subscriber Billing Service Agreement between Warner Cable
Communications, Inc. and First Data Resources Inc. dated July 1,
1991, the first and second amendments thereto, and consents to
assignment and delegation with respect thereto
10.30(1)* Subscriber Billing Service Agreement between Time Warner Cable and
First Data Resources Inc. dated October 18, 1993
10.31(1)* Subscriber Billing Service Agreement between Cable Services Group,
Inc. and Time Warner Cable of New York dated December 9, 1994, and
addenda one and two thereto
10.32(1)* Subscriber Billing Service Agreement between Cable Services Group,
Inc. and Time Warner Programming Co. dated April 30, 1994
10.33(1)* Subscriber Billing Service Agreement between Paragon Communications
and First Data Resources Inc. dated March 9, 1989, and First
Amendment thereto dated June 30, 1993, and Consent to Assignment
and delegation dated March 1, 1994
10.34(1)* Subscriber Billing Service Agreement between KBLCOM Inc. and First
Data Resources Inc. dated June 20, 1989, Consent to Assignment and
Delegation dated January 1, 1994, and Addendum I to Subscriber
Billing Service Agreement dated July 27, 1994
10.35(1)* Subscriber Billing Service Agreement between Paragon Communications
and First Data Resources Inc. dated April 14, 1989, and First
Amendment thereto dated December 20, 1991, and Consent to
Assignment and Delegation dated January 1, 1994
10.36(1)* Subscriber Billing Service Agreement between Paragon Communications
Inc. and First Data Resources Inc. dated March 1, 1989, the first,
second, third and fourth amendments thereto, and Consent to
Assignment and Delegation
10.37(1)* Printing and Mailing Services Agreement between CSG Systems, Inc.
and PageMart, Inc., dated August 29, 1995
10.38(1)* First Amendment to Services Agreement between First Data
Technologies, Inc. and CSG Systems, Inc. dated December 8, 1995,
and Second Amendment to Services Agreement between First Data
Technologies, Inc. and CSG Systems, Inc. dated January 30, 1996
10.39 CSG Systems, Inc. Wealth Accumulation Plan, as amended November 14,
1996 (previously filed as Exhibit 10.38 to the Registrant's
Quarterly Report for the period ended September 30, 1996)
10.40* Amended and Restated Services Agreement between First Data
Technologies, Inc. and CSG Systems, Inc., formerly known as Cable
Services Group, Inc., dated December 31, 1996
10.41 Third Amendment to Subscriber Billing Service Agreement between CSG
Systems, Inc. and TCI Cable Management Corporation, dated March 1,
1996
10.42 Fourth Amendment to Subscriber Billing Service Agreement between CSG
Systems, Inc. and TCI Cable Management Corporation, dated March 29,
1996
10.43 Fifth Amendment to Subscriber Billing Service Agreement between CSG
Systems, Inc. and TCI Cable Management Corporation, dated September
30, 1996
11.01 Statement re: Computation of Per Share Earnings
21.01 Subsidiaries of the Company
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.01 Consent of Arthur Andersen LLP
24.01 Power of Attorney
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
</TABLE>
- --------
(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 Current Report on Form 8-K dated July 9, 1996.
(3) Incorporated by reference to the exhibit of the same number to the
Registrant's Quarterly Report on Form 10-Q for the period ended June 30,
1996.
(4) 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, 1996.
*Confidential Treatment
65
<PAGE>
EXHIBIT 10.40
Pages where confidential treatment has been requested
are stamped "Confidential Treatment Requested and
the Redacted Material has been separately filed with
the Commission," and places where information has
been redacted has been marked with (**).
AMENDED AND RESTATED
SERVICES AGREEMENT
BETWEEN
FIRST DATA TECHNOLOGIES, INC.
AND
CSG SYSTEMS, INC.,
FORMERLY KNOWN AS
CABLE SERVICES GROUP, INC.
CONFIDENTIAL - DO NOT DISCLOSE
<PAGE>
TABLE OF CONTENTS Page
-----------------
SECTION 1 DEFINITIONS........................................................ 1
SECTION 2 PROVISION OF THE FDT SERVICES...................................... 5
2.1 FDT Services............................................... 5
2.2 Platform................................................... 6
2.3 CSG-Vendor Software........................................ 7
2.4 Maintenance of Current Vendor Supported Software Releases.. 7
2.5 Use of Other Software...................................... 7
2.6 Information and Reports.................................... 8
2.7 Backup..................................................... 8
2.8 Security................................................... 8
2.9 Operations Procedures...................................... 8
2.10 CSG Batch Job Targets...................................... 9
2.11 Disaster Recovery.......................................... 9
2.12 Systems Software: Data Telecommunications.................. 9
2.13 Performance Criteria....................................... 10
2.14 Audit Rights............................................... 10
2.15 Additional Services........................................ 11
2.16 CSG Obligations and Responsibilities....................... 12
2.17 Relocation................................................. 12
2.18 Access to FDT Data Center.................................. 12
2.19 Cooperation and Good Faith................................. 12
2.20 Rights of Contemporaneous Negotiation...................... 13
SECTION 3 PAYMENTS FOR FDT SERVICES.......................................... 13
3.1 Fees and Charges........................................... 13
3.2 Taxes...................................................... 13
3.3 Invoice and Time of Payment................................ 13
3.4 Interest................................................... 14
SECTION 4 RELATIONSHIP BETWEEN THE PARTIES................................... 14
SECTION 5 INTELLECTUAL PROPERTY.............................................. 14
5.1 CSG Data................................................... 14
5.2 CSG Proprietary Software................................... 15
5.3 FDT Proprietary Software................................... 15
5.4 Development Software....................................... 15
5.5 Ownership of Information................................... 15
5.6 Team 35 Software........................................... 16
5.7 Injunctions................................................ 16
CONFIDENTIAL - DO NOT DISCLOSE
i
<PAGE>
SECTION 6 LIABILITY AND INDEMNIFICATION..................................... 16
6.1 FDT's Indemnification..................................... 16
6.2 CSG's Indemnification..................................... 17
6.3 Indemnification Procedures................................ 18
6.4 Dispute Resolution........................................ 19
6.5 Litigation................................................ 19
SECTION 7 LIMITATION OF LIABILITY........................................... 19
7.1 Limitation on Amount of Damages........................... 19
7.2 Provision of FDT Services................................. 20
7.3 Mitigation................................................ 20
7.4 Limitation of Assertions.................................. 20
7.5 Express Allocation of Risks............................... 20
SECTION 8 STANDARD OF CARE AND EXCLUSION OF WARRANTIES...................... 20
SECTION 9 EXCLUSION OF DAMAGES.............................................. 21
SECTION 10 CONFIDENTIALITY................................................... 21
10.1 Confidential Information.................................. 21
10.2 No License or Other Rights................................ 23
10.3 Publicity and Use of Certain Information.................. 23
10.4 Equitable Remedies........................................ 23
10.5 Privileged Data........................................... 23
SECTION 11 TERMINATION....................................................... 23
11.1 Termination for Cause..................................... 23
11.2 Termination for Failure to Meet Performance Criteria...... 24
11.3 Termination Due to Change of Control or Assignment........ 24
11.4 Termination for Convenience............................... 24
11.5 Termination Assistance.................................... 25
11.6 Expiration Assistance..................................... 25
11.7 Access upon Expiration or Termination..................... 26
11.8 Expiration or Termination License......................... 26
11.9 Rights Upon Expiration or Termination..................... 26
SECTION 12 MISCELLANEOUS..................................................... 26
12.1 Notice.................................................... 26
12.2 Entire Agreement.......................................... 27
12.3 Assignment: Transfer; Binding Agreement................... 27
12.4 Force Majeure............................................. 28
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12.5 Risk of Loss............................................. 28
12.6 No Third-Party Beneficiaries............................. 28
12.7 Severability............................................. 28
12.8 Certain Construction Rules............................... 29
12.9 Compliance With Laws..................................... 29
12.10 Counterparts............................................. 29
12.11 Headings................................................. 29
12.12 No Interpretation Against Drafter........................ 29
12.13 Waiver; Consent.......................................... 29
12.14 Governing Law............................................ 30
12.15 Limitation of Representations and Warranties;
Indemnification.......................................... 30
SCHEDULES
---------
Schedule 1.17 Development Software
Schedule 1.21 Existing CSG Proprietary Software
Schedule 1.27 FDT Services and FDT Current Service Charges
Schedule 1.43 Platform Description
Schedule 1.47 Systems Software
Schedule 2.3 CSG-Vendor Software
Schedule 2.9 Operations Procedures
Schedule 2.10 CSG Batch Job Targets
Schedule 2.11 Disaster Recovery Plan
Schedule 2.13 Performance Criteria
Schedule 2.14 Confidentiality Agreement
Schedule 2.16.1 Additional CSG Obligations
Schedule 5.3 Existing FDT Proprietary Software
Schedule 5.6 Team 35 Software License Agreement
Schedule 6.4 Dispute Resolution
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THIS AMENDED AND RESTATED SERVICES AGREEMENT (the "Services Agreement") is
entered into as of December 31, 1996, by and between First Data Technologies,
Inc., a Delaware corporation ("FDT"), and CSG Systems, Inc. (formerly known as
Cable Services Group, Inc.), a Delaware corporation ("CSG").
RECITALS
A. FDT is presently engaged in the business of providing data processing
services;
B. CSG and FDT previously entered into a services agreement dated as of
October 26, 1994, as amended by that certain First Amendment to Services
Agreement between FDT and CSG executed December 8, 1995, and as further amended
by that certain Second Amendment to Services Agreement between FDT and CSG
executed January 30, 1996, and as further amended by that Third Amendment to
Services Agreement between FDT and CSG executed November 25, 1996 (collectively,
the "Original Agreement");
C. CSG and FDT desire to amend and restate their obligations relating to
the terms and conditions governing the data processing services which FDT will
continue to provide to CSG.
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
representations, warranties, conditions and agreements hereinafter expressed,
the Parties hereto agree as follows:
SECTION 1
DEFINITIONS
-----------
When used herein, the following terms shall have the meaning set forth
below:
1.1 "Additional Services" has the meaning stated in Section 2.15.
------------
1.2 "Affiliate" means an Entity which, directly or indirectly, owns or
controls, is owned or is controlled by or is under common ownership or control
with another Entity. As used herein, "control" means the power to direct the
management or affairs of an Entity, and "ownership" means the beneficial
ownership of 50% or more of the voting equity securities or other equivalent
voting interests of the Entity.
1.3 "Applications Software" means the CSG-Vendor Software and the CSG
Proprietary Software.
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1.4 "Business" shall have the meaning set forth in that certain Stock
Purchase Agreement dated as of October 26, 1994 between CSG Holdings, Inc. and
First Data Resources, Inc.
1.5 "Claim" has the meaning specified in Section 6.3.1.
-------------
1.6 "Confidential Information" has the meaning stated in Section 10.1.
------------
1.7 "CSG" means CSG Systems, Inc. (formerly known as Cable Services Group,
Inc.), a Delaware corporation, and its permitted successors and permitted
assigns.
1.8 "CSG Batch Job Targets" means the time periods identified on Schedule
--------
2.10 relating to CSG's batch cycles.
- ----
1.9 "CSG Client" shall mean any current or future Entity for which CSG
provides data processing services through FDT in accordance with the terms and
conditions of the Services Agreement.
1.10 "CSG's Clients' Locations" means each of CSG's Clients' business
locations which are connected to the Platform to permit a CSG Client to receive
the benefit of the FDT Services in accordance with the terms and conditions of
this Services Agreement.
1.11 "CSG Data" has the meaning specified in Section 5.1.
-----------
1.12 "CSG Proprietary Software" means New CSG Proprietary Software and
Existing CSG Proprietary Software.
1.13 "CSG-Vendor Software" means the Software licensed to CSG by third
party vendors (excluding FDT and its Affiliates) and to be used by FDT to
provide the FDT Services, together with all developments, improvements,
modifications, additions, expansions, new versions, new releases, rewrites,
enhancements, upgrades or other changes of any kind thereto. The CSG-Vendor
Software is set forth in Schedule 2.3, as it may be amended from time-to-time.
------------
1.14 "Damaged Party" has the meaning stated in Section 12.5.
------------
1.15 "Data Processing Materials" has the meaning stated in Section 5.5.
-----------
1.16 "Declared Disaster" has the meaning stated in Schedule 2.11.
-------------
1.17 "Development Software" means that portion of the Systems Software as
set forth in Schedule 1.17 that CSG may execute and use for development of CSG
-------------
Proprietary Software.
1.18 "Dispute" means any and all disputes, controversies and claims between
the
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Parties arising from or in connection with this Services Agreement or the
relationship of the Parties under this Services Agreement whether based on
contract, tort, common law, equity, statute, regulation, order or otherwise.
1.19 "Effective Date" shall mean January 1, 1997.
1.20 "Entity" means an individual, corporation, limited liability company,
partnership, sole proprietorship, joint venture, or other form of organization
or governmental agency or authority.
1.21 "Existing CSG Proprietary Software" means the applications, job
control language and system and other Software owned by CSG and to be used by
FDT to provide the FDT Services, that is identified in Schedule 1.21 of this
-------------
Services Agreement.
1.22 "Existing FDT Proprietary Software" means the Software owned,
developed by, or licensed by an Affiliate of FDT in connection with the
provision of FDT Services under this Services Agreement, as set forth in
Schedule 5.3 of this Services Agreement.
- ------------
1.23 "Failed Criteria" shall have the meaning stated in Section 11.2.
------------
1.24 "FDT" means First Data Technologies, Inc., a Delaware corporation, and
its permitted successors and permitted assigns.
1.25 "FDT Data Center" means the data center maintained by or on behalf of
FDT in Englewood, Colorado or any other data or information processing centers
maintained by or on behalf of FDT or any of its Affiliates and used to provide
the FDT Services.
1.26 "FDT Proprietary Software" means New FDT Proprietary Software and
Existing FDT Proprietary Software.
1.27 "FDT Service Charges" means the fees charged by FDT for the FDT
Services as set forth in Schedule 1.27.
-------------
1.28 "FDT Services" means the data processing services and systems
currently provided by FDT to CSG which are set forth on Schedule 1.27 and those
-------------
Additional Services that FDT agrees to provide.
1.29 "Indemnified Party" means a Party or Parties seeking or entitled to
indemnification pursuant to the provisions of Section 6.
---------
1.30 "Indemnifying Party" means the Party or Parties hereto responsible for
indemnifying an Indemnified Party pursuant to Section 6.
---------
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1.31 "Infringement Claims" has the meaning stated in Section 6.1.1.
-------------
1.32 "Losses and Expenses" has the meaning stated in Section 7.1.
-----------
1.33 "New CSG Proprietary Software" means all developments, improvements,
modifications, additions, expansions, new versions, new releases, rewrites,
enhancements, upgrades or other changes of any kind to Existing CSG Proprietary
Software, or any new Software owned or developed by CSG following the date of
execution of this Services Agreement and provided to FDT for use in connection
with the provision of the FDT Services that is not identified in Schedule 1.21
-------------
of this Services Agreement.
1.34 "New FDT Proprietary Software" means all developments, improvements,
modifications, additions, expansions, new versions, new releases, rewrites,
enhancements, upgrades or other changes of any kind to Existing FDT Proprietary
Software, or any new Software owned or developed by FDT following the date of
execution of this Services Agreement and used in connection with the provision
of FDT Services under this Services Agreement that is not identified in Schedule
--------
5.3 of this Services Agreement.
- ---
1.35 "Operations Procedures" has the meaning stated in Section 2.9.
-----------
1.36 "Original Agreement" has the meaning specified in the second recital
to this Services Agreement.
1.37 "Original CSG Proprietary Software" means that portion of the Existing
CSG Proprietary Software that existed as of the effective date of the Original
Agreement.
1.38 "Original Term" means the period of time commencing on the Effective
Date and ending on the fifth anniversary of the Effective Date.
1.39 "Other Party" has the meaning stated in Section 12.5.
------------
1.40 "Party" means a party to this Services Agreement and its permitted
successors and permitted assigns.
1.41 "Performance Criteria" has the meaning stated in Section 2.13.
------------
1.42 "Plan" has the meaning stated in Schedule 2.11.
-------------
1.43 "Platform" means the hardware owned or operated by FDT and the network
provided by FDT for data telecommunications and data processing and retrieval
established between the FDT Data Center, CSG, and CSG's Clients' Locations, it
being understood that such Platform
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<PAGE>
is provided by FDT on a non-exclusive basis. The Platform is further described
in Schedule 1.43.
-------------
1.44 "Services Agreement" means this Amended and Restated Services
Agreement between CSG and FDT as it may be amended from time to time.
1.45 "Software" means (i) computer programs, including application
programs, operating programs, file programs and utility programs, and (ii)
tangible media upon which such programs and documentation are recorded,
including hard copy, tapes and disks.
1.46 "Stock Purchase Agreement" means that agreement entered into as of
October 26, 1994 between CSG Holdings, Inc. and First Data Resources Inc.
1.47 "Systems Software" means the Software licensed by FDT to be used to
provide FDT Services, but shall not include the FDT Proprietary Software or the
Applications Software. The current set of Systems Software is set forth in
Schedule 1.47. Such schedule may be amended from time to time.
- -------------
1.48 "Team 35 Software" has the meaning stated in Schedule 5.6.
------------
1.49 "Term" means the Original Term and any mutually agreed extension
thereto.
1.50 "Termination Assistance" has the meaning stated in Section 11.5.
------------
1.51 "Termination for Convenience Fee" shall mean a payment equaling twenty
percent (20%) of the sum of the FDT Service Charges owed and/or paid by CSG to
FDT for the twelve (12) month period prior to the date that CSG notified FDT of
CSG's intent to terminate this Services Agreement for its convenience pursuant
to Section 11.4.
------------
1.52 "Termination Licensed Materials" has the meaning stated in Schedule
--------
11.8
- ----
1.53 "Third Party Provider" has the meaning stated in Section 2.12.
------------
SECTION 2
PROVISION OF THE FDT SERVICES
-----------------------------
2.1 FDT Services. FDT shall make available to and perform for CSG and CSG
------------
shall use the FDT Services during the Term. Notwithstanding the foregoing, if
CSG delivers notification to FDT pursuant to Sections 11.1, 11.2 or 11.4, that
-------- ---- ---- ----
CSG is terminating this Services Agreement, then after such notification CSG may
arrange for CSG or a third party to provide the FDT Services for CSG after the
termination date and CSG may take all actions in preparation therefor as may be
reasonably necessary to enable CSG or such third party to provide such FDT
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<PAGE>
"Confidential Treatment Requested and the
Redacted Material has been separately
filed with the Commission."
Services immediately after the termination date; provided however, the foregoing
-------- -------
shall not be construed to prevent CSG from initiating preliminary discussions
with any such third party prior to giving written notice to FDT.
2.2 Platform; FDT Data Center Raised Floor.
--------------------------------------
2.2.1 Platform. FDT will provide the Platform and shall have all
--------
rights in connection therewith including the right to change the
configuration of the Platform during the Term of this Services Agreement.
FDT shall provide CSG with at least thirty (30) days advance written notice
of any change in the Platform. Such changes shall not materially adversely
affect the operations of CSG or CSG Clients. Except for those components
(if any) identified on Schedule 1.43 as being owned by CSG, the Platform
-------------
shall remain solely the property of FDT, its lessors or providers, if any,
and CSG shall have no ownership interests or other rights therein. CSG may
request changes to the Platform, and all such requests shall be deemed a
request for Additional Services and be subject to Section 2.15. Commencing
------------
January 1, 1998, no later than January 31 during each year of the Term, FDT
shall add to the Platform, four (4) additional tape drives (having a
transfer rate (as specified by the manufacturer) of 14 megabytes per
second), all of which shall not be an Additional Service. FDT shall
provide upgraded DASD relating to the Platform in accordance with the DASD
upgrade practices used by FDT from time to time.
2.2.2 FDT Data Center Raised Floor. CSG shall have the right,
----------------------------
subject to security, space, environmental and other limitations, to
collocate computer, telecommunications and other equipment at the FDT Data
Center and to interconnect such equipment to the FDT Platform; provided
--------
that CSG will at no time during the Term of this Services Agreement (except
as set forth in Section 2.2.3), require more than 900 non-contiguous square
-------------
feet of raised floor space in the FDT Data Center for those purposes. FDT
shall provide for utilities, HVAC, back-up power generators, and security
with respect to such collocated equipment. CSG and third party support
personnel retained by CSG or the CSG Client shall have reasonable access to
the FDT Data Center on a 24 hour per day, 7 day a week basis to maintain
and service such collocated equipment.
2.2.3 Additional FDT Data Center Raised Floor. After July 1, 1997,
---------------------------------------
and upon sixty (60) days prior written notice to FDT, CSG shall also have
the right, subject to security, space, environmental and other limitations,
to collocate additional computer, telecommunications and other equipment at
the FDT Data Center and to interconnect such equipment to the FDT Platform;
provided that CSG will at no time during the Term of this Services
--------
Agreement require more than an additional 900 non-contiguous square feet of
raised floor space (for a total of 1800 square feet) in the FDT Data Center
for those purposes, it being understood that such additional non-contiguous
space will be provided by FDT to CSG for ($**) (annually) per square foot.
FDT shall provide for
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<PAGE>
utilities, HVAC, back-up power generators, and security with respect to
such collocated equipment. CSG and third party support personnel retained
by CSG or the CSG Client shall have reasonable access to the FDT Data
Center on a 24 hour per day, 7 day a week basis to maintain and service
such collocated equipment.
2.3 CSG-Vendor Software. CSG will secure for FDT, at CSG's expense, the
-------------------
rights to access, operate (at or from any location where FDT will provide the
FDT Services), and modify the Vertex Software included within CSG-Vendor
Software to the extent required for FDT's pro vision of the FDT Services under
this Services Agreement. To the extent necessary, CSG will secure for FDT, at
CSG's expense, a license for the other Software included within the CSG-Vendor
Software. Such license shall provide for the rights set forth in the first
sentence of this Section 2.3, including upgrades to such Software and
-----------
maintenance therefor.
2.4 Maintenance of Current Vendor Supported Software Releases. Within one
---------------------------------------------------------
(1) year following the Effective Date, CSG shall cause all CSG-Vendor Software
to be the most current release (or one generation behind the most current
release), unless the most current release (or one generation behind the most
current release) of any CSG-Vendor Software is incompatible with the Team 35
Software. Thereafter, CSG shall cause all CSG-Vendor Software to be the most
current release (or one generation behind the most current release) within one
(1) year of the commercial release of the next version of any CSG-Vendor
Software, unless the most current release (or one generation behind the most
current release) of any CSG-Vendor Software is incompatible with the Team 35
Software. Within one (1) year following the Effective Date, FDT shall cause all
Systems Software to be the most current release (or one generation behind the
most current release) unless the most current release (or one generation behind
the most current release) of any Systems Software is incompatible with the Team
35 Software. Thereafter, FDT shall cause all Systems Software to be the most
current release (or one generation behind the most current release) within one
(1) year following the commercial release of the next version of any Systems
Software, unless the most current release (or one generation behind the most
current release) of any Systems Software is incompatible with the Team 35
Software. CSG shall, at its sole cost and expense, upon the reasonable request
of FDT, cooperate with FDT in testing the implementation of all CSG-Vendor
Software and Systems Software. The Parties agree to use commercially
reasonable efforts to coordinate the timing and installation of new releases of
CSG-Vendor Software and Systems Software so as to not unreasonably disrupt or
materially adversely affect the provision of FDT Services.
2.5 Use of Other Software.
---------------------
2.5.1 FDT Affiliate Software. The Parties shall investigate from
----------------------
time to time the possibility of using Software developed by FDT Affiliates
(such as that Software commonly known as "Tape Access Method"), to augment
the CSG-Vendor Software. If such investigation results in the Parties
determining that the use of such Software is desirable, the Parties shall
negotiate the terms and conditions (including costs) associated with such
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<PAGE>
use.
2.5.2 Third Party Software. If CSG requires FDT to acquire
--------------------
additional Software for use by FDT in the provision of FDT Services, FDT
shall use commercially reasonable efforts to identify other FDT clients
with whom CSG can share the costs associated with such Software, it being
understood that if no other FDT clients use such Software, the costs
associated with such Software shall be the sole responsibility of CSG.
2.6 Information and Reports. In accordance with the Performance Criteria,
-----------------------
FDT will provide to CSG the output information or such other reports as the
Parties may mutually agree, provided, however, that FDT's obligations for output
-------- -------
or reports are specifically conditioned upon receipt of timely input received
from CSG and CSG's Clients.
2.7 Backup. Pursuant to written instructions from CSG, FDT will back-up
------
and maintain copies of the CSG Data, the Applications Software and Team 35
Software on magnetic or other media in accordance with FDT's standard
procedures. In connection with such backup, FDT, in accordance with the fees
set forth in Schedule 1.27, will arrange for off-site storage for CSG Data, as
-------------
well as periodic pick-up and delivery to the off-site storage site. CSG will be
solely responsible for CSG Data that CSG recalls from the off-site storage site
to the FDT Data Center before it is scheduled to be returned from the off-site
storage site.
2.8 Security. FDT will implement and maintain reasonable security
--------
procedures relating to CSG's access to the FDT Proprietary Software, the
Development Software, and access to the corresponding data of CSG Clients,
including administering the procedures relating to the assignment and
administration of all log-on identification numbers, and CSG shall be
responsible for taking appropriate security measures relating to log-on
identification numbers, passwords and access. FDT has provided CSG with a
description of security procedures currently used by FDT, and FDT will provide
reasonable prior written notice of any material changes in such procedures.
From time to time, CSG will notify FDT which employees of CSG are to be granted
access to the FDT Proprietary Software, Development Software and CSG Data and
the authorized level of such access, all in accordance with FDT's standard
procedures.
2.9 Operations Procedures. CSG and FDT shall each use commercially
---------------------
reasonable efforts to comply with the Operations Procedures set forth on
Schedule 2.9 (the "Operations Procedures") in order for FDT to provide the FDT
- ------------
Services; provided, however, that if CSG is unable to give any notice specified
-------- -------
on Schedule 2.9 within the required time frame, FDT will use commercially
------------
reasonable efforts to accommodate the time frame requested by CSG (provided FDT
shall be under no obligation to incur additional costs to accommodate such time
frame or be responsible for the adverse impact on the Performance Criteria).
The Operations Procedures may from time to time be changed by FDT so long as
the changes do not materially (a) increase the duties of CSG or its obligations
hereunder, or (b) adversely affect the business operations of CSG or CSG
Clients. To the extent practicable, FDT agrees to give CSG reasonable advance
written
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<PAGE>
notice of such changes, except for changes which are implemented in
short time frames for which no such notice can be given, such as changes
necessary to correct situations in the FDT Data Center requiring immediate
attention. FDT further agrees to use commercially reasonable efforts to
minimize changes that will materially adversely affect CSG or CSG Clients, all
of which requires CSG's prior written consent, which consent shall not be
unreasonably withheld or delayed. THE OPERATING PROCEDURES ARE DEMARCATIONS OF
RESPONSIBILITIES AND PROCEDURES THAT CSG AND FDT WILL EACH USE COMMERCIALLY
REASONABLE EFFORTS TO ACHIEVE AND PERFORM, IT BEING UNDERSTOOD THAT
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN THIS SERVICES AGREEMENT:
(a) THE OPERATING PROCEDURES MAY NOT BE ACHIEVED OR PERFORMED; AND (b) THE
FAILURE BY FDT OR CSG TO ACHIEVE OR PERFORM ANY OPERATIONS PROCEDURE SHALL NOT
BE DEEMED TO BE A BREACH OF THIS SERVICES AGREEMENT.
2.10 CSG Batch Job Targets. The CSG Batch Job Targets (and improvements
---------------------
resulting from the use of the Timberline Hardware) set forth in Schedule 2.10
-------------
are targets and improvements that CSG and FDT will each use commercially
reasonable efforts to achieve, IT BEING UNDERSTOOD THAT NOTWITHSTANDING ANYTHING
TO THE CONTRARY SET FORTH IN THIS SERVICES AGREEMENT: (a) THE CSG BATCH JOB
TARGETS (AND IMPROVEMENTS (IF ANY) RESULTING FROM THE USE OF THE TIMBERLINE
HARDWARE) MAY NOT BE ACHIEVED; AND (b) THE FAILURE BY FDT OR CSG TO ACHIEVE THE
CSG BATCH JOB TARGETS (OR IMPROVEMENTS (IF ANY) RESULTING FROM THE USE OF THE
TIMBERLINE HARDWARE) SHALL NOT BE DEEMED TO BE A BREACH OF THIS SERVICES
AGREEMENT.
2.11 Disaster Recovery. In the event of a Declared Disaster affecting the
-----------------
CSG Data, FDT will use commercially reasonable efforts to recover the critical
components of the Systems Software, FDT Proprietary Software (excluding the Team
35 Software), and the FDT managed networks in accordance with the Plan. As
compensation for any services provided by FDT in maintaining and implementing
the Plan, CSG agrees to pay FDT the associated fees and charges for such FDT
Services set forth in Schedule 1.27 and Schedule 2.11, as applicable. It is
-------------- -------------
CSG's sole responsibility to recover the Applications Software and the Team 35
Software, and to direct FDT in regard to the CSG Data in accordance with Section
-------
2.7.
- ---
2.12 Systems Software: Data Telecommunications. FDT may procure from one
-----------------------------------------
or more qualified subcontractors or third party vendors (the "Third Party
Providers") the data tele communications services and Systems Software used to
provide FDT Services, except to the extent that CSG has previously contracted
for such services directly. FDT also will be responsible for obtaining from any
such Third Party Providers the appropriate maintenance for data
telecommunications and hardware equipment. CSG agrees to pay FDT the applicable
FDT Service Charge. Annually during the Term, the Parties will review the
quality of service and
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<PAGE>
pricing offered by the Third Party Providers. Following the annual review, FDT
will take such action that the Parties mutually determine appropriate, which may
include renegotiation with current Third Party Providers or termination of
existing service or license agreements and negotiation with new Third Party
Providers. FDT shall keep CSG apprised of negotiations with Third Party
Providers. The Parties acknowledge that each of the Parties share certain
connections to a network commonly known as the Advantis network. Notwithstanding
anything to the contrary set forth in this Services Agreement, each Party shall
pay their respective usage fees however designated for their respective use of
the Advantis network.
2.13 Performance Criteria.
--------------------
2.13.1 Performance Criteria. FDT shall use commercially reasonable
--------------------
efforts to provide and to perform the FDT Services in all material respects in
accordance with each of the performance criteria set forth in Schedule 2.13
-------------
(the "Performance Criteria"). Without limiting the foregoing, any request by
CSG for a new or additional Performance Criteria shall be deemed a request for
Additional Services in accordance with Section 2.15.
------------
2.13.2 Exclusions. There shall be excluded from the measurement of
----------
compliance with any Performance Criteria any failure to meet such Performance
Criteria if, during, and to the extent that such failure is related to (i) any
matter constituting force majeure, as provided in Section 12.4; (ii) any
------------
material failure by CSG to perform its obligations under this Services Agreement
(including those set forth in the Operations Procedures), or where CSG's
approval, acceptance, consent or similar action is required under this Services
Agreement, any unreasonable delay or any withholding of action; (iii) the
performance or nonperformance of any Applications Software or the Team 35
Software; (iv) the performance or nonperformance of any CSG vendor; (v) ad hoc
reporting jobs, special production jobs, testing procedures or other services
that are given priority at the request of CSG; (vi) any significant change in
the manner in which CSG conducts its business or operations adversely affecting
FDT's ability to meet any Performance Criteria; and (vii) any failure of CSG or
CSG Clients to provide CSG Data in the time deemed reasonably necessary by FDT
to meet an output delivery schedule.
2.14 Audit Rights.
------------
2.14.1 CSG Audits. Upon the request and reasonable advance written
----------
notice of CSG, FDT will provide to CSG, its auditors and regulators, if any, and
to CSG Clients in accordance with their agreements with CSG (as directed by CSG
and subject to the need for confidentiality obligations from them as set forth
below) access during regular business hours to the appropriate management per-
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<PAGE>
sonnel of FDT, and to CSG Data and records of CSG directly relating to the FDT
Services. Such access shall be limited to performing audits of FDT and its
business, to verify the accuracy of the fees and charges for the FDT Services,
and FDT's compliance with the Performance Criteria. Such requests for access
shall not be made more frequently than once a year, with the exception of
requests to provide access to CSG's regulators. FDT will provide to such
auditors and regulators any assistance of a routine nature that they reasonably
require. To the extent that FDT's assistance in such audits exceeds more than
sixty (60) man hours of FDT time in any calendar year, CSG shall reimburse FDT
for such assistance in excess of sixty (60) hours at FDT's then current
commercial rates. CSG and the third party auditors and regulators must comply
with all reasonable security and confidentiality procedures (including the
execution of nondisclosure agreements), established by FDT at any facility to
which access is granted, and audits shall not unreasonably interfere with FDT's
normal business operations. CSG shall use commercially reasonable efforts to
cause non-CSG third party auditors and regulators to provide FDT in advance with
a draft copy of each written report or other output containing comments
concerning FDT or the FDT Services and an opportunity to reply to comments that
will be made in the final report.
2.14.2 FDT Audits. From time to time during the Term, FDT will allow a
----------
third party, selected by FDT, to perform an audit of the electronic data
processing environment maintained by FDT to provide the FDT Services
contemplated under this Services Agreement. Upon request, FDT shall provide CSG
with a copy of the results of the audit. CSG may provide a copy of the audit to
its clients who have specifically agreed to hold the audit confidential in
conformance with an agreement in the form of or conforming to Schedule 2.14.
-------------
2.15 Additional Services. If CSG requests FDT to provide any services that
-------------------
are different from, or in addition to, the FDT Services ("Additional Services"),
the Parties will cooperate with each other in good faith in discussing the scope
and nature of the request, the Additional Services so requested, the related
performance criteria, the impact (if any) on existing Performance Criteria, the
time period in which FDT would provide such Additional Services and the basis
upon which FDT would be compensated and reimbursed therefor, it being understood
that such compensation and reimbursement for Additional Services shall be
consistent with the pricing methodology used for the FDT Service Charges, but
only include costs associated with the FDT Data Center (as opposed to indirect
costs of FDT), and may include the payment of additional fees associated with
equipment obtained by FDT for the provision of Additional Services if CSG
terminates this Agreement for its convenience pursuant to Section 11.4. If the
------------
Parties agree upon the scope and nature of the Additional Services and FDT's
compensation therefor, including, the payment of additional fees (if any) set
forth in the previous sentence, the Parties shall amend this Services Agreement
accordingly and such Additional Services shall
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become a part of the FDT Services.
2.16 CSG Obligations and Responsibilities.
------------------------------------
2.16.1 CSG Obligations. CSG shall have and perform the obligations
---------------
including, those identified in Schedule 2.16.1.
---------------
2.16.2 Data Responsibility. CSG shall have responsibility for the
supervision, management and control of its use of the CSG Data, reports and the
like, including implementing sufficient procedures to satisfy its internal
security and accuracy requirements for information FDT furnishes.
2.17 Relocation.
----------
2.17.1 Movement of FDT Data Center. If FDT relocates the FDT Data
---------------------------
Center, FDT shall reimburse CSG for (a) any conversion cost incurred, directly
or indirectly, by CSG as a result of such relocation and (b) any increase in the
ongoing expenses of CSG as a result of such relocation during the Original Term.
2.17.2 Movement of CSG. If CSG relocates its principal place of
---------------
business from Omaha, Nebraska, CSG shall reimburse FDT for (a) any conversion
costs incurred, directly or indirectly, by FDT as a result of such relocation
and (b) any increase in the ongoing expenses of FDT as a result of such
relocation during the Original Term.
2.18 Access to FDT Data Center. During the Term, FDT will permit CSG and
-------------------------
CSG Clients, on reasonable written notice and subject to FDT's standard security
procedures, to have access to the FDT Data Center during normal business hours
for the purpose of giving tours of such FDT Data Center to CSG Clients and
prospective clients of CSG. Such tours shall be conducted by an employee or
representative of FDT and the extent of such tours shall be determined by FDT in
its sole discretion, provided that such tours provide such CSG Clients and
--------
prospective clients of CSG with a reasonable understanding of the FDT Data
Center standard practices and procedures. Employees and representatives of FDT
conducting such tours shall do so in a professional manner.
2.19 Cooperation and Good Faith. Each Party shall cooperate with the other
--------------------------
to establish priorities for the FDT Services and any Additional Services to be
provided to CSG. Each Party will also cooperate with the other by, among other
things, making available and not withholding or delaying, as reasonably
requested by the other, such management decisions and approvals as may be
necessary to fulfill each Party's respective obligations to the other under this
Services Agreement in a timely and efficient manner. All negotiations
including, negotiations for Additional Services, between the Parties shall be
conducted in good faith in accordance with reasonable commercial business
practices. FDT will provide reasonable assistance to CSG in
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CSG's efforts to develop new business, data conversion and deconversion
activities. Each Party shall designate a person to represent the Party and
coordinate its activities in connection with this Services Agreement.
2.20 Rights of Contemporaneous Negotiation. Contemporaneously with
-------------------------------------
soliciting (or responding to an offer by) a third party to perform any other
data processing or data telecommunications services similar to any of the FDT
Services or a replacement for any of the FDT Services, CSG shall offer FDT the
opportunity to provide such services on mutually acceptable terms. The Parties
each agree that they will act in good faith and without undue delay as they
participate in discussions on the terms pursuant to which FDT will provide such
services to CSG; provided however, nothing in this Services Agreement shall
-------- -------
obligate either Party necessarily to reach an agreement with the other with
respect to such services. It is expressly agreed that (notwithstanding this
Services Agreement, or any past or future discussions or other communications
between them) neither Party will have any liability or obligation whatsoever to
the other with respect to the provision of such services unless and until
negotiations between them are completed and they have in fact entered into
comprehensive, mutually-binding written agreement which covers all matters
agreed to and which is signed by each Party's authorized officers. It is agreed
that either Party may terminate such discussions on written notice to the other
Party, without incurring any liability therefor.
SECTION 3
PAYMENTS FOR FDT SERVICES
-------------------------
3.1 Fees and Charges. The FDT Service Charges are set forth in Schedule
---------------- --------
1.27. FDT's obligations and CSG's rights under this Services Agreement are
- ----
conditional upon CSG's payment of the fees and charges in accordance with the
terms and conditions of this Services Agreement.
3.2 Taxes. CSG shall be responsible for any sales, use, excise, value-
------
added and other taxes and duties payable by FDT or CSG on the FDT Services as a
whole or on a particular good or service received by CSG from FDT in connection
with the FDT Services where the tax is imposed on CSG's acquisition or use of
such FDT Services or such other goods or services from FDT, and not by FDT's
cost in acquiring the FDT Services or such other goods or services. FDT shall
be solely responsible for payment of the taxes, if any, on FDT's income from the
FDT Services, and FDT corporate occupation taxes, if any. The Parties will use
commercially reasonable efforts to cooperate with each other to enable each
other to determine accurately each Party's tax liability and to minimize such
liability to the extent legally permissible. Each Party shall provide and make
available to the other any resale certificates, information regarding out-of-
state or out-of-country sales or use of equipment, materials or services, and
other exemption certificates or information reasonably requested by either
Party.
3.3 Invoice and Time of Payment. FDT will invoice CSG on or before the
---------------------------
fifth (5th)
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business day of each month for any amount owed to FDT pursuant to this Services
Agreement for the immediately preceding month. Each such invoice will be due and
payable within thirty (30) days after receipt of the invoice. Notwithstanding
the foregoing, if CSG should dispute the accuracy of all or any portion of an
amount indicated on any invoice, CSG shall timely pay the undisputed portion of
such invoice and notify FDT's accounts receivable department in writing of the
nature of the disputed amount at the time of payment. The Parties shall attempt
in good faith to mutually resolve such dispute; provided however, if the dispute
-------- -------
is not resolved within forty-five (45) days from FDT's receipt of such written
notice, either Party shall have the right to have such dispute resolved pursuant
to the terms of Section 6.4.
-----------
3.4 Interest. If FDT does not receive, or is unable to obtain, payment of
--------
any amount due or payable to FDT under this Services Agreement at the time
provided for payment under this Services Agreement, such unpaid amount shall
bear interest at a rate equal to one percent (1%) over the prime rate as
published in the Wall Street Journal, from the date on which payment was due
-------------------
until the date on which FDT receives such payment.
SECTION 4
RELATIONSHIP BETWEEN THE PARTIES
--------------------------------
Nothing contained in this Services Agreement shall be deemed to constitute
a partnership or joint venture between the Parties. Neither Party shall hold
itself out as having any authority to enter into any contract or create any
obligation or liability on behalf of, in the name of, or binding upon the other
Party, nor shall anything contained in this Services Agreement be deemed to
create or imply a fiduciary relationship between the Parties.
SECTION 5
INTELLECTUAL PROPERTY
---------------------
5.1 CSG Data. Any data regarding the operations of CSG or any data
--------
regarding CSG's Clients provided by CSG to FDT pursuant to this Services
Agreement shall remain the property of CSG or CSG Clients (collectively, "CSG
Data"). CSG authorizes FDT to access and make use of the CSG Data for FDT's
performance of its obligations under this Services Agreement. Upon the
termination or expiration of this Services Agreement for any reason, FDT shall
promptly return CSG Data in the form such data is maintained by FDT in
connection with the performance of the FDT Services or, if CSG so elects in
writing, destroy it. FDT shall not use the CSG Data for any purpose except as
contemplated by this Services Agreement, nor shall any part of such data be
disclosed or sold by FDT to third parties or commercially exploited by FDT other
than CSG Data that may be disclosed in connection with the provision of FDT
Services. Notwithstanding the foregoing, FDT shall have the right without CSG's
approval, to compile and distribute aggregate and statistical analyses and
reports using CSG Data, information, and other sources, provided that such
--------
analyses and reports do not identify CSG, CSG Clients or CSG's industry, and
provided further that such analyses and reports are not sold
- -------- -------
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<PAGE>
to third parties.
5.2 CSG Proprietary Software. CSG hereby grants FDT a non-exclusive,
------------------------
royalty-free license for the Term of this Services Agreement to execute the CSG
Proprietary Software in connection with the performance of the FDT Services and
to access, modify and review the CSG Proprietary Software for problem resolution
and performance recommendations. Except as may be necessary for the
accomplishment of the activities authorized in the immediately preceding
sentence, FDT shall not modify, reverse engineer, decompile, disassemble, create
derivative works or otherwise discover any process or technique inherent in the
CSG Proprietary Software or any portion thereof. As between the Parties, the
CSG Proprietary Software will remain CSG's property. FDT will have no ownership
interests or other rights in the CSG Proprietary Software. CSG represents and
warrants to FDT that the CSG Proprietary Software excluding the Original CSG
Proprietary Software will not violate or infringe, any issued United States
patent as of the effective date of the Original Agreement or any copyright,
trade secret or other intellectual property rights as of the effective date of
the Original Agreement.
5.3 FDT Proprietary Software. FDT hereby grants CSG a non-exclusive,
------------------------
royalty-free license for the Term of this Services Agreement to use the FDT
Proprietary Software (excluding the Team 35 Software, it being understood that
CSG shall be licensed to use the Team 35 Soft ware only as authorized pursuant
to that certain license agreement attached hereto as Schedule 5.6). The
------------
foregoing license shall include access to the source code and documentation in
FDT Proprietary Software for the sole and limited purpose of enabling CSG to
modify Existing CSG Proprietary Software and to develop New CSG Proprietary
Software in response to CSG Client needs. Except as may be necessary for the
accomplishment of the activities authorized in the previous sentence, CSG shall
not modify, reverse engineer, decompile, disassemble, create derivative works,
or otherwise discover any process or technique inherent in the FDT Proprietary
Software or any portion thereof. As between the Parties, the FDT Proprietary
Software will remain FDT's property. CSG will have no ownership interests or
other rights in the FDT Proprietary Software. FDT represents and warrants to
CSG that the foregoing grant in the FDT Proprietary Software will not violate
or infringe, any issued United States patent as of the effective date of the
Original Agreement or any copyright, trade secret or other intellectual property
rights as of the effective date of the Original Agreement
5.4 Development Software. FDT has obtained or will obtain for CSG for the
--------------------
Term the right to execute and use the Development Software at CSG's principal
place of business for the purpose of developing, modifying, and enhancing the
CSG Proprietary Software. CSG shall comply with the terms of the licenses and
use restrictions for the Development Software. CSG shall not modify, reverse
engineer, reverse assemble or decompile the Development Software, nor shall CSG
permit any other person to do so.
5.5 Ownership of Information. All Software, Operating Procedures,
------------------------
manuals, and other documentation and similar data processing materials and
derivative works based thereon
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<PAGE>
("Data Processing Materials") developed or owned by a Party are and, unless
specifically transferred to the other, shall remain the property of such Party
and shall be Confidential Information. Any Operating Procedures, manuals, or
other documentation included within Confidential Information that is required
for CSG Clients to utilize the services of CSG may be provided to CSG Clients,
provided appropriate confidentiality agreements are executed to protect such
Confidential Information.
5.6 Team 35 Software. Contemporaneously with the execution of this
----------------
Services Agreement, the Parties shall execute the agreement attached hereto as
Schedule 5.6 relating to CSG's use of the Team 35 Software.
- ------------
5.7 Injunctions. In the event any injunction is issued as to any portion
-----------
of a product, service or any Software which is used to provide the FDT Services,
the unavailability of which would materially adversely affect the business or
operations of CSG, due to the infringement of a third party's patent, copyright
or trade secret, FDT will use commercially reasonable effort to modify or
replace the product or service if the infringement arises out of or relates to
the Platform, the Systems Software or any portion thereof, and CSG will use
commercially reasonable efforts to modify or replace the Applications Software
or Team 35 Software or any portion thereof if the infringement concerns the
Applications Software or Team 35 Software, in either event in order to avoid the
infringement, and if FDT or CSG, as applicable, is unable to do so with
commercially reasonable efforts or at commercially reasonable prices, FDT shall
no longer be responsible for providing the affected portion of the FDT Services.
SECTION 6
LIABILITY AND INDEMNIFICATION
-----------------------------
6.1 FDT's Indemnification. FDT shall hold harmless and indemnify CSG and
---------------------
its directors, officers, employees, agents and Affiliates from and against
any and all claims, liabilities, losses or damages (including reasonable
attorneys fees, expert witness fees, expenses and costs of settlement)
resulting from or arising out of:
6.1.1 any infringement of any issued United States patent as of the
effective date of the Original Agreement or any copyright, trade secret or
other intellectual property rights as of the effective date of the
Original Agreement (collectively, "Infringement Claims") asserted by any
third party against CSG in connection with the use by CSG of any FDT
Proprietary Software (excluding the Team 35 Software) in accordance with
the terms and conditions of this Services Agreement;
6.1.2 the death or bodily injury of any agent, employee, customer,
client, business invitee or business visitor of FDT except to the extent,
if any, that such death or bodily injury shall have been caused by the
gross negligence or reckless
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<PAGE>
or intentional conduct of CSG; provided, however, that for purposes of
-------- -------
this Section 6.1.2, the agents, employees, customers, CSG Clients, business
-------------
invitees and business visitors of CSG shall not, when on the premises of FDT,
be deemed FDT's business invitee or business visitor;
6.1.3 any payment obligations of FDT to a third party relating to the
Systems Software, FDT Proprietary Software or Platform; and
6.1.4 any misappropriation or misuse by FDT or its employees or agents
of Confidential Information of CSG or a CSG Client.
6.2 CSG's Indemnification. CSG shall hold harmless and indemnify FDT and
---------------------
its directors, officers, employees, agents and Affiliates from and against any
and all claims, liabilities, losses or damages (including reasonable attorney
fees, expert witness fees, expenses and costs of settlement) resulting from or
arising out of:
6.2.1 any Infringement Claim asserted by any third party against FDT
in connection with any CSG Proprietary Software; provided any such claim
arises out of new material or functionality added to such software that is
not present in the Original CSG Proprietary Software;
6.2.2 the death or bodily injury of any agent, employee, customer,
client, business invitee or business visitor of CSG except to the extent, if
any, that such death or bodily injury shall have been caused by the gross
negligence or reckless or intentional conduct of FDT; provided, however, that
-------- -------
for purposes of this Section 6.2.2, the agents, employees, customers,
-------------
clients, business invitees and business visitors of FDT shall not, when on
the premises of CSG, be deemed CSG's business invitee or business visitor;
6.2.3 any payment obligations of CSG to a third party relating to the
CSG Proprietary Software;
6.2.4 any Infringement Claim or other claim asserted by any third
party against FDT in connection with CSG Data or records provided by CSG or
CSG Clients to FDT in connection with the FDT Services;
6.2.5 any claims by third parties, including pursuant to any actions
brought derivatively on behalf of CSG or actions by CSG Clients, suppliers or
creditors of CSG, unless such claims arise from the sole gross negligence or
willful misconduct of FDT; and
6.2.6 any misappropriation or misuse by CSG or its employees or agents
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<PAGE>
of Confidential Information of FDT.
6.3 Indemnification Procedures.
--------------------------
6.3.1 If any civil, criminal, administrative or investigative action
or proceeding (any of the foregoing, a "Claim") is threatened or commenced
against any person or Party that a Party is obligated to defend or indemnify
under Section 6.1 or 6.2 (such person and such Party, collectively, an
----------- ---
"Indemnified Party"), then written notice thereof shall be given to the Party
that is obligated to provide indemnification under such Sections (the
"Indemnifying Party") as promptly as practicable; provided, however, that any
-------- -------
delay by the Indemnified Party in giving such written notice shall not
constitute a breach of this Services Agreement and shall not excuse the
Indemnifying Party's obligation under this Section 6 except to the extent, if
any, that the Indemnifying Party is prejudiced by such delay. After such
notice, the Indemnifying Party shall be entitled, if it so elects in writing
with in ten (10) days after receipt of such notice, to take control of the
defense and investigation of such claim and to employ and engage attorneys of
its choice reasonably acceptable to the Indemnified Party to handle and
defend the same, at the Indemnifying Party's sole cost and expense. The
Indemnified Party shall cooperate in all reasonable respects with the
Indemnifying Party and its attorneys in the investigation, trial and defense
of such claim and any appeal arising therefrom; provided however, that
-------- -------
the Indemnified Party may, at its own cost and expense, participate
through its attorneys or otherwise, in such investigation, trial and defense
of such claim and any appeal arising therefrom. No settlement of a claim that
involves a remedy other than the payment of money by the Indemnifying Party
shall be entered into by the Indemnifying Party without the prior consent of
the Indemnified Party, which consent will not be unreasonably withheld or
delayed.
6.3.2 After written notice by the Indemnifying Party to the
Indemnified Party of its election to assume full control of the defense of
any such claim pursuant to Section 6.3.1, the Indemnifying Party shall not
-------------
be liable to the Indemnified Party for any legal expenses incurred
thereafter by such Indemnified Party in connection with the defense of that
claim and any appeal arising therefrom. If the Indemnifying Party does not
assume full control over the defense of a claim pursuant to Section 6.3.1,
-------------
then the Indemnifying Party may participate in such defense, at its sole cost
and expense, and the Indemnified Party shall have the right to defend the
claim in such manner as it may deem appropriate, at the cost and expense of
the Indemnifying Party.
6.3.3 The remedy of indemnification described in this Section 6 shall
---------
be the sole and exclusive remedy of the Indemnified Party for the Infringement
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Claims and other claims described in Section 6.1 and Section 6.2, except as
----------- -----------
otherwise provided herein for injunctive relief and the recovery of
consequential damages relating to the breach of confidentiality obligations
or misappropriation of Confidential Information.
6.4 Dispute Resolution. Subject to Section 6.5, any and all Disputes
------------------ -----------
shall be resolved as provided in Schedule 6.4 hereto.
------------
6.5 Litigation.
----------
6.5.1 Notwithstanding anything to the contrary set forth herein,
neither Party shall be required to submit any dispute or disagreement
regarding the interpretation of any provision of this Services Agreement,
the performance by either Party of such Party's obligations under this
Services Agreement or a default hereunder to the mechanisms set forth in
Section 6.4, if such submission would be seeking equitable relief from
-----------
irreparable harm.
6.5.2 THE PARTIES CONSENT TO THE NON-EXCLUSIVE JURISDICTION OF THE
UNITED STATES DISTRICT COURT FOR THE STATE OF NEBRASKA AND OF ANY NEBRASKA
STATE COURT SITTING IN OMAHA, NEBRASKA FOR ALL LITIGATION WHICH MAY BE
BROUGHT WITH RESPECT TO THE TERMS OF, AND THE TRANSACTIONS AND RELATIONSHIPS
CONTEMPLATED BY, THIS SERVICES AGREEMENT. THE PARTIES FURTHER CONSENT TO THE
JURISDICTION OF ANY STATE COURT LOCATED WITHIN A DISTRICT WHICH ENCOMPASSES
ASSETS OF A PARTY AGAINST WHICH A JUDGMENT HAS BEEN RENDERED, EITHER THROUGH
ARBITRATION OR THROUGH LITIGATION, FOR THE ENFORCEMENT OF SUCH JUDGMENT
AGAINST THE ASSETS OF SUCH PARTY.
SECTION 7
LIMITATION OF LIABILITY
-----------------------
7.1 Limitation on Amount of Damages. It is understood and agreed that a
-------------------------------
Party's liability to the other Party or any other person for damages, injuries,
losses, costs or expenses of any kind, however caused, based on or arising from
or in connection with this Services Agreement, any termination hereof, the
subject matter hereof, the performance (or non-performance) of any of the FDT
Services or other service or obligation hereunder, whether arising in contract
or tort (including as a result of negligence or strict liability), and whether
or not such Party shall have been informed, or might have anticipated the
possibility of any such damage, loss, cost or expense (collectively, "Losses and
Expenses"), shall be limited with respect to each consecutive twelve (12) month
period during the Term commencing with the Effective Date, to the direct
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<PAGE>
damages actually incurred by such Party or person, or consequential damages
incurred by either Party as a result of the misappropriation or misuse of
Confidential Information, and shall be recoverable if, and only to the extent
such Losses and Expenses exceed two hundred fifty thousand dollars ($250,000);
and provided further, that the aggregate amount required to be paid by a Party
-------- -------
to the Party or any other person for all such Losses and Expenses shall not
exceed during the first year following the Effective Date, thirteen million
dollars ($13,000,000), and for every year thereafter, the lesser of fifteen
million dollars ($15,000,000) or FDT's revenues under this Services Agreement
for the twelve (12) month period immediately preceding the date of the event
giving rise to the claim. The foregoing limitations shall not apply to amounts
for charges including the fees and charges in Schedule 1.27, otherwise due and
-------------
payable under this Services Agreement.
7.2 Provision of FDT Services. CSG acknowledges that the FDT Services
-------------------------
provided by FDT are to assist CSG in its business activities and are not
intended to replace its professional skill and judgment. CSG shall be solely
responsible for: (i) its own actions or omissions, and the actions or omissions
of its agents, employees and clients with respect to CSG Data used as input for
the FDT Services and (ii) any use of any FDT Services and any use made by CSG,
its agents, employees and clients of CSG Data, reports or other products
produced through any of the FDT Services.
7.3 Mitigation. Each Party shall use commercially reasonable efforts to
----------
mitigate damages for which the other Party is responsible.
7.4 Limitation of Assertions. Neither Party may assert any cause of
------------------------
action against the other Party under this Services Agreement that accrued more
than one (1) year prior to: (i) the filing of a suit; or (ii) the commencement
of arbitration proceedings alleging such cause of action.
7.5 Express Allocation of Risks. The Parties expressly acknowledge that
---------------------------
the limitations contained in this Section 7 and Sections 6, 8 and 9 represent
--------- -------- - - -
the express agreement of the Parties with respect to the allocation of risks
between the Parties, including the level of risk to be associated with the
provision of the FDT Services as related to the FDT Service Charges, and each
Party fully understands and irrevocably accepts such limitations. The Parties
acknowledge that but for the limitations contained in this Section 7 and
---------
Sections 6, 8 and 9, the Parties would not have entered into this Services
- -------- - - -
Agreement.
SECTION 8
STANDARD OF CARE AND EXCLUSION OF WARRANTIES
--------------------------------------------
FDT will use reasonable commercial efforts to meet the Performance
Criteria, and FDT will use reasonable care in providing the FDT Services
pursuant to this Services Agreement. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
THIS SERVICES AGREEMENT,
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FDT MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, TO CSG OR TO ANY
OTHER PERSON, INCLUDING ANY WARRANTIES REGARDING THE MERCHANTABILITY,
SUITABILITY, ORIGINALITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE
(IRRESPECTIVE OF ANY PREVIOUS COURSE OF DEALINGS BETWEEN THE PARTIES OR CUSTOM
OR USAGE OF TRADE), OR RESULTS TO BE DERIVED FROM THE USE OF ANY SOFTWARE, FOR
SERVICES, HARDWARE OR OTHER SERVICES, PRODUCTS OR MATERIALS PROVIDED UNDER THIS
SERVICES AGREEMENT.
SECTION 9
EXCLUSION OF DAMAGES
--------------------
NOTWITHSTANDING ANY OTHER PROVISION TO THE CONTRARY SET FORTH IN THIS
SERVICES AGREEMENT, IN NO EVENT SHALL EITHER PARTY, ANY OF THEIR AFFILIATES OR
ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE
UNDER ANY THEORY OF TORT, CONTRACT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE
THEORY FOR ANY LOST PROFITS, LOSS OF DATA, EXEMPLARY, PUNITIVE, SPECIAL,
INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, EACH OF WHICH IS HEREBY EXCLUDED
BY AGREEMENT OF THE PARTIES REGARDLESS OF WHETHER OR NOT EITHER PARTY OR ANY
OTHER SUCH ENTITY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED
THE FOREGOING EXCLUSION SHALL NOT APPLY TO CONSEQUENTIAL DAMAGES INCURRED BY
EITHER PARTY AS A RESULT OF THE MISAPPROPRIATION OR MISUSE OF CONFIDENTIAL
INFORMATION.
SECTION 10
CONFIDENTIALITY
---------------
10.1 Confidential Information. Information exchanged between the Parties
------------------------
or otherwise made available by one Party for the other in connection with this
Services Agreement before or after the date hereof shall be considered a trade
secret or confidential or proprietary information ("Confidential Information")
if it has been designated as such in this Services Agreement or on the
information itself when delivered or made available, or if delivered orally, if
a written notification of the confidential nature of the information is sent
within a reasonable time after the information is transmitted. Among other
things, Confidential Information shall include confidential or proprietary
information of third parties in the possession of one of the Parties to this
Services Agreement and needed to perform obligations hereunder. FDT Pro-
prietary Software and CSG Proprietary Software shall in any event be considered
Confidential Information of the Parties, respectively. Confidential Information
not requiring a marking shall include FDT Proprietary Software, CSG Proprietary
Software, all specifications and documentation therefor, financial information
of either Party, all CSG Data processed in the FDT Data
CONFIDENTIAL - DO NOT DISCLOSE
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<PAGE>
Center, or other confidential business plans of either Party.
10.1.1 Except as expressly authorized by prior written consent of the dis-
closing Party, the receiving Party shall:
(i) limit access to any Confidential Information received by it to
its employees, agents, representatives, and consultants who have a need-to-
know in connection with this Services Agreement and the obligations of the
Parties hereunder;
(ii) advise its employees, agents and consultants having access to
the Confidential Information of the proprietary nature thereof and of the
obligations set forth in this Services Agreement;
(iii) safeguard all Confidential Information received by it using a
reasonable degree of care, but not less than that degree of care used by
the receiving Party in safeguarding its own similar information or
material;
(iv) not disclose any Confidential Information received by it to
third parties; and
(v) use the Confidential Information of the other Party only for
the purposes and in connection with the performance of such Party's
obligations under this Services Agreement; and
(vi) upon the disclosing Party's request after expiration or termi-
nation of this Services Agreement, return promptly to the disclosing Party
all Confidential Information of the disclosing Party in the receiving
Party's possession, and certify in writing to the disclosing Party its
compliance with this subsection (vi).
10.1.2 Exceptions to Confidentiality. Notwithstanding the foregoing
-----------------------------
Section 10.1, the Parties' obligations respecting confidentiality under
------------
Section 10.1.1 shall not apply to any particular information of a Party
--------------
that the other Party can demonstrate (i) was, at the time of disclosure to
it, in the public domain; (ii) after disclosure to it, is published or
otherwise becomes part of the public domain through no fault of the
receiving Party; (iii) was in the possession of the receiving Party at the
time of disclosure to it without being subject to another confidentiality
agreement; (iv) was received after disclosure to it from a third party who
had a lawful right to disclose such information to it; (v) was inde-
pendently developed by the receiving Party without reference to
Confidential Information of the furnishing Party; (vi) was required to be
disclosed to any regulatory body having jurisdiction over FDT or CSG or any
of their respective clients; or (vii) that disclosure is necessary by
reason of legal, accounting or regulatory requirements beyond the
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<PAGE>
reasonable control of the receiving Party. In the case of any disclosure
pursuant to clauses (vi) and (vii) above, to the extent practical, the
disclosing Party shall give prior written notice to the other Party of the
required disclosure and shall use commercially reasonable efforts to obtain
a protective order covering such disclosure. If such a protective order is
obtained, such information shall continue to be deemed to be Confidential
Information.
10.2 No License or Other Rights. Except as specifically granted herein or
--------------------------
in the Stock Purchase Agreement, this Services Agreement does not confer any
right, license, interest or title in, to or under the Confidential Information
to the receiving Party and no license is hereby granted to the receiving Party,
by estoppel or otherwise under any patent, trademark, copyright, trade secret or
other proprietary right of the disclosing Party. Title to the Confidential
Information shall remain solely in the disclosing Party.
10.3 Publicity and Use of Certain Information. Neither Party will,
----------------------------------------
without the other Party's prior written consent, use the name, service marks or
trademarks of the other Party or any of its Affiliates; provided, however, that
-------- -------
FDT may use CSG as a reference and may indicate to others that CSG purchases the
FDT Services under this Services Agreement. Either Party may disclose to other
persons and Entities the existence and general nature of the Services Agreement
but not the terms and conditions hereof.
10.4 Equitable Remedies. Each Party acknowledges that if it breaches (or
------------------
attempts to breach) its obligations under this Section 10, the other Party will
----------
suffer immediate and irreparable harm, it being acknowledged that legal remedies
are inadequate. Accordingly, if a court of competent jurisdiction should find
that a Party has breached (or attempted to breach) any such obligations, such
Party will not oppose the entry of an appropriate order compelling performance
by such Party and restraining it from any further breaches (or attempted
breaches).
10.5 Privileged Data. CSG accepts full responsibility for complying with
---------------
federal, state and local laws, rules and regulations concerning use of
privileged or confidential third party information derived from input into or
output from the FDT Services provided by FDT under this Services Agreement.
SECTION 11
TERMINATION
-----------
11.1 Termination for Cause. Except as provided in Section 11.2, if either
--------------------- ------------
Party breaches any of its material obligations under this Services Agreement,
which breach is not substantially cured within forty-five (45) days (ten (10)
days for payment defaults) after written notice specifying the breach is given
by the non-breaching Party to the breaching Party, then the other Party may, by
giving notice to the defaulting Party terminate this Services Agreement (or any
service provided by or received by the non-defaulting Party hereunder) for cause
as of a
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<PAGE>
future date specified in the notice of termination; provided however,
-------- -------
such termination notice shall not: (i) if delivered by CSG to FDT, specify a
future termination date more than twelve (12) months from the date of the
notice; (ii) if delivered by FDT to CSG, specify a future termination date less
than nine (9) months from the date of the notice; and (iii) in any case,
otherwise extend the Term of this Services Agreement beyond the date for
termination specified in any previous termination notice delivered by either
Party pursuant to the terms of this Services Agreement. Notwithstanding
anything herein to the contrary, in no event shall the operation of this Section
-------
11.1 extend the Term of this Services Agreement.
- ----
11.2 Termination for Failure to Meet Performance Criteria. FDT's
----------------------------------------------------
performance during any month shall be evaluated against the Performance Criteria
set forth in Schedule 2.13. If FDT fails to perform a specified Performance
-------------
Criteria in accordance with Section 2.13 and Schedule 2.13 during any two (2)
------------ -------------
consecutive months, CSG may notify FDT in writing of its desire to have FDT
correct such failure (hereinafter referred to as "Failed Criteria"). During the
next thirty (30) days after receipt of such notice or such shorter period if FDT
shall request less than thirty (30) days (hereinafter referred to as "First Cure
Period"), FDT shall correct such Failed Criteria and immediately notify CSG of
its correction. If FDT fails to correct such Failed Criteria within the First
Cure Period, CSG shall have a right to terminate this Services Agreement;
provided, that this termination option is exercised within thirty (30) days
- --------
after the end of the First Cure Period. Such termination shall become effective
on a date specified by CSG, which date shall be not later than twelve (12)
months after CSG's delivery to FDT of a written notice of its intention to so
terminate. If FDT cures the Failed Criteria within the First Cure Period, but
thereafter within the next sixty (60) days again fails to satisfy such Failed
Criteria, CSG, at its election, may terminate this Services Agreement; provided,
--------
that this termination option is exercised within thirty (30) days after CSG
receives notice of FDT's repeated failure to perform (as set forth above), and
provided that such termination shall become effective on a date specified by
CSG, which date shall be not later than twelve (12) months after CSG's delivery
to FDT of a written notice of its intention to so terminate this Services
Agreement. Notwithstanding anything herein to the contrary, in no event shall
the operation of this Section 11.2 extend the Term of this Services Agreement.
------------
11.3 Termination Due to Change of Control or Assignment. CSG shall
--------------------------------------------------
notify FDT within ten (10) business days of any public announcement relating to:
(a) the sale in one transaction or a series of related transactions of a
majority of the voting equity securities of CSG other than pursuant to an
underwritten public offering; or (b) any other matter specified in Section
-------
12.3. FDT may, within thirty (30) days of receipt of any such notice, notify
CSG of its intent to terminate this Services Agreement, effective no earlier
than twelve (12) months from the date of CSG's notice to FDT. FDT shall provide
CSG or its designee with Termination Assistance as requested by CSG commencing
upon CSG's receipt of FDT's notice pursuant to the limitations and procedures
set forth in Section 11.5.
------------
11.4 Termination for Convenience. CSG may terminate this Services
---------------------------
Agreement in its
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<PAGE>
entirety effective anytime between the thirty-six (36) and sixty (60)
month anniversary of the Effective Date, provided that: (a) CSG
--------
provides FDT with six (6) months advance written notice of the effective date of
any such termination; (b) CSG pays to FDT fifty percent (50%) of the Termination
for Convenience Fee within thirty (30) days of FDT's receipt of the written
notice specifying the termination of this Services Agreement pursuant to this
Section 11.4; and (c) CSG pays to FDT upon the effective date of termination, in
- ------------
addition to all fees due FDT pursuant to this Services Agreement, the remaining
fifty percent (50%) of the Termination for Convenience Fee. CSG may not
terminate this Services Agreement for its convenience at any other time. Not
withstanding anything herein to the contrary, in no event shall the operation of
this Section 11.4 extend the Term of this Services Agreement.
------------
11.5 Termination Assistance. Commencing upon the giving of notice of any
----------------------
termination of this Services Agreement by either Party pursuant to Section 11,
----------
and ending upon the earlier of: (a) the effective date of any such termination
identified in any such notice, or (b) the expiration of the Term, FDT will
provide to CSG reasonable termination assistance requested by CSG to facilitate
the orderly transfer of the systems management operations from FDT to CSG or its
designee (the "Termination Assistance"). All CSG Data or data of CSG Clients
shall be supplied on electronic media in a format selected by FDT. In addition,
FDT shall: (i) provide to CSG appropriate file structure information; (ii)
identify the parameters selected for the Systems Software; (iii) identify
applicable procedures and processes relating to job streams; and (iv) use
reasonable commercial efforts to obtain for CSG licenses to the Software of
Third Party Providers that is used by FDT exclusively to provide FDT Services
hereunder, it being under stood that FDT may be unable to obtain such licenses.
To the extent that any Termination Assistance is provided hereunder, CSG shall
pay FDT for such Termination Assistance on a time and materials basis at FDT's
then current rates in effect under this Services Agreement, unless CSG shall
terminate the Services Agreement under Section 11.1 or Section 11.2, which in
------------ ------------
each such case, CSG shall not be liable for the payment of Termination
Assistance, but CSG shall continue to pay all other fees and charges due under
this Services Agreement. If this Services Agreement is terminated by FDT
pursuant to Section 11.1, then CSG shall prepay FDT, on the first day of each
------------
month in which Termination Assistance will be provided and as a condition to
FDT's obligation to provide Termination Assistance to CSG or its designee, an
amount equal to FDT's reasonable estimate of the total amount payable to FDT for
such Termination Assistance for such month. In addition, CSG shall pay, or
reimburse FDT for, all lease, license or other contract termination, transfer,
assignment, access, upgrade, maintenance or related fees and expenses associated
with the provision of the Termination Assistance to CSG or its designee. Prior
to providing any of such Termination Assistance to a CSG designee, FDT shall be
entitled to receive from such designee, in form and substance, reasonably
satisfactory to FDT, written assurances that (A) such designee shall maintain at
all times the confidentiality of any FDT Confidential Information, Software or
materials disclosed or provided to, or learned by, such designee in connection
therewith, and (B) such designee shall use such Confidential Information,
Software or materials exclusively for purposes for which CSG is authorized to
use such items pursuant to this Services Agreement. Except as set forth in
Section 11.8, FDT shall have no obli-
- ------- ----
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25
<PAGE>
gation to provide any Software to CSG as part of the Termination Assistance
other than the return of the Application Software as required by this Services
Agreement.
11.6 Expiration Assistance. FDT shall provide CSG or its designee with
---------------------
Termination Assistance as requested by CSG commencing no earlier than twelve
(12) months prior to the expiration of this Services Agreement pursuant to the
limitations and procedures set forth in Section 11.5.
------------
11.7 Access upon Expiration or Termination. Upon the effective date of any
-------------------------------------
expiration or termination of this Services Agreement, FDT shall have no further
obligation to provide CSG with access to or use of the Platform, FDT
telecommunications networks or any Systems Software.
11.8 Expiration or Termination License. Upon expiration or termination of
---------------------------------
this Services Agreement, FDT will grant CSG a perpetual, non-transferable, non-
exclusive, royalty-free license to use, only on a computer system owned or
operated by CSG, or any third party providing service bureau data processing for
CSG and acceptable to FDT, and only for the data processing requirements of CSG
or on behalf of CSG Clients relating to the Business (it being understood that
Arthur Andersen LLP, EDS and IBM shall be acceptable to FDT), the application
software programs (including any existing source code or user documentation
relating thereto) comprising the Existing FDT Proprietary Software set forth on
Schedule 5.3 (excluding the Team 35 Software), and any New FDT Proprietary
- ------------
Software (excluding the Team 35 Software) (the "Termination Licensed
Materials"). FDT's obligations under this Section 11.8 are subject to CSG and
------------
FDT executing and delivering a license agreement, in form and substance
reasonably satisfactory to FDT, containing such terms and conditions as are
appropriate to (a) limit CSG's use of such Termination Licensed Materials as set
forth above, (b) protect the value and confidentiality of the Termination
Licensed Materials, (c) exclude all express and implied warranties with respect
to the Termination Licensed Materials and provide the Termination Licensed
Materials on an "AS-IS" basis, (d) exclude all continuing obligations of FDT to
update, maintain, and support the Termination Licensed Materials, and (e)
exclude all liability of FDT with respect to the Termination Licensed Materials.
11.9 Rights Upon Expiration or Termination. Upon expiration or termination
-------------------------------------
of this Services Agreement for any reason, CSG shall pay FDT for all amounts
payable to FDT pursuant to the terms of this Services Agreement including all
reimbursable expenses incurred by FDT through the effective date of such
expiration or termination. The provisions of Sections 3, 4, 5, 6, 7, 8, 9, 10,
-------- - - - - - - - --
11.5, 11.8, 11.9, 12.1, 12.5, 12.8, 12.12, 12.13, 12.14 and 12.15 shall survive
- ---- ---- ---- ---- ---- ---- ----- ----- ----- -----
the expiration or termination of this Services Agreement for any reason.
SECTION 12
MISCELLANEOUS
-------------
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<PAGE>
12.1 Notice. All notices, requests, demands and other communications
------
required or permitted under this Services Agreement shall be deemed to have been
duly given and made if in writing upon being served either by personal delivery
or by telecopier to the Party for whom it is intended or two (2) business days
after being deposited, postage prepaid, certified or registered mail, return
receipt requested (or such form of mail as may be substituted therefor by postal
authorities), in the United States mail, bearing the address shown in this
Section 12.1 for, or such other address as may be designated in writing
- ------------
hereafter by such Party:
If to CSG: CSG Systems, Inc.
2525 N. 117th Avenue
Omaha, Nebraska 68164
Attention: President
Telecopy: 402-431-7218
With a copy to : CSG Systems, Inc.
2525 N. 117th Avenue
Omaha, Nebraska 68164
Attention: General Counsel
Telecopy: 402-431-7278
If to FDT: First Data Technologies, Inc.
6200 South Quebec Street, Ste. 335
Englewood, Colorado 80111
Attn: Charles T. Fote, President
Telecopy: 303-488-8292
With a copy to : First Data Corporation
2121 North 117th Avenue
Omaha, Nebraska 68164
Attention: David P. Bailis, General Counsel
Telecopy: 402-498-4123
12.2 Entire Agreement. This Services Agreement and the Schedules hereto
----------------
embody the entire agreement and understanding of the Parties hereto with respect
to the subject matter hereof, and supersede all prior and contemporaneous
agreements and understandings relative to said subject matter.
12.3 Assignment: Transfer; Binding Agreement. Either Party may assign this
---------------------------------------
Services Agreement to any Affiliate of such Party upon notice to the other
Party. Either Party may: (i) transfer this Services Agreement in connection
with any merger or consolidation of such Party with another corporation,
provided that such Party furnishes the other Party with notice of such transfer
within ten (10) business days of the public announcement of the same; or (ii) in
con-
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<PAGE>
nection with the sale of substantially all of the Party's assets (including
the rights of a Party under this Services Agreement), provided that (a) the
assignee thereof shall assume all of such Party's obligations hereunder, and (b)
the Party furnishes the other Party with notice of the public announcement of
such assignment and assumption within ten (10) business days of the same. Sub-
ject to the foregoing, all provisions contained in this Services Agreement shall
extend to and be binding upon the Parties hereto and their respective permitted
successors and permitted assigns.
12.4 Force Majeure. No Party shall be liable for any default or delay in
-------------
the performance of its obligations (other than payment obligations) under this
Services Agreement if and to the extent such default or delay is caused,
directly or indirectly, by (i) fire, flood, elements of nature or other acts of
God; (ii) any outbreak or escalation of hostilities, war, riots or civil
disorders in any country; (iii) any act, failure to act or omission of the other
Party or any governmental authority; (iv) any labor disputes (whether or not the
employees' demands are reasonable or within the Party's power to satisfy); or
(v) nonperformance by a third party (including third party vendors) or any other
similar cause beyond the reasonable control of such Party, including failures or
fluctuations in electrical or telecommunications equipment or lines or other
equipment. In any such event, the non-performing Party will be excused from any
further performance or observance of the obligation so affected only for as long
as such circumstances prevail and such Party continues to use commercially
reasonable efforts to recommence performance or observance as soon as
practicable.
12.5 Risk of Loss. Except as otherwise provided in this Section 12.5, each
------------ ------------
party shall be responsible for risk of loss of, and damage to, any equipment,
software or other materials in its possession or under its control, subject to
Section 12.4. Notwithstanding anything in this Services Agreement to the
- ------------
contrary, each Party to this Services Agreement (the "Damaged Party") hereby
waives any and all rights of recovery, claims, actions or causes of action,
against the other Party (the "Other Party"), its Affiliates, and any of its or
their directors, officers, employees, agents and subcontractors for any loss or
damage that may occur to the Damaged Party's facilities, any improvements
thereto, or any building or project of which the Damaged Party's facilities are
a part, or any improvements thereon, or any personal property of any Entity
therein, by reason of fire, the elements or any other cause that could be
insured against under the terms of standard fire and extended coverage insurance
policies, regardless of cause or origin, including negligence of the Other
Party, its Affiliates, or such Other Party's or its Affiliates' directors,
officers, employees, agents or subcontractors, and both the Parties covenant
that no insurer of one Party will hold any right of subrogation against the
other. For purposes of this Section 12.5, the FDT Data Center shall be deemed
------------
to be under the control of FDT at all times.
12.6 No Third-Party Beneficiaries. Except as set forth in Section 6 with
---------------------------- ---------
respect to the indemnification of certain directors, officers, employees, agents
and Affiliates of the Parties, nothing contained in this Services Agreement is
intended to confer upon any Entity (other than the Parties hereto) any rights,
benefits or remedies of any kind or character whatsoever, and no Entity shall be
deemed a third-party beneficiary under or by reason of this Services Agreement.
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<PAGE>
12.7 Severability. If any provision of this Services Agreement or the
------------
application of any such provision to any Entity, or circumstance, shall be
declared judicially or by the Arbitration Panel (as defined in Schedule 6.4) to
------------
be invalid, unenforceable or void, such decision shall not have the effect of
invalidating or voiding the remainder of this Services Agreement, it being the
intent and agreement of the Parties that this Services Agreement shall be deemed
amended by modifying such provision to the extent necessary to render it valid,
legal and enforceable while preserving its intent or, if such modification is
not possible, by substituting therefor another provision that is valid, legal
and enforceable so as to materially effectuate the Parties' intent.
12.8 Certain Construction Rules. The description of any FDT Services
--------------------------
contained in the Schedules is qualified in its entirety by reference to the
information set forth in the provisions of this Services Agreement. To the
extent that the provisions of this Services Agreement and of the Schedules are
in any respect inconsistent, the provisions of this Services Agreement shall
govern and control. In addition, as used in this Services Agreement, unless
otherwise provided to the contrary, any reference to a "Section" or "Schedule"
shall be deemed to refer to a Section of this Services Agreement or Schedule
attached to this Services Agreement.
12.9 Compliance With Laws. CSG and its employees and agents and FDT and its
--------------------
employees and agents shall comply, except where noncompliance would not have a
material adverse effect on the Parties hereto, with all applicable laws,
ordinances, regulations and codes relating to this Services Agreement, other
than those relating solely to performance of the FDT Services, which shall be
the responsibility of FDT.
12.10 Counterparts. This Services Agreement may be executed
------------
simultaneously in multiple counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
12.11 Headings. The article and section headings and the table of
--------
contents contained in this Services Agreement are inserted for convenience only
and shall not affect in any way the meaning or interpretation of the Services
Agreement. The recitals set forth on the first page of this Services Agreement
are incorporated into the body of the Services Agreement. Unless the context
clearly indicates, words used in the singular include the plural, words in the
plural include the singular and the word "including" means "including but not
limited to."
12.12 No Interpretation Against Drafter. Both Parties have participated
---------------------------------
substantially in the negotiation and drafting of this Services Agreement and
each Party hereby disclaims any defense or assertion in any litigation or
arbitration that any ambiguity herein should be construed against the draftsman.
12.13 Waiver; Consent.
---------------
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<PAGE>
12.13.1 Waiver. Except as expressly provided herein, this Services
------
Agreement may not be changed, amended, terminated, augmented, rescinded or
discharged (other than in accordance with its terms), in whole or in part,
except by a writing executed by the Parties hereto. No waiver of any of the
provisions or conditions of this Services Agreement or any of the rights of
a Party hereto shall be effective or binding unless such waiver shall be in
writing and signed by the Party claimed to have given or consented thereto.
Except to the extent that a Party hereto may have otherwise agreed in
writing, no waiver by that Party of any term, condition or other provision
of this Services Agreement, or any breath thereof by any other Party shall
be deemed to be a waiver of any other term, condition or pro vision or any
breach thereof, or any subsequent breach of the same term, condition or
provision by the other Party, nor shall any forbearance by the first Party
or Parties to seek a remedy for any noncompliance or breach by the other
Party be deemed to be a waiver by the first party of its, his, her or their
rights and remedies with respect to such noncompliance or breach.
12.13.2 Consent. If either Party requires the consent or approval of
-------
the other Party for the taking of, or omitting to take, any action under
this Services Agreement, such consent or approval shall not be unreasonably
withheld or delayed.
12.14 Governing Law. This Services Agreement shall in all respects be
-------------
construed in accordance with and governed by the laws of the State of New York,
without regard to its conflict of law provisions.
12.15 Limitation of Representations and Warranties; Indemnification.
-------------------------------------------------------------
Notwithstanding anything to the contrary contained herein: (i) no
representation or warranty is made in this Services Agreement as to any matter
which is the subject of a representation or warranty in the Stock Purchase
Agreement; and (ii) no provision of this Services Agreement shall otherwise
expand or limit either Party's indemnity obligations set forth in the Stock
Purchase Agreement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, each of the Parties hereto has caused this Services
Agreement to be executed as of the date first above written.
CSG SYSTEMS, INC., formerly known as CABLE SERVICES
GROUP, INC. ("CSG")
Signed By: /s/ John P. Pogge
-------------------------------
John P. Pogge
Executive Vice President
FIRST DATA TECHNOLOGIES, INC. ("FDT")
Signed By: /s/ Charles T. Fote
-------------------------------
Charles T. Fote
Print Name: Charles T. Fote
------------------------------
Title: Executive Vice President
-----------------------------------
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<PAGE>
SCHEDULE 1.17
DEVELOPMENT SOFTWARE
--------------------
ABEND-AID CICS GDDM/PGF
ABEND-AID NVS GDDM/MVS
ASSEMBLER H INTERTEST
BATCH PIPES ISPF
BOOKHANGER READ JES2
BUNDL
CA-JCLCHECK NETSPY
CA-LIBRARIAN NETVIEW
CA-OPTIMIZER OS/VS COBOL
CA-OPTIMIZER II PHOENIX
CA-ROSCOE PSF
CA-TOP SECRET QMF/MVS
CA-VMAN RADAR
CA-1 RMF
CA-7 SAMS:DISK (DMS)
CICS/ESA SAS
CICS/MVS SDSF
CMA/SPOOL STROBE/CICS
SYNCSORT
COMPAREX/MVS SYSD-32
CUSTOM STATEMENT FORMATTER TMON/CICS
DATA-XPERT TMON/DB2
DB2 TMON/MVS
DYL-280 II VERSION MERGER
EDA/SQL
ENDEVOR
EPILOG VPS
FAST LOAD VPS/CICS
FDR VS COBOL II
FDR/COMPACTOR XPEDITER/ROSCOE
FILE/AID/MVS XPEDITER/TSO
SCHEDULE 1.17 -- PAGE 1
<PAGE>
SCHEDULE 1.27
FDT SERVICES AND FDT CURRENT SERVICE CHARGES
--------------------------------------------
I. FDT SERVICES:
------------
ACCOUNT MANAGEMENT:
The FDT account management team is the primary point of contact between CSG and
FDT providing coordination, direction and assistance for problem management
related to all FDT Data Center activities regarding problems and changes that
impact CSG's system performance. Account management participates in ongoing
discussion and project management efforts to ensure that all FDT activities are
in accordance with CSG's business objectives.
AUTOMATION ANALYST:
Automation analysts review manual computer operation procedures for possible
automation using operator automation tools, primarily Computer Associate's
Automate software. Automated procedures are developed to improve operator
manual errors, batch cycle and transmission completion times to meet all agreed
Performance Criteria. This group is the primary point of contact for problem
determination and resolution regarding automated procedures.
CAPACITY PLANNING:
FDT's capacity planning department monitors current system resource capacity
used based on projections provided by CSG for forecasting system resource
utilization. The forecasts are presented to CSG as recommendations in capacity
plans for CPU, DASD, TAPE indicating trends and possible estimates of how system
resources and their use may change.
TECHNICAL SERVICES:
Technical Services supports the System Software, CICS and OEM software
(excluding the Team 35 Software) required by CSG to run its applications.
DASD:
The DASD group for FDT continually monitors DASD file placement and availability
and provides first level support for all DASD related problems. This group also
reviews system storage growth estimates for overall growth and special projects
provided by FDT customer business units and the FDT Capacity group.
DATABASE MANAGEMENT:
SCHEDULE 1.27-PAGE 1
<PAGE>
Database management at FDT includes installation, maintenance and problem
resolution of all mainframe database related products in use by CSG. Database
management creates new DBMS (Database Management System ) subsystems as
requested including associated interfaces to allow customer access.
CSG DB2 DATABASE MANAGEMENT:
Database management at FDT is responsible for defining and maintaining all
components and related user interfaces in support of IBM's DB2 DBMS. This area
grants system level and storage group access to DB2 and monitors DB2 performance
to help ensure proper tuning of subsystem components.
DATA NETWORK SERVICES:
Data Network Services encompasses all components related to the physical
equipment used for telecommunications, including, telephone company circuit
orders, dial backup testing, performance of circuit outage, dial backup and
telephone company escalation for telecommunica tions related problems and
installation and design of new telecommunications equipment and network
configurations. Data Network Services provides 24x7 second level support for all
net work problems and works continually with the Network software group to
obtain the optimal level of circuit loading and network capacity for the FDT
Data Center.
DISASTER RECOVERY:
Disaster Recovery develops and maintains plans for FDT Data Center recovery.
The plans which identify all procedures and resources necessary for recovery are
tested with the coordination and cooperation of CSG.
HARDWARE AND FACILITIES:
The FDT hardware area coordinates installation, upgrades and maintenance for all
physical hardware and related critical environmental support facilities (power,
water coolers, air handlers, etc.) used by FDT. This area plans and coordinates
all vendor required upgrades and preventative maintenance to help ensure that
equipment functions in accordance with current Performance Criteria.
HELP DESK:
The Help Desk (commonly known as the "CSC" -- Customer Support Center) at FDT
provides the first point of contact for FDT internal, CSG and CSG customer calls
for all system and network related problems. The CSC performs first level
problem determination notifying additional technical support as needed.
SCHEDULE 1.27-PAGE 2
<PAGE>
Effective April 1, 1997, CSG shall assume responsibility for all of its customer
calls. The CSC will provide 24x7 coverage for calls relating to the FDT Data
Center and receive those related calls from CSG's internal support center. This
service shall be provided as an Additional Service, provided that the parties
--------
reach agreement regarding the provision of the same.
Prior to April 1, 1997, FDT, at no additional cost to CSG, shall make available
to CSG 80 hours of conversion assistance (including training), as well as
associated documentation. Thereafter, such assistance shall be provided at an
hourly rate, as an Additional Service, provided that the parties reach agreement
--------
regarding the provision of the same.
Subject to the following, CSG may offer employment to FDT CSG dedicated control
center analysts. CSG shall credit each dedicated control center analyst who
becomes employed by CSG ("Transferred Employee") with all of his or her service
with FDT and its Affiliates for the purpose of eligibility, vesting, seniority
and the computation of any benefits, under all of CSG's employee benefit plans,
policies or programs maintained, sponsored by or contributed by CSG on behalf of
its employees, including, pension and retirement plans, deferred compensation
plans, severance plans or policies.
Transferred Employees shall be immediately eligible upon employment by CSG to
participate in any and all medical plans maintained, sponsored by or contributed
to by CSG ("Medical Plans"). All pre-existing conditions, restrictions or
limitations contained in any Medical Plan shall be waived with respect to
Transferred Employees; provided, that if the Medical Plans do not permit the
--------
waiver of any pre-existing condition, limitation or restriction, CSG shall
reimburse each Transferred Employee who elects to continue to be covered under
FDT's medical benefit plans under its "COBRA option" for the cost of the
premiums for such coverage until such time as the employee can participate in
FDT's medical plans without any pre-existing condition, limitation or
restriction. CSG shall be responsible for paying the severance pay and benefits
of any Transferred Employee required to be paid under FDT's severance policy as
a result of his or her termination as an FDT employee pursuant to this Services
Agreement.
CSG shall pay each Transferred Employee an annual base salary no less than his
or her salary on the date of termination by FDT and shall not reduce the annual
base salary for any Transferred Employee during the first year of his or her
employment with CSG. If CSG terminates any Transferred Employee within his or
her first year of employment, CSG shall pay such employee severance pay at a
rate no less than the severance pay that individual would have been entitled to
based on FDT's severance policy. CSG shall credit all Transferred Employees
with FDT accrued and unused vacation, and shall provide all Transferred
Employees with the remaining balance, if any, of their FDT 1997 unused personal
days. (FDT employees accrue six (6) personal days on the last day of January.)
The termination of FDT providing to CSG the CSC services as of April 1, 1997
shall not result in the reduction of any FDT Service Charges.
SCHEDULE 1.27-PAGE 3
<PAGE>
DATA SECURITY:
FDT Data Security team maintains access rules for files, system resource and
user id's. In addition, Data Security performs the above functions for other
related OEM software requiring inter nal product security administration.
STANDARDS:
FDT Data Center standards are supported by the FDT Quality Services area and
include revisions to established standards and the preparation of proposals
relating to those standards for periodic review by the FDT Standards Committee,
which committee includes CSG personnel. The approved standards are then
published by Quality Services for online viewing.
CHANGE MANAGEMENT:
Change Management is supported by the Quality Services area and includes a
review of all changes for the FDT Data Center. This review is performed to
identify conflicts with other changes, missing required information needed for
changes, and scheduling/approvals for those changes. Reports listing changes by
day and week are published by the Change Management group and are reviewed
during regular meetings internally and with CSG to ensure that system changes
meet both FDT's and CSG's business needs.
INFOMAN STANDARD SUPPORT PROCESSES:
FDT Quality Services supports administrative Infoman functions relating to the
FDT standard problem and change screens and reports.
MAINFRAME CONSOLE OPERATIONS:
Operations is responsible for monitoring all Systems Software and the Platform
to help ensure continued service to CSG. Operations tracks CSG batch cycle and
online processes and reports any Performance Criteria or key indicator impact
to appropriate FDT and CSG management personnel. Operations also assists in
coordinating the implementation of all approved system changes.
MEDIA SERVICES:
FDT Media Services processes, distributes and mails all output generated by
CSG's applications to CSG, CSG customers and associated vendors. Media forms
currently produced are microfiche, magnetic tapes and personal computer
diskettes.
FDT shall provide CSG with a proposal relating to the use of CD-ROM rather than
microfiche in the provision of FDT Services. Such proposal shall include,
without limitation, pricing, conver-
SCHEDULE 1.27-PAGE 4
<PAGE>
sion costs, timing of conversion and Performance Criteria, and the changes (if
any) to the FDT Service Charges identified herein. CSG shall give FDT's proposal
due consideration and shall notify FDT no later than 60 days after the receipt
of such proposal, of whether such proposal meets with CSG's approval. If such
proposal meets with CSG's approval, and if CSG and FDT agree on the terms and
conditions relating to the use of CD-ROM rather than microfiche in the provision
of FDT Services, the parties shall use commercially reasonable efforts to
execute an amendment to this Services Agreement memorializing such agreement.
NETWORK SOFTWARE:
The Network Software (VTAM) group installs, maintains and monitors all network
software components necessary to support host mainframe data communications as
well as specialized hardware components. This group provides support to CSG and
its customers for data file transfer, including RJE, NDM, PC download, and IP
data transfer methods.
PERFORMANCE:
FDT Performance monitors and identifies trends, changes and bottlenecks in
system workload. The performance area recommends and implements system tuning
changes based on identified variances in system performance and workload.
PROBLEM MANAGEMENT:
Problem management provides resolution and follow-up assistance relating to FDT
related problems. Daily and monthly reporting is provided by problem
management for tracking by the Parties.
TAPE OPERATIONS:
Tape operations mounts and re-files tapes for all external tape drives and re-
files tapes ejected from tape silos. Tape operations also performs physical
maintenance related to tape media, including new tape initialization, tape
cleaning, replacement of broken or damaged tapes. Tape operations also resolves
tape drive and silo problems.
II. FDT SERVICE CHARGES:
-------------------
1. Monthly Service Fees. The fees for FDT Services shall be determined
--------------------
on a usage basis as set forth below.
2. Pass-Through Expenses. If the Parties agree that a particular expense
---------------------
is to be paid directly by CSG, FDT will promptly provide CSG with a copy of the
third party invoice for such expense. Otherwise, FDT shall act as a payment
agent for CSG, and FDT shall pay any third party charges comprising such
expense, subject to Section 3 of this Schedule 1.27.
--------- -------------
SCHEDULE 1.27-PAGE 5
<PAGE>
3. Reimbursable Expenses. In addition to any other payments specified in
---------------------
this Services Agreement and to the extent not provided for in this Schedule
--------
1.27, CSG will pay, or reimburse FDT for, all reasonable out-of-pocket costs and
expenses incurred by FDT in connection with: (a) travel specifically requested
by CSG; (b) any CSG-requested document production; (c) specially CSG-requested
courier deliveries; (d) CSG-required preprinted and stock forms; (e) general
supplies; (f) third party charges for programming, training, seminars and
similar consulting; (g) overtime, additional personnel, products and services
required as a result of (i) any federal, state or local regulatory or
administrative authority, (ii) third party audit, or (iii) CSG's internal or
external auditors; or (h) any pass-through expenses paid on CSG's behalf
pursuant to Section II.2 of this Schedule 1.27, including costs arising out of
------------ -------------
all CSG Vendor Software license and maintenance fees, as well as Software
requested by CSG and not originally included in this Services Agreement.
4. Billing. FDT shall bill CSG monthly with a single invoice for all of
-------
CSG's monthly fees and charges. The invoice shall reflect in reasonable detail
the total fees and charges of CSG by FDT Service component, and shall be
supported by appropriate documentation. FDT shall designate a contact person to
answer questions from CSG regarding the monthly invoice.
SCHEDULE 1.27-PAGE 6
<PAGE>
"Confidential Treatment
Requested and the Redacted
Material has been separately
filed with the Commission."
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT Services Unit 1997 1998 1999 2000 2001 Comments
- ------------------------------------------------------------------------------------------------------------------------------------
Assigned CPU MIPS MIP/month $(**) $(**) $(**) $(**) $(**) Notes 1, 2
- ------------------------------------------------------------------------------------------------------------------------------------
CPU Incremental MIPS MIP/month $(**) $(**) $(**) $(**) $(**) Notes 1, 2
- ------------------------------------------------------------------------------------------------------------------------------------
DASD gbyte/month $(**) $(**) $(**) $(**) $(**) Notes 1, 4, 10
- ------------------------------------------------------------------------------------------------------------------------------------
Tape mount $(**) $(**) $(**) $(**) $(**) Notes 1
- ------------------------------------------------------------------------------------------------------------------------------------
Tape Upgrade monthly $(**) $(**) $(**) $(**) $(**) Notes 1, 4
- ------------------------------------------------------------------------------------------------------------------------------------
Help Desk inbound call $(**) $(**) $(**) $(**) $(**) Notes 1, 4
- ------------------------------------------------------------------------------------------------------------------------------------
Network port connections Notes 1, 3, 9
unit/month
0 - 9.6K $(**) $(**) $(**) $(**) $(**)
14.4K - 56K $(**) $(**) $(**) $(**) $(**)
64K - 256K $(**) $(**) $(**) $(**) $(**)
T1 $(**) $(**) $(**) $(**) $(**)
Token Ring $(**) $(**) $(**) $(**) $(**)
- ------------------------------------------------------------------------------------------------------------------------------------
Modems (3 types) unit/month Notes 1, 5
Analog $(**) $(**) $(**) $(**) $(**)
Dialup $(**) $(**) $(**) $(**) $(**)
DSU $(**) $(**) $(**) $(**) $(**)
Controllers $(**) $(**) $(**) $(**) $(**)
- ------------------------------------------------------------------------------------------------------------------------------------
Fiche Masters item $(**) $(**) $(**) $(**) $(**) Notes 1, 11
- ------------------------------------------------------------------------------------------------------------------------------------
Fiche Duplicators item $(**) $(**) $(**) $(**) $(**) Notes 1, 11
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 1.27 -- PAGE 7
<PAGE>
"Confidential Treatment Requested
and the Redacted Material has been
separately filed with the Commission."
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT Services Unit 1997 1998 1999 2000 2001 Comments
- ------------------------------------------------------------------------------------------------------------------------------------
One Way Tapes item $(**) $(**) $(**) $(**) $(**) Notes 1, 4
- ------------------------------------------------------------------------------------------------------------------------------------
Unshared Software N/A (***) (***) (***) (***) (***) Note 8
- ------------------------------------------------------------------------------------------------------------------------------------
Disaster Recovery N/A (***)+(***) (***)+(***) (***)+(***) (***)+(***) (***)+(***) Note 6
- ------------------------------------------------------------------------------------------------------------------------------------
Data Lines N/A (***) (***) (***) (***) (***) Notes 1, 4
- ------------------------------------------------------------------------------------------------------------------------------------
Postage N/A (***)+(**)% (***)+(**)% (***)+(**)% (***)+(**)% (***)+(**)% Note 7
- ------------------------------------------------------------------------------------------------------------------------------------
Special Projects N/A (***) (***) (***) (***) (***)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES BELOW WHICH ARE AN INTEGRAL PART OF THIS SCHEDULE.
1. ASSUMPTIONS. All pricing assumes the volumes, numbers, dollar amounts and
-----------
levels (as applicable) of each of the FDT Services and Performance Criteria
as of the Effective Date, with the following exceptions, each of which
shall be deemed to be as follows:
Assigned CPU MIPS as of January 1, 1997: (**)
Network as of January 1, 1997: $(**) annually; $(**) monthly
Modems and Controllers as of January 1, 1997: $(**) annually; $(**) monthly
2. CPU MIPS.
--------
A. Increases.
---------
(1) During each calendar year during the Term, CSG may increase the
number of Assigned CPU MIPS by no more than (****) percent
((**)%), based on the number of Assigned CPU MIPS as of January 1
of such calendar year. CSG shall notify FDT of any such increases
at least one hundred twenty (120) days prior to the date upon
which CSG desires such increases to be effective, it being
understood that such increases shall be effective on the first
day of the month following the expiration of
SCHEDULE 1.27 -- PAGE 8
<PAGE>
"Confidential Treatment Requested and the
Redacated Material has been separately
filed with the Commission."
such notice period. Prices relating to such increases are set
forth in the CPU Incremental MIPS section of this table.
Example:
-------
a. As of January 1, 1998, the number of Assigned CPU MIPS
equals (**). On August 15, 1998, CSG notifies FDT to
increase its assignment of Assigned CPU MIPS to (**). FDT
shall implement such increase on January 1, 1999.
(2) During any calendar year during the Term, requests by CSG to
increase its assignment of Assigned CPU MIPS in excess of
(******) percent ((**)%), based on the number of Assigned CPU
MIPS as of January 1 of such calendar year, shall be addressed as
an Additional Service. CSG shall notify FDT of any such
increases at least one hundred twenty (120) days prior to the
date upon which CSG desires such increases to be effective, it
being understood that such increases shall be effective on the
first day of the month following the expiration of such notice
period, provided the Parties can reach agreement pursuant to the
procedures set forth in Section 2.15.
------------
Example:
-------
a. As of January 1, 1998, the number of Assigned CPU Base MIPS
equals (**). On August 15, 1998, CSG notifies FDT that it
desires to increase its assignment of Assigned CPU Base MIPS
by (**) MIPS. The Parties shall proceed under Section 2.15
------------
to determine whether FDT would assign CSG an additional (**)
MIPS.
B. Decreases.
---------
(1) Except as specified in Notes 2(B)(2), 2(B)(3) and 2(B)(4) of this
Schedule 1.27, during each calendar year during the Term, CSG may
-------------
decrease its assignment of Assigned CPU MIPS by no more than
(****) percent ((**)%), based on the number of Assigned CPU MIPS
as of January 1 of such calendar year. CSG shall notify FDT of
any such decreases at least one hundred twenty (120) days prior
to the date upon which CSG desires such decreases to be
effective, it being understood that such decreases shall be
effective on the first day of the month following the expiration
of such notice period.
Example:
-------
SCHEDULE 1.27-PAGE 9
<PAGE>
"Confidential Treatment Requested and the
Redacated Material has been separately
filed with the Commission."
a. As of January 1, 2000, the number of Assigned CPU MIPS
equals (**). On January 15, 2000, CSG notifies FDT to
decrease its assignment of Assigned CPU MIPS to (**). FDT
shall implement such decrease on June 1, 2000.
b. As of January 1, 1999, the number of Assigned CPU MIPS
equals (**). on August 12, 1999, CSG notifies FDT to
decrease its assignment of Assigned CPU MIPS to (**). The
operation of Note 2(B)(1) of this Schedule 1.27 is inappli-
-------------
cable; the Parties should proceed to address this decrease
pursuant to Notes 2(B)(3) or 2(B)(4) of this Schedule 1.27.
-------------
(2) Notwithstanding Note 2(B)(1) of this Schedule 1.27, and except as
-------------
set forth in Notes 2(B)(3) and 2(B)(4) of this Schedule 1.27,
-------------
during any calendar year during the Term, CSG may decrease the
number of Assigned CPU MIPS by no more than (**) percent ((**)%),
based on the number of Assigned CPU MIPS as of January 1 of such
calendar year, provided that CSG shall pay to FDT, in addition to
--------
the fees associated with the actual Assigned CPU MIPS, the
following additional payment:
(((**) x 12 x number of Assigned CPU MIPS as of January 1 of the
calendar year) - (12 x number of Assigned CPU MIPS at the start
of the next calendar year)) x ((Assigned CPU MIPS Charge) x
((**)))
FDT shall invoice CSG on or before the tenth (10th) day of
January of the following calendar year for any amount owed for
the foregoing additional payment. Each such invoice shall be due
and payable within fourteen (14) days following receipt.
CSG shall notify FDT of any such decreases at least one hundred
twenty (120) days prior to the date upon which CSG desires such
decreases to be effective, it being understood that such
decreases shall be effective on the first day of the month
following the expiration of such notice period.
Example:
-------
a. As of January 1, 2000, the number of Assigned CPU MIPS
equals (**). On January 15, 2000, CSG notifies FDT to
decrease its assignment of Assigned CPU MIPS to (**). FDT
shall implement such request on June 1, 2000. CSG shall pay
to FDT, in addition to the fees associated with the actual
Assigned CPU MIPS, the following additional payment:
SCHEDULE 1.27-PAGE 10
<PAGE>
"Confidential Treatment Requested and the
Redacated Material has been separately
filed with the Commission."
(((**) x 12 x (**)) - (12 x (**))) x $(**) x (**)
((**) - (**)) x (**)
(**) x (**) = $(**)
b. As of January 1, 1998, the number of Assigned CPU MIPS
equals (**). On August 12, 1998, CSG notifies FDT that it
desires to decrease its assignment of Assigned CPU MIPS to
(**). FDT shall implement such request on January 1, 1999.
CSG shall pay to FDT, in addition to the fees associated
with the actual Assigned CPU MIPS, the following additional
payment:
(((**) x 12 x (**)) - (12 x (**))) x $(**) x (**)
((**) - (**)) x (**)
(**) x (**) = $(**)
(3) Notwithstanding Notes 2(B)(1) and 2(B)(2) of this Schedule 1.27,
-------------
and except as set forth in Note 2(B)(4) of this Schedule 1.27,
-------------
upon twelve (12) months prior written notice, CSG may decrease
its assignment of CPU Base MIPS by more than (***) percent
((**)%), based on the number of Assigned CPU MIPS as of January 1
in the year in which CSG delivers such notice to FDT, provided
--------
that the Parties determine the fee that CSG shall pay to FDT to
implement such decrease, it being understood that in no event
shall such fee be less than $(**). If the Parties cannot reach
agreement on a fee within thirty (30) days of CSG's notice, the
Parties shall proceed under the procedures set forth in Section
-------
6.4. Once the Parties agree on a fee, for purposes of computing
---
further increases and decreases in the assignment of Assigned CPU
MIPS, CSG shall be deemed to have been assigned such reduced
number of MIPS as of January 1 of the year in which such
reduction is to be effective.
CSG shall pay FDT such payment prior to the effective date of
FDT's implementation of such decreased assignment of MIPS.
(4) Notwithstanding Notes 2(B)(1), 2(B)(2) and 2(B)(3) of this
Schedule 1.27, during any calendar year during the Term, CSG may
-------------
decrease the number of CPU Base MIPS assigned to it by more than
(***) percent ((**)%), based on the Assigned CPU MIPS as of
January 1 of such calendar year, provided that CSG shall pay to
--------
FDT, in addition to the fees associated with the actual Assigned
CPU MIPS, the following additional payment:
SCHEDULE 1.27-PAGE 11
<PAGE>
"Confidential Treatment Requested and the
Redacated Material has been separately
filed with the Commission."
(**) x 12 x number of Assigned CPU MIPS as of January 1 of the
calendar year x Assigned CPU MIPS Charge
FDT shall invoice CSG on or before the tenth (10th) day of
January of the following calendar year for any amount owed for
the foregoing additional payment. Each such invoice shall be due
and payable within fourteen (14) days following receipt.
CSG shall notify FDT of any such decreases at least one hundred
twenty (120) days prior to the date upon which CSG desires such
decreases to be effective, it being understood that such
decreases shall be effective on the first day of the month
following the expiration of such notice period.
Example:
-------
a. As of January 1, 1997, the number of Assigned CPU MIPS
equals (**). On December 12, 1997, CSG notifies FDT to
decrease its assignment of Assigned CPU MIPS to (**),
effective July 1, 1998. CSG shall pay to FDT, in addition
to the fees associated with the actual Assigned CPU MIPS,
the following additional payment:
(**) x 12 x (**) x $(**) = $(**)
(5) If CSG notifies FDT to decrease the number of Assigned CPU MIPS,
and CSG subsequently fails to be in a position whereby FDT could
implement such decrease (either in whole or in part) without
disrupting CSG's business, in addition to any of the charges set
forth in this Schedule 1.27, CSG shall pay to FDT, as applicable:
-------------
(a) if FDT has MIPS capacity available, the costs (as set forth
herein) associated with CSG's assignment of Assigned CPU MIPS in
excess of the Assigned CPU MIPS level that CSG instructed FDT to
decrease CSG's assignment to, and (b) FDT's costs of maintaining
or implementing CSG's assignment of Assigned CPU MIPS in excess
of the level of Assigned CPU MIPS that CSG instructed FDT to
decrease CSG's assignment to.
(6) If CSG requests dedicated engines in any LPAR, any MIP
fluctuation must be in whole engine increments for the Platform.
Such limitation may result in higher or lower Assigned CPU MIPS
incremental adjustments, all of which shall be calculated in
accordance with the foregoing.
SCHEDULE 1.27-PAGE 12
<PAGE>
"Confidential Treatment Requested and the
Redacted Material has been separately
filed with the Commission."
3. NETWORK
-------
A. Increases.
---------
(1) During each calendar year during the Term, CSG may increase its
use of the Network FDT Services by no more than (***) percent
((**)%), based on the Network fees incurred by CSG during
December of the prior calendar year, it being understood that for
calendar year 1997, CSG shall be deemed to have incurred fees of
$(**) in December, 1996. CSG shall notify FDT of any such
increases in any component of the Network FDT Services at least
sixty (60) days prior to the date upon which CSG desires such
increases to be effective, it being understood that such
increases shall be effective on the first day of the month
following the expiration of such notice period. The fees
attributable for such increases in any component of the Network
FDT Services shall be those identified in this Schedule 1.27,
-------------
provided that CSG shall only be charged for (*******) percent
--------
((**)%) of the fees attributable to the Network FDT Services that
exceed $(**) in any given month.
Example:
-------
a. In December, 1997, CSG incurred $(**) of Network FDT
Services. On April 12, 1998, CSG notifies FDT to add one
(1) T1 and two (2) 64K-256K port connections. On July 1,
1998, FDT shall implement such additional port connections.
During July, 1998, CSG would incur the following fees for
Network FDT Services:
$(**) + (((**)) x (($(**) + 2($(**))))
(2) During any calendar year during the Term, requests by CSG to
increase its use of the Network FDT Services by more than (****)
percent ((**)%) shall be addressed as an Additional Service. CSG
shall notify FDT of any such increases in any component of the
Network FDT Services at least sixty (60) days prior to the date
upon which CSG desires such increases to be effective, it being
understood that such increases shall be effective on the first
day of the month following such notice period, provided the
Parties can reach agreement pursuant to the procedures set forth
in Section 2.15.
------------
Example:
-------
SCHEDULE 1.27-PAGE 13
<PAGE>
"Confidential Treatment Requested and the
Redacted Material has been separately
filed with the Commission."
a. In December, 1997, CSG incurred $(**) of Network FDT
Services. On April 12, 1998, CSG notifies FDT that it
desires to add $(**) of additional Network FDT Services. The
Parties shall proceed under Section 2.15 to determine
------------
whether FDT would provide CSG such additional Network FDT
Services.
B. Decreases.
---------
(1) Except as specified in Notes 3(B)(2), 3(B)(3) and 3(B)(4) of this
Schedule 1.27, during each calendar year during the Term, CSG may
-------------
decrease its use of the Network FDT Services in a given month
during a calendar year by no more than (*****) percent ((**)%),
based on the value of the Network FDT Services incurred by CSG
during December of the prior calendar year, it being understood
that during December, 1996, CSG shall be deemed to have incurred
$(**) of Network FDT Services. CSG shall notify FDT of any such
decreases in any component of the Network FDT Services at least
sixty (60) days prior to the date upon which CSG desires such
decreases to be effective, it being understood that such
decreases shall be effective on the first day of the month
following the expiration of such notice period.
Example:
-------
a. In December, 1999, CSG incurred $(**) of Network FDT
Services. On February 4, 2000, CSG notifies FDT to de-
crease its use of Network FDT Services to $(**). FDT shall
implement such decrease on May 1, 2000.
b. In December, 1998, CSG incurred $(**) of Network FDT
Services. On August 12, 1999, CSG notifies FDT to decrease
its use of Network FDT Services to $(**). This operation of
this Note 3(B)(1) of this Schedule 1.27 is inapplicable;
-------------
the Parties shall proceed to address this decrease pursuant
to Notes 3(B)(3) and 3(B)(4) of this Schedule 1.27.
-------------
SCHEDULE 1.27-PAGE 14
<PAGE>
"Confidential Treatment Requested and the
Redacated Material has been separately
filed with the Commission."
(2) Notwithstanding Note 3(B)(1) of this Schedule 1.27, and except as
-------------
set forth in Notes 3(B(3) and 3(B)(4) of this Schedule 1.27,
-------------
during any calendar year during the Term, CSG may decrease its
use of Network FDT Services in a given month during a calendar
year by no more than (***) percent ((**)%), based on the Network
FDT Services incurred by CSG during December of the previous
calendar year, provided that CSG shall pay to FDT, in addition to
--------
the fees associated with CSG's actual use of Network FDT
Services, the following additional payment:
(((**) x 12 x the fees incurred by CSG for Network FDT Services
in December of the prior calendar year) - (12 x the fees incurred
by CSG for Network FDT Services in December of the then current
calendar year)) x (**)
FDT shall invoice CSG on or before the tenth (10th) day of
January of the following calendar year for any amount owed for
the foregoing additional payment. Each such invoice shall be due
and payable within fourteen (14) days following receipt.
CSG shall notify FDT of any such decreases in any component of
the Network FDT Services at least sixty (60) days prior to the
date upon which CSG desires such decreases to be effective, it
being understood that such decreases shall be effective on the
first day of the month following the expiration of such notice
period.
Example:
-------
a. In December, 1998, CSG incurred Network FDT Services fees of
$(**). On August 12, 1999, CSG notifies FDT that it desires
to decrease its use of Network FDT Services to $(**). FDT
shall implement such request effective November 1, 1999.
CSG shall pay to FDT, in addition to the fees associated
with CSG's actual use of Network FDT Services, the following
additional payment:
(((**) x 12 x $(**)) - (12 x $(**))) x (**)
($(**) - $(**)) x (**) = $(**)
(3) Notwithstanding Notes 3(B)(1) and 3(B)(2) of this Schedule 1.27,
-------------
and except as set forth in Note 3(B)(4) of this Schedule 1.27,
-------------
upon twelve months prior written notice, CSG may decrease its use
of the Network FDT Services in a given month during a calendar
year by more than (***) percent ((**)%), based on the Network FDT
Services incurred by CSG during December of
SCHEDULE 1.27-PAGE 15
<PAGE>
"Confidential Treatment Requested and the
Redacted Material has been separately
filed with the Commission."
the previous calendar year, provided that the Parties determine
--------
the fee that CSG shall pay to FDT to implement such decrease, it
being understood that in no event shall such fee be less than
$(**). If the Parties cannot reach agreement on a fee within
thirty (30) days of CSG's notice, the Parties shall proceed under
the procedures set forth in Section 6.4. Once the Parties agree
-----------
on a fee, for purposes of computing further increases and
decreases of Network FDT Services, CSG shall be deemed to have
incurred the fees incurred by CSG in the first month following
the effective date of any such decrease in December of the prior
calendar year.
CSG shall pay FDT such payment prior to the effective date of
FDT's implementation of such decreased use of Network FDT
Services.
(4) Notwithstanding Notes 2(B)(1), 2(B)(2) and 2(B)(3) of this
Schedule 1.27, during any calendar year during the Term, CSG may
-------------
decrease its use of the Network FDT Services in a given month
during a calendar year by more than (***) percent ((**)%), based
on the Network FDT Services incurred by CSG during December of
the previous calendar year, provided that CSG shall pay to FDT,
--------
in addition to the fees associated with CSG's actual use of
Network FDT Services, the following additional payment:
(**) x 12 x the fees incurred by CSG for Network FDT Services in
December of the prior calendar year
CSG shall notify FDT of any such decreases in any component of
the Network FDT Services at least sixty (60) days prior to the
date upon which CSG desires such decreases to be effective, it
being understood that such decreases shall be effective on the
first day of the month following the expiration of such notice
period.
Example:
-------
a. In December, 1997, CSG incurred Network FDT Services fees of
$(**). On December 12, 1997, CSG notifies FDT to decrease
its use of Network FDT Services to $(**) on April 1, 1998.
CSG shall pay to FDT, in addition to the fees associated
with the CSG's actual use of Network FDT Services, the
following additional payment:
(**) x 12 x $(**) = $(**)
SCHEDULE 1.27-PAGE 16
<PAGE>
"Confidential Treatment Requested and the
Redacted Material has been separately
filed with the Commission."
(5) If CSG notifies FDT to decrease its use of Network FDT Services,
and CSG subsequently fails to be in a position whereby FDT could
implement such decrease (either in whole or in part) without
disrupting CSG's business, in addition to any of the charges set
forth in this Schedule 1.27, CSG shall pay to FDT, as applicable:
-------------
(a) if FDT has Network FDT Services capacity available, the costs
(as set forth herein) associated with CSG's use of Network FDT
Services in excess of the Network FDT Services that CSG
instructed FDT to decrease to, and (b) FDT's costs of maintaining
or implementing CSG's Network FDT Services in excess of the level
of Network FDT Services that CSG instructed FDT to decrease to.
4. FDT SERVICES OTHER THAN CPU BASE MIPS, TAPE MOUNTS, NETWORK, MODEMS AND
-----------------------------------------------------------------------
CONTROLLERS, FICHE AND UNSHARED SOFTWARE (THE "OTHER FDT SERVICES").
-------------------------------------------------------------------
Increases and decreases in each of the Other FDT Services shall be
calculated in the same manner that CPU Base MIPS were calculated herein,
provided that the notice period for increases and decreases shall only be
--------
sixty (60) days rather than one hundred twenty (120) days.
5. MODEMS AND CONTROLLERS. Increases and decreases in modems and controllers
----------------------
shall be calculated in the same manner that Network FDT Services were
calculated herein.
6. Management fee covers in-house staff, currently $(**) per month, which
shall increase (**) percent ((**)%) during each calendar year during the
Term.
7. (***) percent ((**)%) fee covers in-house staff.
8. CSG shall pay FDT for all Unshared Software licensed by FDT for use by CSG,
including associated maintenance fees, regardless of whether CSG ceases use
of any of such Unshared Software. Upon the written request of CSG, FDT
shall use commercially reasonable efforts to termi nate any license and
associated maintenance for specified Unshared Software, it being understood
that FDT may not be successful in such efforts.
9. In years 1999, 2000 and 2001, Network FDT Services fees shall reflect a
$(**) monthly / $(**) annual credit.
10. If CSG requests FDT to provide CSG with additional DASD without providing
FDT with the sixty (60) day notice required herein, to the extent that FDT
can accommodate such a request, it will use reasonable commercial efforts
to do so, it being understood that FDT may not be able to accommodate
CSG's request.
SCHEDULE 1.27-PAGE 17
<PAGE>
"Confidential Treatment Requested and the
Redacted Material has been separately
filed with the Commission."
extent that FDT can accommodate such a request, it will use reasonable
commerical efforts to do so, it being understood that FDT may not be able to
accommodate CSG's request.
11. FICHE.
-----
A. Increases.
---------
(1) During each calendar year during the Term, CSG may increase its
volume of Fiche FDT Services by no more than (****) percent
((**)%), based on the volume of Fiche FDT Services of CSG as of
January 1 of such calendar year. CSG shall notify FDT of any such
increases at least sixty (60) days prior to the date upon which
CSG desires such increases to be effective, it being understood
that such increases shall be effective on the first day of the
month following the expiration of such notice period.
(2) During any calendar year during the Term, requests by CSG to
increase its volume of Fiche FDT Services in excess of (****)
percent ((**)%), based on the volume of Fiche FDT Services of CSG
as of January 1 of such calendar year, shall be addressed as an
Additional Service. CSG shall notify FDT of any such increases
at least sixty (60) days prior to the date upon which CSG desires
such increases to be effective, it being understood that such
increases shall be effective on the first day of the month
following the expiration of such notice period, provided the
Parties can reach agreement pursuant to the procedures set forth
in Section 2.15.
------------
B. Decreases.
---------
(1) Except as specified in Note 11(B)(2) of this Schedule 1.27,
-------------
during each calendar year during the Term, CSG may decrease the
volume of Fiche FDT Services by no more than (*******) percent
((**)%), based on the volume of Fiche FDT Services of CSG as of
January 1 of such calendar year. CSG shall notify FDT of any
such decreases at least sixty (60) days prior to the date upon
which CSG desires such decreases to be effective, it being
understood that such decreases shall be effective on the first
day of the month following the expiration of such notice period.
(2) Notwithstanding Note 11(B)(1) of this Schedule 1.27, during any
-------------
calendar year during the Term, CSG may decrease the
SCHEDULE 1.27-PAGE 18
<PAGE>
"Confidential Treatment Requested and the
Redacted Material has been separately
filed with the Commission."
volume of Fiche FDT Services by more than (*******) percent
((**)%), based on the volume of Fiche FDT Services of CSG as of
January 1 of such calendar year, provided that CSG shall pay to
--------
FDT, in addition to the fees associated with the actual Fiche FDT
Services, the following additional payment:
(((**) x volume of Fiche FDT Services as of January 1 of the
calendar year) - (actual volume of Fiche FDT Services during such
calendar year)) x (Applicable Fiche FDT Services Charges x (**))
FDT shall invoice CSG on or before the tenth (10th) day of
January of the following calendar year for any amount owed for
the foregoing additional payment. Each such invoice shall be due
and payable within fourteen (14) days following receipt.
CSG shall notify FDT of any such decreases at least sixty (60)
days prior to the date upon which CSG desires such decreases to
be effective, it being understood that such decreases shall be
effective on the first day of the month following the expiration
of such notice period.
(3) If CSG notifies FDT to decrease the volume of Fiche FDT Services,
and CSG subsequently fails to be in a position whereby FDT could
implement such decrease (either in whole or in part) without
disrupting CSG's business, in addition to any of the charges set
forth in this Schedule 1.27, CSG shall pay to FDT, as applicable:
-------------
(a) if FDT has Fiche FDT Services capacity avai lable, the costs
(as set forth herein) associated with CSG's use of Fiche FDT
Services in excess of the Fiche FDT Services level that CSG
instructed FDT to decrease CSG's volume to, and (b) FDT's costs
of maintaining or implementing CSG's volume of Fiche FDT Services
in excess of the level of Fiche FDT Services that CSG instructed
FDT to decrease CSG's volume to.
SCHEDULE 1.27-PAGE 19
<PAGE>
SCHEDULE 1.43
PLATFORM
--------
HARDWARE CONFIGURATION (AS OF JANUARY 1, 1997)
----------------------------------------------
Processor
IBM 9021 -982
340 MIPS (including System Software)
528 MB Central Storage
720 MB Expanded Storage
13 Copper Channels
117 ESCON Channels
-----------------------------------------------
- --------------------------------------------------------------------------------
Tape 1/97 * Tapes * F.E.P.
Address Address Units
5 STK Silo's 5 STK Silo's 1 IBM 3745/170
(56 Addresses) (56 Addresses) 1 IBM 3745-61A
32 Timberline** 56 4490
24 4490 4 STK 4480
4 STK 4480 8 STK 4490
8 STK 4490 w/autoloaders
w/autoloaders 8 STK 4670
8 STK 4670
- --------------------------------------------------------------------------------
--------------------------------------------------------------------------
DASD *
Controllers DASD *
Strings
Units
2 IBM 3390/3
1 IBM 3990/6 4 IBM 3390/3
256 mb/cache 1 IBM 3390/9
1 IBM 3990/3 2 HDS 7693
128 mb/cache 1 IBM 3380/K
1 IBM 3990/3 1 IBM 3380/D
64 mb/cache 1 STK 8380/E
2 IBM 3990/6 512mb/cache 2 EMC 5500-9M22
2 HDS/7690 1.5 EMC gb/cache
256 mb/cache 1 HDS 7700 3 gb/cache
1 IBM 3880 Total = 1,959gb
1 STK 8880
--------------------------------------------------------------------------
* Shared with other Business Units
** Dedicated to CSG
SCHEDULE 1.43-PAGE 1
<PAGE>
SCHEDULE 2.3
CSG VENDOR SOFTWARE
-------------------
VERTEX -- is a software package that calculates sales tax at the State, City,
Municipality, etc. level. CSG has the right to use the Vertex software under a
license granted to Time Warner Satellite Services (a/k/a Time Warner Publishing
Co.). CSG may access and use the Vertex software for Time Warner's business
purposes only.
GROUP 1 Software, including CODE1, Mail-Stream Plus, Desktop MailStream Plus,
ArcList, Online/Time Sharing -- used to perform various addressing and sorting
functions for mailing statements to subscribers of CSG Clients.
CLARITIS Software, including PRIZM, PRIZM+4, and Census Block Group Level
Demographics -- Market Segmentation systems that classify residential
neighborhoods and communities in the U.S. into distinct types or "clusters"
according to factors derived from the U.S. Census; used with VIP Software.
SCHEDULE 2.3-PAGE 1
<PAGE>
SCHEDULE 2.9
OPERATIONS PROCEDURES
---------------------
See attached listing.
SCHEDULE 2.9 -- PAGE 1
<PAGE>
ACCOUNT MANAGEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Act as primary client contact between CSG and FDT. Coordinate FDT Data Center activity through account manager.
Provide quality control on Performance Criteria and key Ensure FDT is aware of all data processing
indicators. /telecommunications implemented by
Participate in ongoing negotiation of Performance Criteria CSG affecting production batch, onlines and network.
and key indicators. Adhere to established change control methodologies for
Provide status and statistical reporting to help ensure application changes.
Services Agreement compliance (INFOMAN/Development calendar)
Conduct regular quality of service review meetings. Provide representation for change control and planning meetings.
Take part in senior-level discussions to help ensure technology Communicate changes to business that may require alteration of
concerns are closely linked to business decisions. Performance
Identify open issues and future plans through ongoing Criteria and key indicators.
discussions with client management personnel.
Coordinate project management efforts with technical personnel
and client management to determine that the proper balance between
client priorities and FDT resources are adequately utilized.
Ensure coordination and consistency of FDT Data Center policies and
performance.
Participate and represent client in change control planning and meetings.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 2
<PAGE>
OPERATIONS AUTOMATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investigate the possible elimination of all manual computer operations Create change record in INFOMAN to request specific
intervention. automation changes or enhancements.
Coordinate implementation of new operator automation procedures between all
affected departments.
Maintain operation automation software in a dynamic environment.
Work issues pertaining to Performance Criteria using operator automation
tools where applicable.
Develop automatic controls around the transmission environment that would
escalate lateness or problem situations.
Propose the appropriate course of action for research, development,
implementation and problem resolution of operator automation issues.
Review and resolve any problems with automated procedures.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 3
<PAGE>
CAPACITY PLANNING
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT BUSINESS UNIT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
CAPACITY Application capacity planner must provide information one month before
Provide quarterly capacity plan end of each quarter to include information in capacity plan.
Gather resource usage for existing applications from Gather and document areas affected by changed resource usage for
SMF, RMF,EPILOG, NETVIEW. existing jobs, jobsteps, programs, network, online systems and
Identify how resources may grow. applications.
Apply resource usage and estimate CPU, DASD, Tape, Document dates of unit testing, beta test, parallels and production.
Network or other resources from business unit assumptions. Document all assumptions which include how resource utilization will
Estimate total resources required (CPU, DASD, Tape and grow for identified areas.
Network). Provide monthly business units growth.
Estimate effects on customer cost for estimates. Approve FDT Data Center capacity plan.
Monitor and provide reports for trends in workloads.
Recommend trending for workloads that do not have a specific
estimate.
Summarize capacity plan by customer and seek approval from
customer's management.
Present consolidated customer plans to FDT management.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 4
<PAGE>
CICS ON LINE SOFTWARE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
CICS installation, customization, tuning, application of Applications (or Q/A) is responsible for its loadlibs:
PTFs, table maintenance. cleanup old versions, sizing, compression, backups.
Support CICS disaster recovery. Each application group is responsible for completing the
Build new CICS regions as requested. correct paperwork for normal table maintenance along with the
Design and implement CICS direction/workload analysis. correct parameters for the usage of the table entry (i.e.,
Monitor all production CICS regions and note exceptions. CICS region/notification of entries that will have abnormally
Provide debugging and problem resolution assistance for high usage).
application programming staff when requested. Each application group is responsible for identifying correctly the
Tech Services will research all regions abends. requirements for new CICS regions when requesting the same,
Tech Services will assist with all test, QA and acceptance including region size, table entries, customization, etc.
test storage violations upon request. CSG should contact Applications as the first point of contact for
Tech Services will research all production storage violations. transaction ASRA (s) and Abends.
Tech Services will assist with transaction abends upon request. CSG should contact Applications immediately for storage violations
Tech Services will research all exceptions to Performance along with FDT Tech Services and both groups will investigate
Criteria. the dumps.
Participate in department education practices and provide Interest Protsym maintenance, if any.
workshops on materials and information obtained. (In-house, Use supplied monitoring tools to report on and analyze applications
IBM external and vendor supplied). All TEAM 35 Software.
Evaluate new products. Recovery/synchronization of all on-line application data sets at DR
Apply maintenance to all vendor products as per software Advantis: assignment of valid LU names that follow auto-install
support list(exceptions/additions to all support are listed). standards.
Run traces for troubleshooting application problems. Adhere to established change control methodologies for applications
Data set contents (dumps) cleanup/copy. changes (INFO/MAN and Develop Calendar).
Create and maintain documentation within the CICS team.
Create documentation to educate the technical services staff.
Create documentation within INFO management for problem
understanding and future tracking.
Maintain accurate software inventory listing.
Maintain software at vendor's supported releases.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 5
<PAGE>
DASD
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
FDT CSG
- --------------------------------------------------------------------------------------
<S> <C>
DASD Capacity Planning DASD Capacity Planning:
- ------------------------ -----------------------
1. Review the forecast provided by CSG and 1. Project quarterly DASD
determine hardware requirements. requirement forecasts
a. Analyze current DASD availability. with changes and refinements
b. If necessary, outline increased DASD noted.
to be purchased. a. Develop requirements for new
c. Develop a proposal and distribute to CSG and existing projects and special
and conduct a formal review. projects.
2 Execute the approved proposal. 2. Distribute forecast to FDT and
a. Order and install DASD. conduct formal review.
b. Initialize and configure DASD. 3. Review the proposal provided by
FDT and obtain the appropriate approvals.
- ---------------------------------------------------------------------------------------------
File Monitoring/Maintenance: File Monitoring/Maintenance:
- ---------------------------- -----------------------------
1. Monitor GDG bases and sequential
1. Provide reporting to assist CSG files for allocation, sizing, and
with file maintenance and attributes to enhance performance and
monitoring. Review and discuss with prevent problems. Initiate review
CSG changes necessary to enhance with FDT to discuss recommended
performance or alleviate problems changes and determine implementation
and implement decided plan for plan.
change. 2. Provide change control or form to
2. Allocate production VSAM ,BDAM FDT with necessary specifications for
files as requested by CSG, determine production VSAM and BDAM files.
sizing and placement from attributes 3. Allocate and size production gdg
in request. bases and sequential files.
3. Implement and maintain software 4. Implement and maintain daily
that manages DASD at the dataset and cleanup jobs on work and GDG
pool level. Review with CSG changes volumes.
necessary for problem resolution,
enhancements or growth and implement
decided plan for change.
4. Monitor all critical production
batch and online files for extents
daily and make changes to alleviate
any space problems .
- --------------------------------------------------------------------------------------
Monitor DASD Usage: Monitor DASD Usage:
- ------------------- -------------------
1. Review suggestions with FDT to
1. Review DASD pools for performance determine final resolution to
and sizing, discuss suggested necessary changes.
changes with CSG and implement 2. Review and Monitor BDAM files.
decided plan for change.
2. Research and recommend software
packages
to assist in monitoring and
reporting
- --------------------------------------------------------------------------------------
Production Support: Production Support:
- ------------------- -------------------
1. Provide first level support for
1. Provide first level oncall applications issues.
support for DASD and storage 2. Review suggestions with FDT to
software issues. determine final resolution to
2. Perform weekly library necessary changes.
compression and defrag routines, 3. CMA spool, BUNDL(RMS)
determining the applicable administration.
candidates.
3. Provide support on restore/recall
problems
- --------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 6
<PAGE>
DATABASE MANAGEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Install database software and all related products. Responsible for application software implementation.
Resolve database system software problems. Provide input for system problem resolution.
Maintain database system software and related products. Develop and maintain application data backup and recovery
Develop and maintain system backup and recovery procedures. procedures.
Assist as needed with application recovery. Perform application recovery.
Perform database system environment recovery. Application level performance and tuning.
Database system level performance and tuning. Provide projections of application growth.
Database capacity planning. Prepare and maintain production control documentation and
Prepare and maintain operations procedures. procedures.
Create new DBMS subsystems as required. Develop and maintain application software migration policies
Develop and implement System Software migration policies and procedures.
and procedures. Develop and maintain application naming standards.
Develop and maintain system level naming standards. Assist in software evaluations and testing.
Evaluate and test database related software. Assist in design and implementation of security.
Design and implement database security. Provide support for application specific compile, execute
Provide consultation services for any applications issues and utility procedures in conjunction with Quality Services.
as needed. Adhere to established change control methodologies for applications
Provide support for all database platforms and their changes (INFO/MAN and Develop Calendar).
interfaces.
Provide support for standard compile, execute and utility
procedures.
Maintain accurate software inventory listing.
Maintain software at vendor's supported releases.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 7
<PAGE>
CSG DB2 DATABASE MANAGEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Migrate DB2 subsystem and objects to new release. Project DBA grants appropriate authority to applications
Support standard attach facility and other subsystem programmers.
interfaces. Assumes all logical data modeling efforts.
Define storage groups to subsystems. Provide notice of any implementation that may impact DASD
Grant authority to access storage groups and buffer subsystem.
pools. Monitor DB2 application DASD and take appropriate action to
Grant system level security for appropriate databases. ensure data integrity and performance optimization.
Define physical design review requirements. Adhere to established change control methodologies for
Monitor and adjust buffer pools and EDM pool and other applications changes (INFO/MAN and Develop Calendar).
subsystem components.
Monitor and maintain DB2's log and bootstrap datasets.
Perform performance and audit tracing when necessary.
Monitor DB2 System DASD and take appropriate action to
help ensure data and performance optimization.
Maintain QMF userids.
Maintain all OEM database objects.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 8
<PAGE>
DATA NETWORK SERVICES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT DENVER CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Place orders with telephone companies for data circuits Submit telecommunications service requests for all new
as required. installations, changes, deletions or information regarding
Maintain network availability for all client data data network services and price quotes.
connections. Place orders with telephone companies for data circuits
Provide monthly dial back up line testing for all as required.
circuits having these features. Provide internal local security and access to installed
Perform monthly data line billing review and audits. data communications equipment in specified secured areas.
Approval of all data line invoices. Install dial back up analog lines at remote customer
Order, test and install all data communications hardware locations when required.
associated with client orders. Purchase hardware such as modems and csu/dsu's when
Administration and monitoring of all network management not provided by FDT.
systems for clients. This includes Racal NMS400 system Physically replace failed modems and communications
used in the network control center. equipment at remote sites which are CSG owned
Provide 24X7 NCC second level support for all clients. Provide third level support for all clients.
Maintain complete inventory tracking and record keeping Assist FDT personnel as needed in the local troubleshooting
for all network hardware and systems. CSG provided communications equipment. i.e. modems,
Perform all required disaster recovery testing for each sharing devices.
client as directed. Arrange for any internal wiring or connectivity as
Enter appropriate change control records. required from telecommunications demarc to DTE equipment
Review/approve change control records. at client sites.
Develop and distribute all problem report and network Enter appropriate change control records.
performance information used to produce client Third level support for protocol converter troubles and
Performance Criteria statistics. configurations as required.
Joint responsibility with network software group for Support new client installations and/or upgrades to
circuit loading and network capacity planning. existing configurations.
Represent Telecommunications in all scheduled and required Manage Racal (VSAT) and Advantis account relationships
client performance/status meetings. and review monthly Performance Criteria.
Vendor management of data network service providers which
terminate at Millennium.
Telephone company service escalation's at all levels.
Provide client quotes for pricing of new data lines
and/or other network services.
Create back up diskettes for CSG sub-client 3174/3274
controllers when requested.
Second level support for protocol converter troubles and
configurations as required.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE OF DATA NETWORK SERVICES ADDITIONAL SERVICES
Service provided by NCC staff or Telecomm Analyst II which requires dispatch to
customer locations.
This includes working open problem tickets and\or supporting new installations.
SCHEDULE 2.9 -- PAGE 9
<PAGE>
DISASTER RECOVERY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Develop and maintain DR plans for initial response Supply hotsite testing requirements in the form of
and recovery of the Data Center including, Disaster goals and objectives
Recovery Management Team, Hotsite Recovery Team, Document and maintain the application recovery plan
Telecom Team, Client Services Team, Quality Services for the product
Team, Administration Team Participate in the hotsite recovery testing by
Maintain Hotsite contract and administer costs to supporting the applications and their clients
business unit To backup and send offsite, CSG Application Data
Ensure all business units have appropriate hardware Recover application data for testing and in the event
to receive their application or if such hardware is of a disaster (which includes the forward recovery of
not required, have such business units acknowledge CICS and DB2)
such non-requirements. If there is any additional data that CSG wants FDT to
Coordinate and plan hotsite DR tests for CSG. be responsible for backing up and recovering for disaster
Document the hotsite test plans, post mortem and track recovery, CSG shall submit these requirements in writing
problem/resolution to FDT, and FDT must agree in writing to the additional
Assist business units where possible with their requirements.
planning efforts Develop, maintain and test its business recovery plans
Assist if requested, in business units' business
recovery planning efforts
Ensure offsite storage audits are performed quarterly
Assist business units in their implementation of the data
set tracking tool "Sunrise"
Recover CSG's production environment including the
database data but not the production application data for
hotsite testing
Develop and maintain technical recovery plans: Technical
support (MVS), Data Base Support (CICS, DB2), Software
Telecommunications, Hardware Telecommunications, Operations
support, Quality Services
To recover the system, the following areas shall have the
following responsibilities:
MVS: recover the operating system with the appropriate
software
DASD: provide full volume backups of System, and CSG
Applications Software volumes for CSG. Also maintain the
VSAM allocation process. At time of disaster or testing,
restore the system volumes, CSG Application Software
volumes and execute the VSAM allocation process
x CICS: recover the CICS software
x DB2: recover the DB2 subsystem and QMF system software
x Software/Hardware Telecom: recover the subscribed to
telecom network
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 10
<PAGE>
HARDWARE AND FACILITIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Coordinate the installation and/or upgrade of the Determine hardware requirements and submit a formal
requested FDT Data Center hardware with the vendor request to FDT quarterly.
and all business units serviced by the FDT Data All requests for hardware and/or facility changes
Center. require 60 days prior written notice to FDT.
Coordinate the installation and/or upgrade of the
FDT Data Center hardware microcode, to current and
supported levels.
Evaluate vendor hardware related to the operations
of the FDT Data Center and the business unit needs.
Maintain a current floor plan of the FDT Data Center.
Maintain configuration documentation related to the
hardware installed in the FDT Data Center.
Manage and maintain the power plant which support the
FDT Data Center and will provide a configuration to
support the continuous 24x7x365 operation of the FDT
Data Center businesses.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 11
<PAGE>
HELP DESK*UNTIL 4/1/97*
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
- - Main point of contact for CSG internal and external - Main point of contact for all CSG external customer
customer calls regarding online software, system calls and questions regarding application data entry
software and network related issues for CSC, SMS, TVRO, problems between the hours of 7:00 am - 9:00 pm, Mondays
VIP and ACSR products. through Fridays and 7:00 am - 2:00 pm, Saturdays.
- - Responsible for resolving first level data - Responsible for coordinating and resolving new
communications, hardware and software related issues. installation issues.
- - Responsible for performing hardware dispatch and follow-up. - Responsible for providing to FDT up date client
- - Responsible for coordinating FDT Data Center resources hardware configuration and client location/contact
to resolve second level and higher online software, system information.
software and network related issues. - Responsible for providing to FDT an up to date listing
- - Responsible for notifying CSG resources and assisting as of sensitive accounts.
required/requested to resolve second level application - Responsible for coordinating and resolving second level
software, Addressability, ACSR and new customer and higher application software, addressability, and new
installation related issues. customer installation related issues.
- - Responsible for providing critical situation
notifications to CSG management. Notifications to be
performed on a 7x24 basis.
- - Responsible for providing 30 minutes status notifications
throughout the life of all critical situations (life of
problem means the time the CSC is aware of a critical
problem until the impact to client has ceased). This
notification is performed on a 7x24 basis.
- - Responsible for providing sensitive account problem
notifications to CSG management.
- - Responsible for providing monthly ACD statistical reports
showing daily calls offered, calls answered and average
speed of answer.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 12
<PAGE>
MEDIA SERVICES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Responsible for the creation of microfiche and Responsible for providing update/current distribution
distributing the same to the customer. list for all microfiche and special tape mailings 14
Responsible for mailing out all customer CAD440 days prior to implementation
selects. (Tape, diskettes and cartridges) Main point of contact for all CSG external customer
Responsible for all media conversion (Tape to calls and questions regarding inquiries/problems with
diskette) distributed microfiche, conversion, and tapes.
Responsible for processing/distributing special tape Responsible for coordinating and implementing all
requests. customer conversions.
Responsible for labeling and entering into Roscoe
all conversion tapes received from the customer.
Responsible for providing monthly Customer Media
statistical reports showing volumes processed,
distributed and accuracy.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 13
<PAGE>
MVS SYSTEMS SOFTWARE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Install, maintain, customize and support all Request product trials.
mainframe operating systems and associated program Assist in testing of new releases and upgrades of all
products. software.
Perform diagnostic and consulting services to the Support administration of third party software as agreed.
business units. Adhere to established change control methodologies for
Provide product documentation for the FDT Data Center applications changes (INFO/MAN and Develop Calendar).
on operational aspects of installed products.
Investigate and recommend new system software.
Maintain accurate software inventory listing.
Maintain software at vendor's supported releases.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 14
<PAGE>
NETWORK SOFTWARE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Maintain high network availability/stability. Determine Network software requirements and submit formal
Perform Network customization, monitoring and tuning. requests to FDT staff.
Install, customize and maintain network and network Test and evaluate software and network installations to
related software products. insure requirements are satisfied.
Problem determination and resolution of network and Participate with FDT staff in monitoring network resources.
network related software product issues. Use supplied monitoring tools to report on and analyze
Install, customize and maintain transmission software network resources.
products. Provide feedback to assist in customization and tuning
Problem determination and resolution of transmission efforts.
software product issues. Interface with and provide first level troubleshooting for
Assist client with client and sub-client transmission sub clients.
software/hardware installation and support issues. Assist sub clients with transmission software selection,
Assist in installation and support of network hardware installation and support.
components (including 3172, SPC and Netlink solutions). Primary interface with Advantis on network definitions,
Maintain accurate software inventory listing. problem determination and resolution.
Perform Network disaster recovery planning and support. Primary support for client connections to SP2.
Design and implement network direction/workload analysis. Adhere to established INFO management procedures for
Provide consulting services for software product problem notification and tracking of network, transmission
acquisition and evaluation. and related issues.
Provide consulting services for network planning and Adhere to established INFO management change control
design. procedures in addition to the development calendar for
Participate in the monitoring, tuning, capacity planning network, transmission and related change implementations.
and problem determination/resolution issues with external
connected networks and VAN providers.
Provide debugging and problem resolution assistance for
client representatives when requested.
Assist with network connectivity and access issues.
Run traces to assist in troubleshooting network and
application issues.
Research exceptions to Performance Criteria.
Create and maintain network documentation to assist the
technical services and support staffs in troubleshooting
and providing client service.
Participate in interdepartmental education and provide
seminars on monitoring and first level debugging procedures.
Provide available network performance and availability
reports as requested.
Participate in INFO management procedures to assist in
problem tracking and documentation.
Participate in INFO management procedures to assist in
change control tracking and documentation.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 15
<PAGE>
STANDARDS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Standards Standards
Co-maintain data processing standards by: Co-maintain data processing standards by:
Submitting additions, changes and deletes through Submitting additions, changes and deletes through
established FDT procedures. established FDT procedures.
Preparing and distributing an agenda for the monthly Attend monthly Standards meetings support any proposals
Standards Committee meeting, consisting of all submitted to the committee
proposals received by Quality Services by the monthly
cutoff date.
Chair the Standards Committee meeting.
Quality Services will publish, either in hardcopy
format or online format, using the BookManager product,
updates approved by the Standards Committee.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 16
<PAGE>
CHANGE MANAGEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Provide Standard INFOMAN Support. Submit all request for services through INFOMAN for
Provide Standard Reports to support scheduled meetings. all FDT Data Center Activities, including:
All changes are opened on FDT's INFOMAN System. System Software
Hardware
Network Request
Operations Requests
Security
Storage Management
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 17
<PAGE>
INFOMAN STANDARD SUPPORT PROCESSES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Administrative Functions
Set up userid by specific privilege classes within
business unit controls.
Store employee data for interested party access.
Problem Tracking
Collection of production identified job abend data.
Log problems regarding end users that appear to be
caused by FDT support groups:
Systems area
Security
Operations
INFOMAN
DASD management
Capacity management
performance management
Change Tracking
Allow logging of request for service from each business
unit to support areas of FDT:
Systems area
CICS
Security
Operations
INFOMAN
DASD management
Capacity management
Performance management
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 18
<PAGE>
MAINFRAME CONSOLE OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Monitor system tasks Maintain list of unique business unit system tasks to
Monitor system performance be monitored
Monitor and adjust cycle progress based upon key Maintain list of key indicator jobs and latest completion
indicator jobs defined by CSG time without impacting Performance Criteria
Notify FDT management and primary business unit Maintain list of contacts and phone numbers
contact of problems impacting Performance Criteria and Maintain Performance Criteria and key indicator expectations
key indicator jobs via account manager
Monitor system hardware Maintain escalation and notification procedures
Monitor computer room environmentals Maintain job restart documentation and procedures
Track and act upon approved changes assigned to Provide operations with cycle run instructions
operations including IPL's Perform all CA7 scheduling functions for application related
Process approved special requests jobs
Perform system level control functions as required
Process batch cycle as defined in CA-7 and notify cycle
support of discrepancies/problems identified in the
process
Provide 24x7 console coverage
Monitor CAD1 transmissions during off hours
Perform off hour job restarts based on CSG provided
documentation or verbal instructions from cycle support
groups
Perform CA7 scheduling for non-application related jobs
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 19
<PAGE>
PERFORMANCE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
PERFORMANCE
Provide standard reports that identify changes in Complete application design and maintenance.
workloads. Identify application tuning opportunities.
Monitor reports to ensure Performance Criteria and Implement application tuning changes.
key indicators are met, and recognize workload variances. Identify business elements for Performance Criteria
Identify application/systems tuning opportunities. and key indicators
Provide manpower for systems tuning when Performance Provide manpower for application tuning when Performance
Criteria and key indicators are not being met. Criteria and key indicators are not being met.
Adhere to established change control methodologies for
applications changes (INFO/MAN and Develop Calendar).
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 20
<PAGE>
PROBLEM MANAGEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
All problems are opened on FDT's Infoman system by All problems are opened on FDT's Infoman system by FDT
FDT or CSG personnel. or CSG personnel.
- ------------------------------------------------------------------------------------------------------------------------------------
FDT will respond to, update and resolve any records CSG will respond to, update and resolve any records
assigned to FDT Data Center departments. assigned to CSG departments.
- ------------------------------------------------------------------------------------------------------------------------------------
Performance Criteria exceptions: FDT will compile CSG will ensure that any Performance Criteria records
exception information for Performance Criteria records. assigned to them will contain accurate resolution and
FDT and CSG will negotiate accountability if necessary. duration information.
- ------------------------------------------------------------------------------------------------------------------------------------
FDT will provide scheduled and adhoc reporting from CSG will have access to the FDT Infoman database for
data on the FDT Infoman database. data retrieval, reporting, etc.
- ------------------------------------------------------------------------------------------------------------------------------------
FDT Problem Management Department will provide the CSG will provide problem summary information whenever the
account manager with problem detail information from recipient is a CSG client.
the Infoman database. The account manager will provide
CSG with any requested summaries, memos, post-mortems, etc.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 21
<PAGE>
PRODUCTION SCHEDULING
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Maintain and follow problem flow via INFOMAN and Add, delete and update jobs in CA-7 scheduler.
escalate per problem escalation procedures. Add, delete and update all scheduling parameters with the
Schedule and implement production change, including exception of the security macro.
new business acquisitions. Create change record in INFOMAN to request adds/deletes
Support operations in maintaining and verifying to security macro
production processing. Provide restart services for Cable processing.
Support operations/tape library in maintaining TMS
batch processing.
Document departmental procedures
Maintain CA-7 automated scheduler jobs and parameters
for system level and operations processing.
Provide abend restart functions where requested.
Document and escalate processing problems according to
escalation procedures.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 22
<PAGE>
DATA SECURITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Upgrade or install fixes to the TOP SECRET software. (*) Maintain internal security of other products:
Maintain TOP SECRET databases. RMS/ESF (BUNDLE).
Install/maintain external security interfaces between TOP SECRET for RMS/ESF (clients only): create, modify,
TOP SECRET and other software. delete.
Maintain internal security for other software, such as: Respond to audits with respect CSG responsibilities.
CA7 (*) Reset passwords and/or resume userids for CSG clients
NETVIEW (*) and personnel on TOP SECRET.
DB2 (*) Administer all Team 35 Software security
INFOMAN (*)
ROSCOE
QMF (*)
VMANCSG
NETSPY
NDM
TSO.
Reset passwords, suspend or resume userids for FDT
personnel.
Maintain TOP SECRET userids: create, modify, delete.
Reset passwords and/or resume userids for CSG clients
and personnel on TOP SECRET
Maintain CSG client and personnel on TOP SECRET.
Maintain DSN/RESOURCE access rules under TOP SECRET
Delete datasets/aliases when user id are deleted.
SDSF system access
Interface with CSG data security administrator.
Respond to audits with respect to FDT responsibilities.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 23
<PAGE>
TAPE OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FDT CSG
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Monitor all external tape drives for mount activity. Maintain master document of what application files are
Setup, maintain and support tape vault patterns offsite sent offsite.
disaster recovery activities. Provide written documentation when requesting offsite
Pull all offsite backup tapes from offsite storage disaster recovery tape vaulting.
Refile all returning backup tapes from offsite storage. Maintain a master list of retention periods for all
Refile tapes manually loaded (round reel and cartridge). tapes created using RDS (Retention DataSet).
Refile all tapes ejected from the tape silo's throughout Provide written documentation when requesting changes to
the day. RDS file.
Enter scratch tapes, cleaning cartridges and requested input Use tape file stacking whenever possible.
tapes into the tape silo's Minimize tape drive allocation during job processing.
Initialize new tapes both round reel and cartridge (inhouse Migrate small datasets to disk whenever possible.
and oneway tapes).
Clean and/or replace broken or damaged tapes with I/O errors
for inhouse and microfiche.
Retrieve and deliver all microfiche and Media Support tape
requests for CSG.
Publish monthly reports for tape utilization both automated
and manual.
Monitor, clean and resolve tape drive and silo problems.
Provide 24 x 7 tape coverage for CSG.
Analyze daily tape operations for possible improvements.
Perform updates to TMS (ie. extend and/or expire tapes).
Resolve problem tickets involving tape library and tape
operations.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.9 -- PAGE 24
<PAGE>
SCHEDULE 2.10
CSG BATCH JOB TARGETS
---------------------
See attached listing. All times listed are Mountain Time.
SCHEDULE 2.10-PAGE 1
<PAGE>
With the installation of the proposed Timberline hardware, CSG critical path
processing should be completed an average of two (2) hours earlier than the
completion time as of the Effective Date, provided that (a) at least thirty two
--------
(32) Timberline transports and eight (8) ESCON channels are available for CSG
processing so as to avoid allocation delays, (b) the job mix and job scheduling
parameters as of the Effective Date are not significantly altered (e.g., no
changes in CPU resources, etc.), and (c) transaction workload levels do not
increase more than ten percent (10%) above activity levels as of the Effective
Date. Critical path completion time means the end time of CAD0350, which as of
the Effective Date, completes at approximately 05:00.
- --------------------------------------------------------------------------------
DEFINITION TARGET
- --------------------------------------------------------------------------------
1. Online System Updated: CAD0139 Completed by 04:30.
CCS
- --------------------------------------------------------------------------------
2. Online System Updated: TVD0139 Completed by 04:30.
TVRO
- --------------------------------------------------------------------------------
3. Online System Updated: VID0139 Completed by 04:30.
SMS
- --------------------------------------------------------------------------------
4. File Availability: CCS This covers the CCS files available 23
availability of hours a day, from 04:30
production files for CCS. to 03:30, 98.2% of the
total month ly hours.
File availability is
measured at the
completion of CAD0139
and will encompass
downtime of CICS and
the operating system.
- --------------------------------------------------------------------------------
5. Daily Reports Sequence (CADSEQ11), In the print que by
house and work order 04:30.
(CADHWRK1) and converter
(CADCPMD1) reports
available for prin ting
at customer's location.
- --------------------------------------------------------------------------------
6. Workorders CAEWPT2 Completed by 02.00.
- --------------------------------------------------------------------------------
7. WPT Transactions CAEWPT1B & CAEWPTIC Completed by 1 1/4
hours after scheduled
beginning time.
Scheduled beginning
time is 05:30, 09:00,
12:00, 14:00, and 17:00
- --------------------------------------------------------------------------------
SCHEDULE 2.10-PAGE 2
<PAGE>
- --------------------------------------------------------------------------------
DEFINITION TARGET
- --------------------------------------------------------------------------------
8. Weekly Reports CAW7000 CAW7000 completed by
17:30 on Sunday.
- --------------------------------------------------------------------------------
9. Monthly Financial A. CAM7031 A. Completed by 18:00
Reports on the 23rd of the
B. Financial Tapes month.
B. Tapes mailed within
48 hours after tape
creation, 99.9% of the
time.
- --------------------------------------------------------------------------------
10. Monthly Statistics Completes the following CAM7062 completed by
Reports statistics reports: 19:00 on the 24th of
CPMM0004, CPRM0006, the month.
CPMM308 and CAM7062.
- --------------------------------------------------------------------------------
11. Online Statements -- CAD320 Completed by 05:30.
Information Available
- --------------------------------------------------------------------------------
12. Statements Available CAD0330 Completed by 09:00.
to the CSG Production
Facility
- --------------------------------------------------------------------------------
13. Daily Vantage Cycle CAEx99 Started by 06:00.
- --------------------------------------------------------------------------------
14. weekly Vantage Cycle CAW6443 Completed by 06:00 on
Monday, unless the 21st
is a Friday.
- --------------------------------------------------------------------------------
15. Mid-month Vantage CAM7596 Started by 06:00 on
Cycle Monday, following the
first Friday of the
Month.
- --------------------------------------------------------------------------------
16. Monthly Vantage Cycle CAM7496 Started by 24:00 on the
CAM7596 24th of the month.
- --------------------------------------------------------------------------------
17. Vantage Static Tables CAM7450 Completed by 06:00 on
the 23rd of the
- --------------------------------------------------------------------------------
SCHEDULE 2.10-PAGE 3
<PAGE>
- -------------------------------------------------------------------------------
DEFINITION TARGET
- -------------------------------------------------------------------------------
month.
- --------------------------------------------------------------------------------
SCHEDULE 2.10-PAGE 4
<PAGE>
SCHEDULE 2.13
PERFORMANCE CRITERIA
--------------------
See attached list. All times listed are Mountain Time.
SCHEDULE 2.13 -- PAGE 1
<PAGE>
"Confidential Treatment Requested and the
Redacated Material has been separately
filed with the Commission."
FDT has no control or responsibility of how Application Software and Team 35
Software uses the environment. Application Software, Team 35 Software, hardware
at client sites, client provided networks, use of DB2, CICS transactions and
batch scheduling is the responsibility of CSG.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE REPORTED
CATEGORY DEFINITION CRITERIA BY MEASUREMENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. OPERATING SYSTEM This covers the host The operating system will be Data Center Report daily and
AVAILABILITY computer hardware and available 24 hours a day, (Operations) detail exceptions
systems software. (**)% of the time, excluding monthly.
scheduled downtime.
----------------------------
- MAINTENANCE WINDOW EVERY
WEEKEND (02:30-04:00).
- 2 FDT INITIATED IPL'S PER
MONTH (HARDWARE/SOFTWARE).
- QUARTERLY EXTENDED OUTAGE
(03:00-07:00) 30 DAY NOTIFICATION.
- IPL'S REQUIRED FOR CSG
APPLICATION WILL BE ADDITIONAL.
- ------------------------------------------------------------------------------------------------------------------------------------
2. CICS AVAILABILITY This covers The online regions will be Data Center Report daily and
availability to all available 24 hours per day, (Operations) detail exceptions
production online (**)% of the time, excluding monthly.
regions. scheduled downtime.
-------------------------------
- CICS REGIONS ARE CYCLED
NIGHTLY WITH BATCH JOB CAD0127.
- A MINIMUM OF 15 MINUTES
WILL BE ASSESSED UPON
ANY UNSCHEDULED REGION CYCLE.
*CSG MUST IDENTIFY
UNSCHEDULED CICS RECYCLE
TIMELINE.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.13 -- PAGE 2
<PAGE>
"Confidential Treatment Requested and the Redacated
Material has been separately filed with the Commission."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE REPORTED
CATEGORY DEFINITION CRITERIA BY MEASUREMENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3. HOST RESPONSE Processing time for Average (**) seconds during each Data Center Report and detail
TIME task by the CPU. 15 minute interval (an "Interval") (Capacity exceptions
Measure the host from 06:00 to 18:00 Monday through Planning) monthly.
response time for Saturday, iT being understood that FDT
production CICS shall be permitted (**) Intervals per
regions. Excluding calendar month to exceed this Performance
DB2. Criteria, calculated as follows:
-(**) or more Intervals exceeding an
average of(**) seconds shall be deemed to
be 1 violation of this Performance Criteria,
provided that each such Interval violation
exceeding an average of (**) seconds relates to
the same issue.
- if an issue arises that causes an Interval
to exceed an average of (**) seconds, and FDT
creates a remedy for such issue, CSG and FDT
shall confer promptly regar-ding the
implementation of such remedy. If CSG does
not permit FDT to implement the remedy, any
subsequent Interval that exceeds an average of
(**) seconds as a result of FDT not being
permitted to implement such remedy shall not be
deemed to be a violation of this Performance
Criteria.
- If one or more Intervals fails to meet this
Perfor mance Criteria due to the way in
which CSG conducts its business, such failures
shall not be deemed to be a violatiON of this
Performance Criteria.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.13 -- PAGE 3
<PAGE>
"Confidential Treatment Requested and the Redacted
Material has been separately filed with the Commission."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE REPORTED
CATEGORY DEFINITION CRITERIA BY MEASUREMENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4. USER RESPONSE Measure the user (**) seconds for 95th percentile. Data Center Report and detail
TIME FOR DIRECT CONNECT response time (host + (Capacity exceptions monthly.
CLIENTS network) for clients Planning)
directly attached to
the FDT host.
- ------------------------------------------------------------------------------------------------------------------------------------
5. NETWORK UPTIME Measure the network (**)% availability, excluding Data Center Report and detail
BY CONTROLLER FOR DIRECT availability which scheduled downtime. (Network) exceptions monthly.
CONNECT includes front end
CLIENTS processors, modems
and data circuits
for all controllers
directly connected
to the FDT host.
- ------------------------------------------------------------------------------------------------------------------------------------
6. CALL The percentage number The average call abandonment Data Center Report and detail
ABANDONMENT of calls that are rate not to exceed (**)%. Based (CSC) exceptions monthly.
RATE abandoned before they are on (**) calls offered per month.
*Until 4/01/97* answered by the Customer
Support Center.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.13 -- PAGE 4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE REPORTED
CATEGORY DEFINITION CRITERIA BY MEASUREMENT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7. MEDIA SERVICES Measure the turnaround (**)% of tapes and diskettes Data Center Report and detail
TAPE/DISKETTE TURNAROUND percentage of magnetic will be shipped to client (Media Services) exceptions monthly.
A. SELECTS AND media items that are within 48 hours of receipt by
SPECIALS received by Media Media Services. (**)% of
B. CONVERSIONS Services. conversions will be entered
into the system within 48
hours of receipt by Media
Services. Exception situations
will be handled using
commercially reasonable efforts.
- ------------------------------------------------------------------------------------------------------------------------------------
8. MEDIA SERVICES Measure the percentage a. Daily Data Center Report and detail
MICROFICHE TURNAROUND of microfiche items (**)% of daily microfiche mailed (Media Services) exceptions monthly.
A. DAILY shipped to clients within 48 hours of tape receipt
B. WEEKLY by Media Services.
C. MONTHLY b. Weekly
(**)% of weekly microfiche mailed
within 72 hours of tape receipt
by Media Services.
c. Monthly
(**)% of monthly microfiche mailed
within 14 days of tape receipt
by Media Services.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE 2.13 -- PAGE 5
<PAGE>
SCHEDULE 2.16.1
ADDITIONAL CSG OBLIGATIONS
--------------------------
1. Applications Software; Team 35 Software. CSG will have
---------------------------------------
responsibility for the integrity and performance of the Applications Software
and the Team 35 Software and will cause the same to be maintained in accordance
with the provisions of the Services Agreement, including any special provisions
in the Operations Procedures.
2. Trained Personnel. CSG will provide appropriate training
-----------------
for all new CSG employees on Software then in use by or on behalf of CSG. CSG
will notify FDT promptly of any changes in authorized users of the Software to
be operated by FDT.
3. Compatible Operating Environment. If CSG obtains any
--------------------------------
services from a third party relating to the FDT Services, any Software provided
by such third party that will be operated by FDT must conform to, and be
compatible with, the then current operating environ ment in the FDT Data Center
and must meet any applicable operating standards relating to the FDT Services.
In addition, CSG shall ensure that any third party-provided services or Software
will not interfere with FDT's ability to provide the FDT Services hereunder or
increase FDT's costs associated therewith.
4. Resource Requirements. It will be CSG's responsibility to
---------------------
track its pro duction and resource requirements and to request any Additional
Services required beyond the existing FDT Services, allowing a reasonable time
under the circumstances for FDT to provide such Additional Services in
accordance with the Operations Procedures.
SCHEDULE 2.16.1 -- PAGE 1
<PAGE>
SCHEDULE 5.6
TEAM 35 SOFTWARE LICENSE AGREEMENT
----------------------------------
See attached.
SCHEDULE 5.6--PAGE 1
<PAGE>
A G R E E M E N T
-----------------
THIS AGREEMENT (the "License Agreement") is entered into as of
December 31, 1996, by and between First Data Technologies, Inc., a Delaware
corporation ("FDT"), and CSG Systems, Inc. (formerly known as Cable Services
Group, Inc.), a Delaware corporation ("CSG").
WHEREAS, FDT and CSG are parties to a certain Amended and Restated
Services Agreement dated as of December 31, 1996 (the "Services Agreement"),
pursuant to which FDT provides, inter alia, data processing services to CSG; and
----- ----
WHEREAS, pursuant to the Services Agreement, the Parties (as hereafter
defined) agreed to enter into this License Agreement relating to the use by CSG
of the Team 35 Software (as hereafter defined).
NOW THEREFORE, in consideration of the premises and mutual covenants,
representations, conditions and agreements hereafter expressed, the Parties (as
hereafter defined) hereto agree as follows:
1. Definitions. As used in this License Agreement, the
-----------
following terms shall have the meanings set forth herein, and shall be equally
applicable to the singular and plural forms. Any agreement referred to herein
shall mean such agreement as amended, supplemented and modified from time to
time to the extent permitted by the applicable provisions thereof.
"Affiliate" means an Entity which, directly or indirectly, owns or
controls, is owned or is controlled by or is under common ownership or control
with another Entity. As used herein, "control" means the power to direct the
management affairs of an Entity, and "ownership" means the beneficial ownership
of the voting equity securities or other equivalent voting interests of the
Entity.
"License Agreement" shall have the meaning set forth in the first
paragraph hereof.
"Business" shall have the meaning set forth in that certain Stock
Purchase Agree ment dated as of October 26, 1994 between CSG Holdings, Inc. and
First Data Resources, Inc.
"Confidential Information" shall have the meaning set forth in
Section 5(a).
- ------------
"CSG" shall have the meaning set forth in the first paragraph of
this License Agreement.
"Dispute" shall mean any and all disputes, controversies and claims
between the
SCHEDULE 5.6--PAGE 2
<PAGE>
Parties arising from or in connection with this License Agreement or
the relationship of the Parties under this License Agreement whether based on
contract, tort, common law, equity, statute, regulation, order or otherwise.
"Effective Date" shall mean January 1, 1997.
"Entity" shall mean any individual, corporation, limited liability
company, partnership, joint venture, or other form of organization or
governmental agency or authority.
"FDT" shall have the meaning set forth in the first paragraph of
this License Agreement.
"FDR" shall mean First Data Resources, Inc.
"Party" shall mean a party to this License Agreement and its
permitted successors and assigns.
"Services Agreement" shall have the meaning set forth in the
first recital to this License Agreement.
"Team 35 Software" shall mean the software commonly known as "Team
35," together with any documentation (if any) relating thereto as described on
Exhibit A attached hereto and incorporated herein, together with all updates,
- ---------
modifications or enhancements thereto created or developed by FDR in its
ordinary course of business during the term of the Services Agreement, it being
understood that FDR may not create or develop any updates, modifications or
enhancements, and therefore, FDT may be unable to provide the same to CSG.
2. License Grant.
-------------
(a) FDT hereby grants to CSG a perpetual, nontransferable,
nonexclusive, royalty-free license to:
(i) access the Team 35 Software pursuant to the on-line facility
used by CSG pursuant to the Services Agreement and modify the same for use
solely in connection with the Business; and
(ii) sublicense the Team 35 Software to any Entity providing service
bureau data processing services on behalf of CSG solely for the data
processing requirements of CSG relating to that portion of the Business of
CSG located outside of the United States, provided that (A) such Entity
--------
performs such services using computer systems located outside of the United
States, (B) such computer systems are owned or operated by such Entity, (C)
such Entity is reasonably acceptable to FDT, it being understood that
Arthur Andersen LLP, EDS and IBM shall be acceptable to FDT, and (D) such
Entity and CSG execute a written sublicense agreement reasonably
satisfactory to FDT
SCHEDULE 5.6--PAGE 3
<PAGE>
relating to such Entity's limited use and nondisclosure of the Team 35
Software.
(b) Upon the expiration or termination of the Services Agreement for
any reason, the Parties shall execute an amendment to this License
Agreement pursuant to which the license granted in Section 2(a)(i) shall be
---------------
amended to read in its entirety as follows: "copy, modify and use the Team
35 Software solely in connection with the Busi ness, provided that such
copying, modification and use occurs only on computer systems that are
owned or operated by CSG, or on computer systems that are owned or operated
by an Entity providing data processing services to CSG, so long as (A) such
Entity per forms such services using computer systems located in the United
States, (B) such Entity is reasonably acceptable to FDT, it being
understood that Arthur Andersen LLP, EDS and IBM shall be acceptable to
FDT, and (C) such Entity and CSG execute a written sublicense agreement
reasonably satisfactory to FDT relating to such Entity's limited use and
nondisclosure of the Team 35 Software".
(c) All right, title and interest in and to the Team 35 Software,
other than those rights expressly granted herein, shall remain in FDT. In
no event may CSG use the Team 35 Software (or any modifications thereto)
other than in connection with the Business.
3. Delivery of Team 35 Software. The Parties shall cooperate to
----------------------------
specify the form, format, timing and cost of any delivery of the Team 35
Software to CSG or to any Entity identi fied in Section 2(a)(ii), if the same is
----------------
required pursuant to this License Agreement, it being understood that FDT shall
provide any updates, modifications or enhancements provided by FDR to FDT within
ninety (90) days of FDR's implementation of the same into production. FDT's
delivery obligations set forth in this Section 3 shall terminate upon the
---------
expiration or termination of the Services Agreement.
4. Ownership (and Distribution) of Modifications Developed by CSG.
--------------------------------------------------------------
As between CSG and FDT, the parties acknowledge and agree that FDT shall own all
right, title and interest in and to the Team 35 Software. Subject to FDT's
ownership rights in the Team 35 Software, as between FDT and CSG, CSG shall own
all right, title and interest in and to all modifications it creates to the Team
35 Software. CSG covenants and agrees that it shall use such modifications
solely in connection with the Team 35 Software and only in connection with the
Business. CSG covenants and agrees that CSG shall maintain the confidentiality
of such modifications in the same manner as it treats the Team 35 Software.
5. Confidentiality.
---------------
(a) Information exchanged between FDT and CSG or otherwise made
available by one Party to the other in connection with this License
Agreement before or after the date hereof shall be considered a trade
secret or confidential or proprietary information ("Confidential
Information") if it has been designated as such in this License Agreement
or on the information itself when delivered or made available, or if
SCHEDULE 5.6--PAGE 4
<PAGE>
delivered orally, if a written notification of the confidential nature of
the information is sent within a reasonable time after the information is
transmitted. Among other things, Confidential Information shall include
confidential or proprietary information of third parties in the possession
of one of the Parties to this License Agreement and needed to perform
obligations hereunder. Team 35 Software shall in any event be considered
Confidential Information of FDT. Confidential Information not requiring a
marking shall include Team 35 Software and all specifications and
documentation therefor.
(b) Except as expressly authorized by prior written consent of the
disclosing Party, the receiving Party shall:
(i) limit access to any Confidential Information received by it to
its employees, agents, representatives, and consultants who have a
need-to-know in connection with this License Agreement and the
obligations of the Parties hereunder;
(ii) advise its employees, agents and consultants having access to
the Confidential Information of the proprietary nature thereof and of
the obligations set forth in this License Agreement;
(iii) safeguard all Confidential Information received by it using a
reasonable degree of care, but not less than that degree of care used
by the receiving Party in safeguarding its own similar information or
material;
(iv) not disclose any Confidential Information received by it to
third parties; and
(v) use the Confidential Information of the other Party only for
the purposes and in connection with the license granted herein; and
(vi) upon the disclosing Party's request after expiration or
termination of this License Agreement, return promptly to the
disclosing Party all Confidential Information of the disclosing Party
in the receiving Party's possession, and certify in writing to the
disclosing Party its compliance with this subsection (vi).
(c) Exceptions to Confidentiality. Notwithstanding the foregoing
-----------------------------
Section 5(a), the Parties' obligations respecting confidentiality under
------------
Section 5(b) shall not apply to any particular information of a Party that
------------
the other Party can demonstrate (i) was, at the time of disclosure to it,
in the public domain; (ii) after disclosure to it, is published or
otherwise becomes part of the public domain through no fault of the
receiving Party; (iii) was in the possession of the receiving Party at the
time of disclosure to it without being subject to another confidentiality
agreement; (iv) was received after disclosure to it from a third party who
had a lawful right to disclose such information to it; (v) was
independently developed by the receiving Party without
SCHEDULE 5.6--PAGE 5
<PAGE>
reference to Confidential Information of the furnishing Party; (vi) was
required to be disclosed to any regulatory body having jurisdiction over
FDT or CSG or any of their respective clients; or (vii) that disclosure is
necessary by reason of legal, accounting or regulatory requirements beyond
the reasonable control of the receiving Party. In the case of any
disclosure pursuant to clauses (vi) and (vii) above, to the extent
practical, the disclosing Party shall give prior notice to the other Party
of the required disclosure and shall use commercially reasonable efforts to
obtain a protective order covering such disclosure. If such a protective
order is obtained, such information shall continue to be deemed to be
Confidential Information.
(d) Except as specifically granted herein, this License Agreement
does not confer any right, license, interest or title in, to or under the
Confidential Information to the receiving Party and no license is hereby
granted to the receiving Party, by estoppel or otherwise under any patent,
trademark, copyright, trade secret or other proprietary right of the
disclosing Party. Title to the Confidential Information shall remain
solely in the disclosing Party.
(e) Each Party acknowledges that if it breaches (or attempts to
breach) its obligations under this Section 5, the other Party will suffer
---------
immediate and irreparable harm, it being acknowledged that legal remedies
are inadequate. Accordingly, if a court of competent jurisdiction should
find that a Party has breached (or attempted to breach) any such
obligations, such Party will not oppose the entry of an appropriate order
compelling performance by such Party and restraining it from any further
breaches (or attempted breaches).
(f) CSG accepts full responsibility for complying with federal, state
and local laws, rules and regulations concerning use of privileged or
confidential third party infor mation derived from input into or output
from the Team 35 Software.
6. Disclaimer of Warranties. THE TEAM 35 SOFTWARE AND THE
------------------------
SERVICES PROVIDED TO CSG HEREUNDER ARE PROVIDED ON AN "AS-IS" BASIS WITHOUT ANY
REPRESENTATION OR WARRANTY OF ANY KIND WHATSOEVER. CSG ACKNOWLEDGES AND AGREES
THAT NEITHER FDT NOR ANY OF ITS AFFILIATES HAVE MADE ANY EXPRESS WARRANTIES
RELATING TO THE TEAM 35 SOFTWARE OR THE SERVICES PROVIDED TO CSG HEREUNDER. FDT
MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, TO CSG OR ANY OTHER
ENTITY, INCLUDING ANY WARRANTIES REGARDING THE MERCHAN TABILITY, SUITABILITY,
NONINFRINGEMENT, ORIGINALITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE
(IRRESPECTIVE OF ANY PREVIOUS COURSE OF DEALINGS BETWEEN THE PARTIES OR CUSTOM
OR USAGE OF TRADE), OR RESULTS TO BE DERIVED FROM THE USE OF THE TEAM 35
SOFTWARE OR THE SERVICES PROVIDED HEREUNDER.
7. Update, Maintenance and Support of Team 35 Software. FDT
---------------------------------------------------
shall have
SCHEDULE 5.6--PAGE 6
<PAGE>
no responsibility to update, maintain or support the Team 35 Software. The
foregoing shall not be deemed to negate the obligations of FDT set forth in
Section 4.
- ---------
8. Disclaimer of Liability. NOTWITHSTANDING ANY OTHER PROVI-
-----------------------
SION TO THE CONTRARY SET FORTH IN THIS LICENSE AGREEMENT, IN NO EVENT SHALL FDT,
ANY OF ITS AFFILIATES, OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS OR SUBCONTRACTORS BE LIABLE UNDER ANY THEORY OF TORT,
CONTRACT, STRICT LIABILITY OR OTHER LEGAL THEORY FOR ANY LOST PROFITS, LOSS OF
DATA, EXEMPLARY, PUNITIVE, SPECIAL INCIDEN TAL, DIRECT, INDIRECT OR
CONSEQUENTIAL DAMAGES, EACH OF WHICH IS HEREBY EXCLUDED BY AGREEMENT OF THE
PARTIES REGARDLESS OF WHETHER OR NOT EITHER PARTY OR ANY OTHER SUCH ENTITY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES; PROVIDED THE FOREGOING
--------
EXCLUSION SHALL NOT APPLY TO CONSEQUENTIAL DAMAGES INCURRED BY CSG AS A RESULT
OF THE MISAPPROPRIATION OR MISUSE OF CONFIDENTIAL INFORMATION OF CSG. THE
FOREGOING REPRESENTS AN EXPRESS ALLOCATION OF RISK BETWEEN THE PARTIES.
9. Dispute Resolution.
------------------
(a) Subject to Section 9(b), any and all Disputes shall be resolved
------------
in accordance with Exhibit 9(a) attached hereto and incorporated herein.
------------
(b) Notwithstanding anything to the contrary set forth herein,
neither Party shall be required to submit any dispute or disagreement
regarding the interpretation of any provision of this License Agreement,
the performance by either Party of such Party's obli gations under this
License Agreement or a default hereunder to the mechanisms set forth in
Section 9(a), if such submission would be seeking equitable relief from
------------
irreparable harm.
(c) THE PARTIES CONSENT TO THE NON-EXCLUSIVE JURISDICTION OF THE
UNITED STATES DISTRICT COURT FOR THE STATE OF NEBRASKA AND OF ANY NEBRASKA
STATE COURT SITTING IN OMAHA, NEBRASKA FOR ALL ACTIONS WHICH MAY BE BROUGHT
WITH RESPECT TO THE TERMS OF, AND THE TRANSACTIONS AND RELATIONSHIPS
CONTEMPLATED BY, THIS LICENSE AGREEMENT. THE PARTIES FURTHER CONSENT TO
THE JURISDICTION OF ANY STATE COURT LOCATED WITHIN A DISTRICT WHICH
ENCOMPASSES THE ASSETS OF A PARTY AGAINST WHICH A JUDGMENT HAS BEEN
RENDERED, EITHER THROUGH ARBITRATION OR THROUGH LITIGATION, FOR THE
ENFORCEMENT OF SUCH JUDGMENT AGAINST THE ASSETS OF SUCH PARTY.
SCHEDULE 5.6--PAGE 7
<PAGE>
10. Term and Termination.
--------------------
(a) This License Agreement shall be effective as of the Effective
Date. Notwithstanding anything to the contrary set forth herein, this
License Agreement (and the licenses granted herein) shall continue unless
terminated pursuant to Section 10(b).
-------------
(b) This License Agreement (and the licenses granted herein) shall
terminate if CSG breaches any of its material obligations under this
License Agreement which breach is not substantially cured within forty-five
(45) days (ten (10) days for payment defaults) after written notice
specifying the breach is given by FDT to CSG.
(c) Upon termination of this License Agreement for any reason: (i)
the licenses granted to CSG shall immediately terminate and CSG shall cease
use of the Team 35 Software; (ii) CSG shall immediately terminate all
sublicenses (if any) of the Team 35 Software; (iii) CSG shall promptly
comply with the provisions of Section 5(b)(vi) upon the receipt of the
----------------
materials identified in Section 10(c)(iv) and shall also provide FDT with
-----------------
the certifications received from each sublicensee (if any) of the Team 35
Software; (iv) CSG shall promptly require any sublicensees of the Team 35
Software to return all Confidential Information of FDT (and all
modifications (if any) relating to the Team 35 Software) and certify in
writing to CSG of such sublicensee's compliance with this subsection; and
(v) all fees (if any) due FDT hereunder shall be immediately due and
payable.
11. Miscellaneous.
-------------
(a) Notice. All notices, requests, demands and other communications
------
required or permitted under this License Agreement shall be deemed to have
been duly given and made if in writing upon being served either by personal
delivery or by telecopier to the Party for whom it is intended or two
business days after being deposited, postage prepaid, certified or
registered mail, return receipt requested (or such form of mail as may be
substituted therefor by postal authorities), in the United States mail,
bearing the address shown in this Section 12(a) for, or such other address
-------------
as may be designated in writing hereafter by such Party:
If to CSG: CSG Systems, Inc.
2525 N. 117th Avenue
Omaha, Nebraska 68164
Attention: President
Telecopy: (402) 431-7218
With a copy to: CSG Systems, Inc.
2525 N. 117th Avenue
Omaha, Nebraska 68164
Attention: General Counsel
Telecopy: (402) 431-7218
SCHEDULE 5.6--PAGE 8
<PAGE>
If to FDT: First Data Technologies, Inc.
6200 S. Quebec Street, Ste. 335
Englewood, Colorado 80111
Attn: President
Telecopy: (303) 488-8292
With a copy to: First Data Corporation
2121 North 117th Avenue
Omaha, Nebraska 68164
Attention: General Counsel
Telecopy: (402) 498-4123
(b) Entire Agreement. This License Agreement and the Exhibits embody
----------------
the entire agreement and understanding of the Parties hereto with respect
to the subject matter hereof, and supersede all prior and contemporaneous
agreements and understandings relative to said subject matter.
(c) Assignment: Binding Agreement. Either Party may assign this
------------------------------
License Agreement to any Affiliate of such Party upon notice to the other
Party. Either Party may: (i) transfer this License Agreement in
connection with any merger or consolidation of such Party with another
corporation, provided that such Party furnishes the other Party with notice
of such transfer within ten (10) business days of the public announcement
of the same; or (ii) in connection with the sale of substantially all of
the Party's assets (inclu ding the rights of a Party under this License
Agreement), provided that (a) the assignee thereof shall assume all of such
Party's obligations hereunder, and (b) the Party furnishes the other Party
with notice of the public announcement of such assignment and assump tion
within ten (10) business days of the same. Subject to the foregoing, all
provisions contained in this License Agreement shall extend to and be
binding upon the Parties here to and their respective permitted successors
and permitted assigns.
(d) Force Majeure. No Party shall be liable for any default or delay
-------------
in the performance of its obligations (other than payment obligations, if
any) under this License Agreement if and to the extent such default or
delay is caused, directly or indirectly, by (i) fire, flood, elements of
nature or other acts of God; (ii) any outbreak or escalation of
hostilities, war, riots or civil disorders in any country; (iii) any act or
omission of the other Party or any governmental authority; (iv) any labor
disputes (whether or not the em ployees' demands are reasonable or within
the Party's power to satisfy); or (v) nonperfor mance by a third party
(including third party vendors) or any other similar cause beyond the
reasonable control of such Party, including failures or fluctuations in
electrical or tele communications equipment or lines or other equipment.
In any such event, the non-per forming Party will be excused from any
further performance or observance of the obliga tion so affected only for
as long as such circumstances prevail and such Party continues to use
commercially reasonable efforts
SCHEDULE 5.6--PAGE 9
<PAGE>
to recommence performance or observance as soon as practicable.
(e) Risk of Loss. Except as otherwise provided in this Section
------------ -------
11(e), each Party shall be responsible for risk of loss of, and damage to,
any equipment, software or other materials in its possession or under its
control, subject to Section 11(d). Notwith standing anything in this
-------------
License Agreement to the contrary, each Party to this License Agreement
(the "Damaged Party") hereby waives any and all rights of recovery, claims,
actions or causes of action, against the other Party (the "Other Party"),
its Affiliates, and any of its or their directors, officers, employees,
agents and subcontractors for any loss or damage that may occur to the
Damaged Party's facilities, any improvements thereto, or any building or
project of which the Damaged Party's facilities are a part, or any
improvements thereon, or any personal property of any individual or Entity
therein, by reason of fire, the elements or any other cause that could be
insured against under the terms of standard fire and extended coverage
insurance policies, regardless of cause or origin, including negligence of
the Other Party, its Affiliates, or such Other Party's or its Affiliates'
directors, officers, employees, agents or subcontractors, and both FDT and
CSG covenant that no insurer of one Party will hold any right of
subrogation against the other.
(f) No Third-Party Beneficiaries. Nothing contained in this License
----------------------------
Agreement is intended to confer upon any individual or Entity (other than
the Parties hereto) any rights, benefits or remedies of any kind or
character whatsoever, and no individual or Entity shall be deemed a third-
party beneficiary under or by reason of this License Agreement.
(g) Severability. If any provision of this License Agreement or the
------------
application of any such provision to any individual or Entity, or
circumstance, shall be declared judicially or by the Arbitration Panel (as
defined in Exhibit 9(a)) to be invalid, unenforceable or void, such
------------
decision shall not have the effect of invalidating or voiding the remainder
of this License Agreement, it being the intent and agreement of the Parties
that this License Agreement shall be deemed amended by modifying such
provision to the extent necessary to render it valid, legal and enforceable
while preserving its intent or, if such modification is not possible, by
substituting therefor another provision that is valid, legal and
enforceable so as to materially effectuate the Parties' intent.
(h) Certain Construction Rules. The section headings contained in
--------------------------
this License Agreement are for convenience of reference only and shall in
no way define, limit, extend or describe the scope or intent of any
provisions of this License Agreement. In addition, as used in this License
Agreement, unless otherwise provided to the contrary, any reference to a
"Section" or "Exhibit" shall be deemed to refer to a Section of this
License Agreement or Exhibit attached to this License Agreement. The
recitals set forth on the first page of this License Agreement are
incorporated into the body of the License Agreement. Unless the context
clearly indicates, words used in the
SCHEDULE 5.6--PAGE 10
<PAGE>
singular include the plural, words in the plural include the singular and
the word "including" means "including but not limited to".
(i) Counterparts. This License Agreement may be executed
------------
simultaneously in multiple counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
(j) No Interpretation Against Drafter. Both Parties have
---------------------------------
participated substan tially in the negotiation and drafting of this License
Agreement and each Party hereby dis claims any defense or assertion in any
litigation or arbitration that any ambiguity herein should be construed
against the draftsman.
(k) Waiver Consent. (i) Except as expressly provided herein, this
--------------
License Agreement may not be changed, amended, terminated, augmented,
rescinded or discharged (other than in accordance with its terms), in whole
or in part, except by a writing executed by the Parties hereto. No waiver
of any of the provisions or conditions of this License Agreement or any of
the rights of a Party hereto shall be effective or binding unless such
waiver shall be in writing and signed by the Party claimed to have given or
consented thereto. Except to the extent that a Party hereto may have
otherwise agreed in writing, no waiver by that Party of any term, condition
or other provision of this License Agreement, or any breach thereof by any
other Party shall be deemed to be a waiver of any other term, condition or
provision or any breach thereof, or any subsequent breach of the same term,
condition or provision by the other Party, nor shall any forbearance by the
first Party or Parties to seek a remedy for any noncompliance or breach by
the other Party be deemed to be a waiver by the first Party of its, his,
her or their rights and remedies with respect to such noncompliance or
breach.
(ii) If either Party requires the consent or approval of the other
Party for the taking of, or omitting to take, any action under this License
Agreement, such consent or approval shall not be unreasonably withheld or
delayed.
(l) Governing Law. This License Agreement shall in all respects be
-------------
construed in accordance with and governed by the laws of the State of New
York, without regard to its conflict of law provisions.
(m) Survival. The provisions of Sections 4, 5, 6, 8, 9, 10 and 11
-------- -------- - - - - - -- --
shall survive the termination of this License Agreement for any reason.
IN WITNESS WHEREOF, each of the Parties hereto has caused this License
Agreement to be executed as of the date first above written.
CSG SYSTEMS, INC. (formerly known as CABLE SER VICES
GROUP, INC.) ("CSG")
SCHEDULE 5.6--PAGE 11
<PAGE>
Signed By: /s/ John P. Pogge
-------------------
John P. Pogge
Executive Vice President
FIRST DATA TECHNOLOGIES, INC. ("FDT")
Signed By: /s/ Charles T. Fote
--------------------
Charles T. Fote
Print Name: Charles T. Fote
-------------------
Title: Executive Vice President
------------------------
SCHEDULE 5.6--PAGE 12
<PAGE>
EXHIBIT 10.41
THIRD AMENDMENT
TO
SUBSCRIBER BILLING SERVICE AGREEMENT
BETWEEN
CSG SYSTEMS, INC.
AND
TCI CABLE MANAGEMENT CORPORATION
This Third Amendment ("Amendment") is executed this 1st day of March, 1996,
and is made by and between CSG Systems, Inc., formerly known as Cable Services
Group, Inc., successor in interest to First Data Resources, Inc. ("CSG") and TCI
Cable Management Corporation ("Buyer"). CSG and Buyer entered into a certain
Subscriber Billing Service Agreement dated April 29, 1992, as amended by an
Amendment to Subscriber Billing Service Agreement dated April 8, 1994, and a
Second Amendment regarding ESP for Primestar dated March 6, 1996 (collectively,
"the Agreement"), and now desire to further amend the Agreement in accordance
with the terms and conditions set forth in this Amendment. If the terms and
conditions set forth in this Amendment shall be in conflict with the Agreement,
the terms and conditions of this Agreement shall control. Upon execution of this
Amendment by the parties, any subsequent reference to the Agreement between the
parties shall mean the Agreement as amended by this Amendment. Except as amended
by this Amendment, the terms and conditions set forth in the Agreement shall
continue in full force and effect according to their terms.
IN CONSIDERATION of the promises set forth herein, CSG and Buyer agree as
follows:
1. In addition to the Cable System Locations currently receiving the CSG
Services, the Agreement is hereby amended to add the following Cable
System Location:
<TABLE>
<CAPTION>
System Location Estimated Conversion Date Estimated number of subscribers
--------------- ------------------------- -------------------------------
<S> <C> <C>
Oil City, PA April 1, 1996 8,000
</TABLE>
2. Section 8.1 of the Agreement is hereby amended to add the following to
the end of the Section:
However, with respect to the Cable System Location of Oil City, PA and
any other system locations added to the Agreement and converted
subsequent to March 31, 1996, the Original Term shall end on December
31, 1998.
IN WITNESS WHEREOF, the parties have executed this Second Amendment as of
the day first stated above.
TCI CABLE MANAGEMENT CORPORATION CSG SYSTEMS, INC.
By: /s/ Jim Workman By: /s/ George F. Haddix
--------------------------------- -------------------------------
Title: Director, Billing Services Title: President
------------------------------ -----------------------------
<PAGE>
EXHIBIT 10.42
FOURTH AMENDMENT
TO
SUBSCRIBER BILLING SERVICE AGREEMENT
BETWEEN
CSG SYSTEMS, INC.
AND
TCI CABLE MANAGEMENT CORPORATION
This Fourth Amendment ("Amendment") is executed this 29th day of March,
1996, and is made by and between CSG Systems, Inc., formerly known as Cable
Services Group, Inc., successor in interest to First Data Resources, Inc.
("CSG") and TCI Cable Management Corporation ("Buyer"). CSG and Buyer entered
into a certain Subscriber Billing Service Agreement dated April 29, 1992, as
amended by an Amendment to Subscriber Billing Service Agreement dated April 8,
1994, a Second Amendment regarding ESP for Primestar dated March 6, 1996, and a
Third Amendment dated March 1, 1996 (collectively, "the Agreement"), and now
desire to further amend the Agreement in accordance with the terms and
conditions set forth in this Amendment. If the terms and conditions set forth
in this Amendment shall be in conflict with the Agreement, the terms and
conditions of this Amendment shall control. Upon execution of this Amendment by
the parties, any subsequent reference to the Agreement between the parties shall
mean the Agreement as amended by this Amendment. Except as amended by this
Amendment, the terms and conditions set forth in the agreement shall continue in
full force and effect according to their terms.
IN CONSIDERATION of the promises set forth herein, CSG and Buyer agree as
follows:
1. In addition to the Cable System Locations currently receiving the CSG
Services, the Agreement is hereby amended to add the following Cable
System Location:
<TABLE>
<CAPTION>
System Location Estimated Conversion Date Estimated number of subscribers
--------------------------- ------------------------- -------------------------------
<S> <C> <C>
South San Francisco July 1, 1996 19,000
Burlingame, CA July 1, 1996 8,500
</TABLE>
IN WITNESS WHEREOF, the parties have executed this Second Amendment as of
the day first stated above.
TCI CABLE MANAGEMENT CORPORATION CSG SYSTEMS, INC.
By: /s/ Jim Workman By: /s/ George F. Haddix
----------------------------------- --------------------------------
Title: Director, Billing Services Title: President
-------------------------------- -----------------------------
<PAGE>
EXHIBIT 10.43
FIFTH AMENDMENT
TO
SUBSCRIBER BILLING SERVICE AGREEMENT
BETWEEN
CSG SYSTEMS, INC.
AND
TCI CABLE MANAGEMENT CORPORATION
This Fifth Amendment ("Amendment") is executed this 30th day of September,
1996, and is made by and between CSG Systems, Inc., formerly known as Cable
Services Group, Inc., successor in interest to First Data Resources, Inc.
("CSG") and TCI Cable Management Corporation ("Buyer"). CSG and Buyer entered
into a certain Subscriber Billing Service Agreement dated April 29, 1992, as
amended by an Amendment to Subscriber Billing Service Agreement dated April 8,
1994, a Second Amendment regarding ESP for Primestar dated March 6, 1996, a
Third Amendment dated March 1, 1996, and a Fourth Amendment dated March 29, 1996
(collectively, "the Agreement"), and now desire to further amend the Agreement
in accordance with the terms and conditions set forth in this Amendment. If the
terms and conditions set forth in this Amendment shall be in conflict with the
Agreement, the terms and conditions of this Amendment shall control. Upon
execution of this Amendment by the parties, any subsequent reference to the
Agreement between the parties shall mean the Agreement as amended by this
Amendment. Except as amended by this Amendment, the terms and conditions set
forth in the agreement shall continue in full force and effect according to
their terms.
IN CONSIDERATION of the promises set forth herein, CSG and Buyer agree as
follows:
1. In addition to the Cable System Locations currently receiving the CSG
Services, the Agreement is hereby amended to add the following Cable
System Location:
<TABLE>
<CAPTION>
System Location Estimated Conversion Date Estimated number of subscribers
--------------- ------------------------- -------------------------------
<S> <C> <C>
Foster City, CA November 1996 9,000
</TABLE>
IN WITNESS WHEREOF, the parties have executed this Fifth Amendment as of
the day first stated above.
TCI CABLE MANAGEMENT CORPORATION CSG SYSTEMS, INC.
By: /s/ Sundra Simmons By: /s/ George F. Haddix
---------------------------------- ---------------------------------
Title: Division Billing Coordinator Title: President
------------------------------- ------------------------------
<PAGE>
EXHIBIT 11.01
CSG SYSTEMS INTERNATIONAL, INC.
STATEMENT OF NET LOSS PER COMMON AND EQUIVALENT SHARE
<TABLE>
<S> <C>
For the year ended December 31, 1996:
Weighted average common shares outstanding............. 24,988,244
----------
Shares used in computation............................. 24,988,244
==========
Loss before extraordinary item......................... $(2,476,000)
Extraordinary loss from early extinguishment of debt... (1,260,000)
-----------
Net loss............................................... $(3,736,000)
===========
Net loss per common and equivalent share:
Loss before extraordinary item............... $ (0.10)
Extraordinary loss from early extinguishment
of debt.................................... (0.05)
-----------
Net loss per common and equivalent share..... $ (0.15)
===========
</TABLE>
For the year ended December 31, 1995 and the period from inception (October 17,
1994) through December 31, 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Weighted average common shares outstanding........ 4,243,000 4,243,000
Common equivalent shares from stock options
granted during the twelve-month period prior
to the Company's initial public offering....... 251,750 251,750
Common equivalent shares attributable to:
Redeemable Convertible Series A
Preferred Stock.......................... 17,999,998 17,999,998
---------- ----------
Shares used in computation........................ 22,494,748 22,494,748
========== ==========
Loss before discontinued operations............... $(15,427,000) $(40,464,000)
Loss from discontinued operations................. ( 3,753,000) ( 239,000)
------------ ------------
Net loss.......................................... $(19,180,000) $(40,703,000)
============ ============
Net loss per common and equivalent share:
Loss before discontinued operations........ $ (0.69) $ (1.80)
Loss from discontinued operations.......... (0.17) (0.01)
------------ ------------
Net loss per common and equivalent share... $ (0.86) $ (1.81)
============ ============
</TABLE>
<PAGE>
EXHIBIT 21.01
CSG SYSTEMS INTERNATIONAL, INC.
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
STATE OR COUNTRY
SUBSIDIARY OF INCORPORATION
- ---------- ----------------
<S> <C>
CSG Systems, Inc. Delaware
Bytel Limited United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Annual Report on Form 10-K, into the Company's
previously filed Registration Statement File No.'s 333-10315 and 333-04286.
ARTHUR ANDERSEN LLP
Omaha, Nebraska
March 28, 1997
<PAGE>
EXHIBIT 24.01
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that I do hereby constitute and
appoint Neal C. Hansen, George F. Haddix, John P. Pogge, and David I. Brenner,
and each of them individually, as my true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for me and in my
name, place, and stead in my capacity as a director of CSG Systems
International, Inc. to sign the Annual Report on Form 10-K of CSG Systems
International, Inc. for the fiscal year ended December 31, 1996, and to file
such Annual Report, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents, and each of them individually and their
substitutes, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises in connection
with such Annual Report as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents or any of them, or their or his substitutes or substitute, lawfully
may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney this 21st
day of March, 1997.
/s/ Royce J. Holland
---------------------------
Royce J. Holland
/s/ Bernard W. Reznicek
---------------------------
Bernard W. Reznicek
/s/ Rockwell A. Schnabel
---------------------------
Rockwell A. Schnabel
/s/ Frank V. Sica
---------------------------
Frank V. Sica
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,134
<SECURITIES> 0
<RECEIVABLES> 40,522
<ALLOWANCES> 819
<INVENTORY> 0
<CURRENT-ASSETS> 48,456
<PP&E> 23,757
<DEPRECIATION> 10,664
<TOTAL-ASSETS> 114,910
<CURRENT-LIABILITIES> 44,026
<BONDS> 22,500
0
0
<COMMON> 255
<OTHER-SE> 41,709
<TOTAL-LIABILITY-AND-EQUITY> 114,910
<SALES> 0
<TOTAL-REVENUES> 132,297
<CGS> 0
<TOTAL-COSTS> 74,245
<OTHER-EXPENSES> 20,206
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,168
<INCOME-PRETAX> (2,476)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,476)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,260)
<CHANGES> 0
<NET-INCOME> (3,736)
<EPS-PRIMARY> (0.15)<F1>
<EPS-DILUTED> 0
<FN>
<F1>EPS is basic EPS as common stock equivalents are anti-dilutive.
</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, 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.
CSG Phoenix/TM/ 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. Release Version 0.7 of CSG Phoenix was
delivered to two customers in December 1996 for testing and to facilitate their
implementation planning activities. Release Version 1.1, which contains
additional functionality for convergence including telephony, but does not
contain certain functionality related to statement processing, is scheduled to
be delivered by the end of March 1997 for testing and integration at customer
sites. Release Version 1.2, which will include additional functionality
originally scheduled for Release Version 1.0, is scheduled to be delivered to
customer sites in the second quarter of 1997. The Company presently expects a
beta site to be installed in the third quarter of 1997. There can be no
assurance that the CSG Phoenix product will be delivered 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
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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
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.
<PAGE>
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.
