<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 333-48135
PROSPECTUS
3,498,700 Shares
LOGO
CSG Systems International, Inc.
COMMON STOCK
----------------
ALL OF THE 3,498,700 SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE BEING
SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING
STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM
THE SALE OF SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDERS. OF
THE 3,498,700 SHARES OF COMMON STOCK BEING OFFERED HEREBY,
2,798,960 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED
STATES AND CANADA BY THE U.S. UNDERWRITERS AND 699,740
SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED
STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS. SEE "UNDERWRITERS." THE COMMON
STOCK OF THE COMPANY IS QUOTED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "CSGS."
ON APRIL 6, 1998, THE REPORTED LAST
SALE PRICE OF THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET WAS
$47 3/16 PER SHARE.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
PRICE $47 3/16 A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS (1) STOCKHOLDERS (2)
------------ --------------- ----------------
<S> <C> <C> <C>
Per Share......................... $47.1875 $2.1875 $45.00
Total (3)......................... $165,094,906 $7,653,406 $157,441,500
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) See "Underwriters" for information relating to the payment of expenses in
connection with the Offering.
(3) Certain Selling Stockholders have granted to the U.S. Underwriters an
option, exercisable within 30 days of the date hereof, to purchase up to
an aggregate of 524,805 additional Shares of Common Stock at the price to
public less underwriting discounts and commissions for the purpose of
covering over-allotments, if any. If the U.S. Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions and proceeds to selling stockholders will be $189,859,142,
$8,801,417 and $181,057,725, respectively. The Company will not receive
any proceeds from the sale of Shares by the Selling Stockholders. See
"Principal and Selling Stockholders" and "Underwriters."
----------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about April 13, 1998 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.
----------------
MORGAN STANLEY DEAN WITTER BT ALEX. BROWN
April 6, 1998
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, BY ANY SELLING STOCKHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREIN SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 12
Price Range of Common Stock and Dividend Policy.......................... 12
Dilution................................................................. 12
Capitalization........................................................... 13
Selected Financial and Operating Data.................................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 26
Management............................................................... 33
Principal and Selling Stockholders....................................... 35
Description of Capital Stock............................................. 38
Certain United States Federal Tax Consequences for Non-U.S. Holders...... 41
Underwriters............................................................. 44
Legal Matters............................................................ 47
Experts.................................................................. 47
Available Information.................................................... 47
Incorporation of Certain Information by Reference........................ 48
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
CSG Phoenix(TM), CSG Vantage(TM), Advanced Customer Service
Representative(TM), ACSR(TM), CCS(TM), Customer Interaction Tracking(TM),
CIT(TM), Enhanced Statement Presentation(TM), ESP(TM), CSG VantagePoint(TM),
CSG Dispatch(TM), CSG TechNet(TM), CSG.web(TM), IVR(TM), UHS(TM) and
SUMMITrak(TM) are trademarks of the Company. All other trademarks, service
marks, or trade names referred to in this Prospectus are the property of the
respective owners.
----------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Risk Factors," among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Prospectus,
including, without limitation, in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in filings by the
Company with the Securities and Exchange Commission (the "Commission"), in the
Company's press releases and in oral statements made by authorized officers of
the Company. When used in this Prospectus, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, included or
incorporated by reference in this Prospectus. Unless the context otherwise
requires, "CSG" or the "Company" refers to CSG Systems International, Inc. and
its subsidiaries.
THE COMPANY
The Company is a leading provider of customer care and billing solutions for
cable television and direct broadcast satellite ("DBS") providers, and also
serves on-line services and telecommunications providers. The Company's
products and services enable its clients to focus on their core businesses,
improve customer service, and enter new markets and operate more efficiently.
The Company offers its clients a full suite of processing and related services,
and software and professional services which automate customer care and billing
functions. These functions include set-up and activation of customer accounts,
sales support, order processing, invoice calculation, production and mailing,
management reporting, and customer analysis for target marketing. The Company's
products and services combine the reliability and high volume transaction
processing capabilities of a mainframe platform with the flexibility of
client/server architecture. The Company generated revenue of $171.8 million in
1997 compared to $132.3 million in 1996, an increase of 29.9%, and revenue grew
at a compound annual growth rate of 27.0% over the three year period ended
December 31, 1997.
The Company has established a leading presence by developing strategic
relationships with major participants in the cable television and DBS
industries, and derived approximately three-quarters of its revenues in 1997
from the U.S. cable television industry. The Company's U.S. clients include six
of the ten largest cable television service providers, four Regional Bell
Operating Companies ("RBOCs") for video services, two DBS service providers,
and an on-line services company. During 1997, the Company derived approximately
77% of its total revenues from processing and related services. At December 31,
1997, the Company was servicing client sites having an aggregate of 21.1
million customers in the U.S., compared to 19.2 million customers serviced as
of December 31, 1996. The Company has contracts to convert a significant number
of additional customers to its customer care and billing systems. From January
1, 1998 through February 28, 1998, the Company converted and processed
approximately 1.6 million additional customers on its systems.
The convergence of communications markets and growing competition are
increasing the complexity and cost of managing the interaction between
communications service providers and their customers. Customer care and billing
systems coordinate all aspects of the customer's interaction with a service
provider, from initial set-up and activation, to service activity monitoring,
through billing and accounts receivable management. The growing complexity of
communications services and the manner in which they are packaged and priced,
has created increased demand for customer care and billing systems which
deliver enhanced flexibility and functionality. Because of the significant
level of technological expertise and capital resources required to develop and
implement such systems successfully, the majority of cable television, DBS, and
wireless service providers have elected to outsource customer care and billing.
The Company entered into a 15-year contract (the "TCI Contract") with a Tele-
Communications, Inc. ("TCI") affiliate during the third quarter of 1997.
Subject to performance of the Company's obligations, the contract provides for:
(i) the Company to be TCI's exclusive provider of customer care and billing
solutions for analog and digital cable television, on-line services, wireline
residential telephony, and print and mail services; and (ii) minimum financial
commitments by TCI based on a minimum of 13.0 million TCI cable television
customers, of which approximately 4 million were on the Company's system prior
to the execution of the TCI Contract.
3
<PAGE>
The Company expanded its operations internationally through the acquisition
of Bytel Limited ("Bytel") in June 1996. Bytel, established in 1992, is the
leading provider of customer care and billing solutions in the United Kingdom
to providers of combined cable television and telephony (business and
residential) services. Bytel serves a total of approximately 1 million
customers, approximately 48% of whom receive multiple services. During 1997,
the Company derived 9.6% of its total revenues from international sources.
GROWTH STRATEGY
The Company's growth strategy is designed to provide revenue and profit
growth. The key elements of the strategy include:
Expand Core Processing Business. The Company will continue to leverage its
investment and expertise in high-volume transaction processing to expand its
processing business. The processing business provides highly predictable
recurring revenues through multi-year contracts with a client base which
includes leading communications service providers in growing markets. The
Company increased the number of customers processed on its systems from 16.4
million as of December 31, 1994 to 21.1 million as of December 31, 1997, with
approximately 11 million additional customers under contract to be converted.
The Company's approach to customer care and billing provides a full suite of
products and services which combines the reliability and high volume
transaction processing capabilities of a mainframe platform with the
flexibility of client/server architecture.
Introduce New Products and Services. The Company has a significant installed
client base to which it can sell additional value-added products and services.
Through the introduction of new client/server software applications, including
Advanced Customer Service Representative ("ACSR"), Enhanced Statement
Presentation ("ESP") and CSG VantagePoint, the Company has increased its annual
revenue per customer from $5.30 in 1994 to $7.73 in 1997. The Company will
continue to develop software applications, which will enhance and extend the
functionality of its customer care and billing solution and also provide
additional revenue opportunities.
Enter New Markets. As communications markets converge, the Company's products
and services can facilitate efficient entry into new markets by existing or new
clients. For example, as the cable television providers expand into on-line
services and telephony, the Company will continue to offer the customer care
and billing solutions necessary to meet their needs. The Company also seeks to
identify other industries, such as utilities, that with modifications to the
Company's existing technology, could be served by the Company's customer care
and billing solutions.
Enhance Growth Through Focused Acquisitions. The Company follows a
disciplined approach to acquire assets and businesses which provide the
technology and technical personnel to expedite the Company's product
development efforts, provide complementary products or services, or provide
access to new markets or clients.
Continue Technology Leadership. The Company believes that its technology in
customer care and billing solutions gives communications service providers a
competitive advantage. The Company's continuing investment in research and
development is designed to position the Company to meet the growing and
evolving needs of existing and potential clients.
Pursue International Opportunities. The Company believes that privatization
and deregulation in international markets presents new opportunities for
customer care and billing providers. In the United Kingdom, Bytel is the
leading provider of customer care and billing solutions to providers of
combined cable television and telephony (business and residential) services.
The Company expects to complete major project enhancements to Bytel's customer
care and billing system in 1998, including UNIX/Oracle platform conversion and
internationalization to accommodate various currencies, postal codes, and tax
requirements. The Company intends to market the product in European and other
international markets.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Selling Stockholders............. 3,498,700 shares (1)
Common Stock offered in:
U.S. Offering........................ 2,798,960 shares (1)
International Offering............... 699,740 shares
Total.............................. 3,498,700 shares (1)
Common Stock outstanding.............. 25,485,780 shares (2)
Use of Proceeds....................... The Company will not receive any of the net
proceeds
from the Offering.
Nasdaq National Market Symbol......... CSGS
</TABLE>
- --------
(1) Assumes the over-allotment option granted to the U.S. Underwriters will not
be exercised.
(2) As of January 31, 1998. Excludes: (i) 2,540,835 shares of Common Stock
issuable upon the exercise of stock options granted under the Company's
stock incentive plans, of which options to purchase 2,148,645 shares are
currently outstanding but not exercisable and options to purchase 392,190
shares are currently outstanding and exercisable; and (ii) warrants to
purchase up to 1,500,000 shares at $24.00 per share issued to a TCI
affiliate, which are currently outstanding but not exercisable.
RISK FACTORS
Prior to making an investment in the Common Stock offered hereby, prospective
purchasers of the Common Stock should take into account the specific
considerations set forth under "Risk Factors" as well as the other information
included or incorporated by reference in this Prospectus.
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The summary financial and operating data presented below for the year ended
December 31, 1993, the eleven months ended November 30, 1994, the one month
ended December 31, 1994, and the years ended December 31, 1995, 1996 and 1997
have been derived from the Company's and the Predecessor's (as defined below)
audited consolidated financial statements. The data presented below should be
read in conjunction with, and are qualified in their entirety by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto (the "Consolidated Financial Statements") included and incorporated by
reference in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR (1) COMPANY (1) (2)
------------------------- ----------------------------------------------
11 MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, ---------------------------------
1993 1994 1994 1995 1996 1997
------------ ------------ ------------ --------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Processing and related
services.............. $75,578 $76,081 $ 7,757 $ 96,343 $ 113,422 $ 131,399
Software license and
maintenance fees...... -- -- -- 57 14,736 26,880
Professional services.. -- -- -- 4 4,139 13,525
------- ------- --------- --------- ---------- ----------
Total revenues....... 75,578 76,081 7,757 96,404 132,297 171,804
------- ------- --------- --------- ---------- ----------
Expenses:
Cost of revenues:
Cost of processing and
related services:
Direct costs.......... 34,503 34,977 3,647 46,670 52,027 58,259
Amortization of
acquired software
(1).................. 2 -- 917 11,000 11,003 10,596
Amortization of
client contracts and
related intangibles
(1).................. 1,518 1,594 341 4,092 4,092 4,293
------- ------- --------- --------- ---------- ----------
Total cost of
processing and
related services.... 36,023 36,571 4,905 61,762 67,122 73,148
Cost of software
license and
maintenance fees...... -- -- -- -- 5,040 9,787
Cost of professional
services.............. -- -- -- -- 2,083 7,047
------- ------- --------- --------- ---------- ----------
Total cost of
revenues............ 36,023 36,571 4,905 61,762 74,245 89,982
------- ------- --------- --------- ---------- ----------
Gross margin............ 39,555 39,510 2,852 34,642 58,052 81,822
------- ------- --------- --------- ---------- ----------
Operating expenses:
Research and
development:
Research and
development........... 5,591 7,680 1,044 14,278 20,206 22,586
Charge for purchased
research and
development (1) (5)... -- -- 40,953 -- -- 105,484
Impairment of
capitalized software
development costs
(6)................... -- -- -- -- -- 11,737
Selling and marketing.. 2,012 3,054 293 3,770 8,213 10,198
General and
administrative:
General and
administrative........ 11,431 9,461 3,073 11,406 13,702 19,385
Amortization of
goodwill and other
intangibles (1)....... 1,052 826 547 5,680 6,392 6,927
Impairment of
intangible assets
(7)................... -- -- -- -- -- 4,707
Stock-based employee
compensation (1)...... -- -- -- 841 3,570 449
Depreciation........... 3,847 3,520 433 5,687 5,121 6,884
------- ------- --------- --------- ---------- ----------
Total operating
expenses............ 23,933 24,541 46,343 41,662 57,204 188,357
------- ------- --------- --------- ---------- ----------
Operating income
(loss)................. 15,622 14,969 (43,491) (7,020) 848 (106,535)
------- ------- --------- --------- ---------- ----------
Other income (expense):
Interest expense....... (1,941) (1,067) (769) (9,070) (4,168) (5,324)
Interest income........ 205 227 39 663 844 1,294
Other.................. -- -- -- -- -- 349
------- ------- --------- --------- ---------- ----------
Total other.......... (1,736) (840) (730) (8,407) (3,324) (3,681)
------- ------- --------- --------- ---------- ----------
Income (loss) before
income taxes,
extraordinary item and
discontinued
operations............. 13,886 14,129 (44,221) (15,427) (2,476) (110,216)
Income tax (provision)
benefit............... (5,539) (5,519) 3,757 -- -- --
------- ------- --------- --------- ---------- ----------
Income (loss) before
extraordinary item and
discontinued
operations............. 8,347 8,610 (40,464) (15,427) (2,476) (110,216)
Extraordinary loss from
early extinguishment
of debt (3) (5)....... -- -- -- -- (1,260) (577)
------- ------- --------- --------- ---------- ----------
Income (loss) from
continuing operations.. 8,347 8,610 (40,464) (15,427) (3,736) (110,793)
Discontinued operations
(4):
Loss from operations... -- -- (239) (3,093) -- --
Gain (loss) from
disposition........... -- -- -- (660) -- 7,922
------- ------- --------- --------- ---------- ----------
Total gain (loss)
from discontinued
operations.......... -- -- (239) (3,753) -- 7,922
------- ------- --------- --------- ---------- ----------
Net income (loss)....... $ 8,347 $ 8,610 $ (40,703) $ (19,180) $ (3,736) $ (102,871)
======= ======= ========= ========= ========== ==========
Net loss per common
share (basic and
diluted) (8):
Loss attributable to common stockholders......... $ (15.75) $ (5.51) $ (.14) $ (4.32)
Extraordinary loss from early extinguishment of
debt............................................ -- -- (.06) (.02)
Gain (loss) from discontinued operations......... (.09) (1.09) -- .31
--------- --------- ---------- ----------
Net loss attributable to common stockholders..... $ (15.84) $ (6.60) $ (.20) $ (4.03)
========= ========= ========== ==========
Weighted average common shares (basic and diluted)
(8).............................................. 2,587,500 3,450,415 21,872,860 25,497,033
========= ========= ========== ==========
</TABLE>
(footnotes appear on the following page)
6
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR (1) COMPANY (1) (2)
------------------------- ----------------------------------------
11 MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, ---------------------------
1993 1994 1994 1995 1996 1997
------------ ------------ ------------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA (AT PERIOD
END):
Number of clients'
customers processed... 15,410 16,347 16,435 17,975 19,212 21,146
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents........... $ 61 $ 22 $ 6,650 $ 3,603 $ 6,134 $ 20,417
Working capital........ 7,570 8,356 4,681 2,359 4,430 3,518
Total assets (5)...... 64,298 65,695 130,160 105,553 114,910 179,793
Total debt (3) (5)..... 16,375 10,438 95,000 85,068 32,500 135,000
Redeemable convertible
preferred stock (3).. -- -- 59,363 62,985 -- --
Stockholders' equity
(deficit) (1) (3) (5)
(6)................... 35,980 43,031 (40,429) (61,988) 41,964 (33,086)
</TABLE>
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(1) The Company was formed in October 1994 and acquired all of the outstanding
shares of CSG Systems, Inc., formerly Cable Services Group, Inc. (the
"Predecessor"), from First Data Corporation ("FDC") on November 30, 1994
(the "Acquisition"). The Company did not have any substantive operations
prior to 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. The Company incurred certain acquisition-related
charges as a result of the Acquisition. These acquisition-related charges
included an immediate charge of $40.9 million as of the Acquisition date
for purchased research and development and recurring, periodic amortization
of acquired software, client contracts and related intangibles, noncompete
agreement and goodwill, and stock-based employee compensation.
(2) On June 28, 1996, the Company acquired all of the outstanding shares of
Bytel. The acquisition was accounted for using the purchase method of
accounting.
(3) The Company completed an initial public offering ("IPO") of its Common
Stock in March 1996. The Company sold 3,335,000 shares of Common Stock
resulting in net proceeds to the Company of $44.8 million. Such proceeds
were used to repay long-term debt of $40.3 million and to pay accrued
dividends of $4.5 million on Redeemable Convertible Preferred Stock
("Preferred Stock"). As of the closing of the IPO, all of the Preferred
Stock was automatically converted into 17,999,998 shares of Common Stock.
The Company incurred an extraordinary loss of $1.3 million for the write-
off of deferred financing costs attributable to the portion of the long-
term debt repaid.
(4) Contemporaneously with the Acquisition, the Company purchased from FDC all
of the outstanding capital stock of Anasazi Inc. ("Anasazi"). On August 31,
1995, the Company completed a substantial divestiture of Anasazi, resulting
in the Company owning less than 20% of Anasazi. In September 1997, the
Company sold its remaining ownership interest in Anasazi for $8.6 million
in cash. The Company accounted for its ownership in Anasazi as discontinued
operations after its acquisition in 1994.
(5) In September 1997, the Company purchased certain SUMMITrak assets from TCI
and entered into the TCI Contract. The total purchase price for the assets
was approximately $159 million, $106.0 million of which was paid in cash at
closing, with approximately $105 million allocated to purchased research
and development with the remaining amount allocated to long-lived assets.
See Note 4 to the Consolidated Financial Statements for a description of
the balance of the purchase price. The purchased research and development
was charged to operations in the fourth quarter of 1997. The Company
financed the asset acquisition with a $150.0 million term credit facility
(the "Term Credit Facility"), of which $27.5 million was used to retire the
Company's previously outstanding debt, resulting in an extraordinary loss
of $.6 million for the write-off of deferred financing costs attributable
to such debt.
(6) During the fourth quarter of 1997, the Company recorded a non-recurring
charge of $11.7 million to reduce certain CSG Phoenix assets to their net
realizable value as of December 31, 1997.
(7) During the fourth quarter of 1997, the Company recorded a non-recurring
charge of $4.7 million for the impairment of certain intangible assets
related to software systems which the Company decided to no longer market
and support.
(8) Net loss per common share and the shares used in the per share computation
have been computed on the basis described in Note 2 to the Consolidated
Financial Statements.
7
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information included or incorporated by reference in
this Prospectus, in evaluating an investment in the shares of Common Stock
offered hereby.
NET LOSSES
The Company has recorded annual net losses since inception (October 17,
1994) through December 31, 1997. These net losses have resulted from several
factors, including: (i) amortization of intangible assets (acquired software,
client contracts and related intangibles, and noncompete agreements and
goodwill); (ii) charge for purchased research and development; (iii) charge
for impairment of software development costs; (iv) charge for impairment of
intangible assets; (v) interest expense; (vi) stock-based employee
compensation expense; (vii) extraordinary losses from early extinguishment of
debt; and (viii) discontinued operations. There can be no assurance that the
Company will achieve or sustain profitability in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RELIANCE ON CCS
The Company derived approximately 77.3% and 76.7% of its total revenues from
its primary product, Communications Control System ("CCS"), and related
products and services in the years ended December 31, 1996 and 1997,
respectively. CCS and related products and services are expected to provide
the substantial majority of the Company's total revenues in the foreseeable
future. The Company's results will depend upon continued market acceptance of
CCS and related products and services, as well as the Company's ability to
continue to adapt and modify them to meet the changing needs of its clients.
Any reduction in demand for CCS would have a material adverse effect on the
financial condition and results of operations of the Company. See "Business--
CSG Services and Products."
DEPENDENCE ON MAJOR CLIENTS
During the years ended December 31, 1996 and 1997, revenues from TCI
represented approximately 25.9% and 32.9% of total revenues, respectively, and
revenues from Time Warner Cable and its affiliated companies ("Time Warner")
represented approximately 22.9% and 20.1% of total revenues, respectively. As
a result of the TCI Contract, revenues derived from TCI are expected to
increase significantly as a percentage of revenue. Loss of all or a
significant part of the business of either TCI or Time Warner would have a
material adverse effect on the financial condition and results of operations
of the Company. See "Business--Clients."
REQUIREMENTS OF THE TCI CONTRACT
The TCI Contract requires the conversion of a significant number of
additional TCI customers onto the Company's customer care and billing system.
See "--Conversion to the Company's Systems." The TCI Contract provides certain
performance criteria and other obligations to be met by the Company. The
Company is subject to various remedies and penalties if it fails to meet the
performance criteria or other obligations. The Company is also subject to an
annual technical audit to determine whether the Company's products and
services include innovations in features and functions that have become
standard in the industry. If an audit determines the Company is not providing
such an innovation and it fails to do so within the schedule required by the
contract, then TCI would be released from its exclusivity obligation to the
extent necessary to obtain the innovation from a third party. To fulfill the
TCI Contract and to remain competitive, the Company believes it will be
required to develop new and advanced features to existing products and
services, new products and services, and new technologies, all of which will
require substantial research and development. TCI also would have the right to
terminate the TCI Contract in the event of certain defaults by the Company.
The termination of the TCI Contract or of any of TCI's commitments under the
contract would have a material adverse effect on the financial condition and
results of operations of the Company.
8
<PAGE>
RENEWAL OF TIME WARNER CONTRACTS
The Company provides services to Time Warner under multiple, separate
contracts with various Time Warner affiliates. These contracts are scheduled
to expire at various times. The failure of Time Warner to renew contracts
representing a significant part of its business with the Company would have a
material adverse effect on the financial condition and results of operations
of the Company.
CONVERSION TO THE COMPANY'S SYSTEMS
The Company's ability to convert new client sites to its customer care and
billing systems on a timely and accurate basis is necessary to meet the
Company's contractual commitments and to achieve its business objectives.
Converting multiple sites under the schedules required by contracts or
business requirements is a difficult and complex process. One of the
difficulties in the conversion process is that competition for the necessary
qualified personnel is intense and the Company may not be successful in
attracting and retaining the personnel necessary to complete conversions on a
timely and accurate basis. The inability of the Company to perform the
conversion process timely and accurately would have a material adverse effect
on the results of operations of the Company.
DEPENDENCE ON CABLE TELEVISION INDUSTRY
The Company's business is concentrated in the cable television industry,
making the Company susceptible to a downturn in that industry. During the
years ended December 31, 1996 and 1997, the Company derived 77% and 73%,
respectively, of its revenues from companies in the U.S. cable television
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.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
The market for customer care and billing 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 products and 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. Substantial
research and development will be required to maintain the competitiveness of
the Company's products and services in the market. Development projects can be
lengthy and costly, and are subject to changing requirements, programming
difficulties, a shortage of qualified personnel, 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.
CONVERGING COMMUNICATIONS MARKETS
The Company's growth strategy is based in large part on the continuing
convergence and growth of the cable television, 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 Company's growth.
COMPETITION
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
9
<PAGE>
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 already have significant
international operations. There can be no assurance that the Company will be
able to compete successfully with its existing competitors or with new
competitors. See "Business--Competition."
CLIENT FAILURE TO RENEW OR UTILIZE CONTRACTS
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. Many of the Company's contracts do not require clients to make any
minimum purchases, and contracts are cancelable by clients under certain
conditions.
ATTRACTION AND RETENTION OF PERSONNEL
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 one of
those executive officers is party to an employment agreement with the Company,
and such agreement is terminable 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, particularly in the areas of research and development
and technical support. The Company may not be successful in attracting and
retaining the personnel it requires.
VARIABILITY OF QUARTERLY RESULTS
The Company's quarterly revenues and results, particularly relating to
software and professional services, may fluctuate depending on various
factors, including the timing of executed contracts and the delivery of
contracted services or products, the cancellation of the Company's services
and products by existing or new clients, the hiring of additional staff, new
product development and other expenses, and changes in sales commission
policies. No assurance can be given that results will not vary due to these
factors. Fluctuations in quarterly results may result in volatility in the
market price of the Company's Common Stock.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
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. See "Business--Proprietary Rights and Licenses."
INTERNATIONAL OPERATIONS
The Company's business strategy includes a commitment to the marketing of
its products and services internationally, and the Company has acquired and
established operations outside of the U.S. The Company is subject to certain
inherent risks associated with operating internationally. Risks include
product development to meet local requirements such as the conversion to EURO
currency, 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 firmly established
significant 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.
10
<PAGE>
INTEGRATION OF ACQUISITIONS
As part of its growth strategy, the Company seeks to acquire assets,
technology, and businesses which would provide the technology and technical
personnel to expedite the Company's product development efforts, provide
complementary products or services or provide access to new markets and
clients. Acquisitions involve a number of risks and difficulties, including
expansion into new geographic markets and business areas, the requirement to
understand local business practices, the diversion of management's attention
to the assimilation of acquired operations and personnel, potential adverse
short-term effects on the Company's operating results, and the amortization of
acquired intangible assets.
YEAR 2000
The Company's business is dependent upon various computer software programs
and operating systems that utilize dates and process data beyond the year
2000. If the actions taken by the Company to mitigate its risks associated
with the year 2000 are inadequate, there could be a material adverse effect on
the financial condition and results of operations of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
RELATIONSHIP WITH FIRST DATA CORPORATION
The Company has entered into a data processing services agreement with FDC.
The Company is dependent upon FDC to perform these services for the operation
of CCS. The inability of FDC to perform these services satisfactorily could
have a material adverse effect on the financial condition and results of
operations of the Company. The existing agreement is scheduled to expire in
December 2001.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution of $51.7619 in the net tangible book value per share of
the Common Stock. See "Dilution."
11
<PAGE>
USE OF PROCEEDS
All of the shares of Common Stock offered hereby are being sold by the
Selling Stockholders. The Company will not receive any of the proceeds from
the sale of the Shares being offered.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is quoted on the Nasdaq National Market under the symbol
"CSGS." The following table sets forth, for the periods indicated, the range
of high and low sale prices per share of the Common Stock as reported on the
Nasdaq National Market since February 28, 1996, the date trading of the Common
Stock began in connection with the Company's IPO.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
First Quarter (from February 28)............................ $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
1997
First Quarter............................................... 20 1/4 15
Second Quarter.............................................. 31 14 3/4
Third Quarter............................................... 40 1/4 22
Fourth Quarter.............................................. 49 3/4 30 5/8
1998
First Quarter............................................... 45 7/8 35
Second Quarter (through April 6)............................ 49 1/2 45 1/4
</TABLE>
On April 6, 1998, the reported last sale price of the Company's Common Stock
as reported on the Nasdaq National Market was $47 3/16 per share. On January
31, 1998, the number of holders of record of the Common Stock was 253.
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain earnings, if any, to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. The Company's debt agreement also
contains restrictions on the payment of dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 6 to the Consolidated Financial Statements. Any payment of cash dividends
in the future will depend upon the financial condition, capital requirements
and earnings of the Company, as well as other factors the Board of Directors
may deem relevant.
DILUTION
The net tangible book value of the Company as of December 31, 1997 was
approximately ($116.6 million) or ($4.57) per share. Net tangible book value
per share is determined by subtracting the Company's total amount of
liabilities from its total amount of tangible assets and dividing the
remainder by the number of shares of Common Stock outstanding. The Company's
net tangible book value per share will not be affected by the Offering. The
price per share to the public of the shares of Common Stock offered hereby
exceeds the net tangible book value per share prior to the Offering.
Therefore, purchasers of shares of Common Stock in the Offering will realize
immediate and substantial dilution in the net tangible book value of their
shares. The following table, based upon the net tangible book value of the
Company as of December 31, 1997, illustrates the dilution to purchasers of
shares of Common Stock sold in the Offering, based on the public offering
price.
<TABLE>
<S> <C>
Public offering price per share.................................. $47.1875
Net tangible book value per share................................ (4.5744)
--------
Dilution per share purchased in the Offering (1)................. $51.7619
========
</TABLE>
- --------
(1) Excludes as of January 31, 1998: (i) 2,540,835 shares of Common Stock
issuable upon the exercise of stock options granted under the Company's
stock incentive plans, of which options to purchase 2,148,645 shares are
currently outstanding but not exercisable and options to purchase 392,190
shares are currently outstanding and exercisable; and (ii) warrants to
purchase up to 1,500,000 shares at $24.00 per share issued to a TCI
affiliate, which are currently outstanding but not exercisable. To the
extent that any of these options or warrants are exercised, there could be
further dilution to new investors.
12
<PAGE>
CAPITALIZATION
The following table sets forth the current portion of long-term debt and the
total capitalization of the Company at December 31, 1997. The following table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
-----------------
ACTUAL
-----------------
(IN THOUSANDS)
<S> <C>
Current portion of long-term debt............................ $ 6,750
=========
Long-term debt, net of current portion....................... $ 128,250
---------
Stockholders' deficit:
Preferred stock, $0.01 par value per share; 10,000,000
shares authorized; no shares issued and outstanding....... --
Common stock, $0.01 par value per share; 100,000,000 shares
authorized; 25,479,968 shares issued and outstanding (1).. 255
Common stock warrants; 1,500,000 warrants outstanding ($24
per share exercise price)................................. 26,145
Additional paid-in capital................................. 112,870
Deferred employee compensation............................. (636)
Notes receivable from employee stockholders................ (685)
Cumulative translation adjustments......................... (1)
Accumulated deficit........................................ (171,034)
---------
Total stockholders' deficit.............................. (33,086)
---------
Total capitalization................................... $ 95,164
=========
</TABLE>
- --------
(1) Excludes as of January 31, 1998: (i) 2,540,835 shares of Common Stock
issuable upon the exercise of stock options granted under the Company's
stock incentive plans, of which options to purchase 2,148,645 shares are
currently outstanding but not exercisable and options to purchase 392,190
shares are currently outstanding and exercisable; and (ii) warrants to
purchase up to 1,500,000 shares at $24.00 per share issued to a TCI
affiliate, which are currently outstanding but not exercisable.
13
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The selected financial and operating data presented below for the year ended
December 31, 1993, the eleven months ended November 30, 1994, the one month
ended December 31, 1994, and the years ended December 31, 1995, 1996 and 1997
have been derived from the Company's and the Predecessor's consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants, whose report on the years ended December 31,
1995, 1996 and 1997 is included elsewhere in this Prospectus. The data
presented below should be read in conjunction with, and are qualified in their
entirety by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and Notes thereto included and incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR (1) COMPANY (1) (2)
------------------------- ----------------------------------------------
11 MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, ---------------------------------
1993 1994 1994 1995 1996 1997
------------ ------------ ------------ --------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Processing and related
services.............. $75,578 $76,081 $ 7,757 $ 96,343 $113,422 $ 131,399
Software license and
maintenance fees...... -- -- -- 57 14,736 26,880
Professional services.. -- -- -- 4 4,139 13,525
------- ------- --------- --------- ---------- ----------
Total revenues....... 75,578 76,081 7,757 96,404 132,297 171,804
------- ------- --------- --------- ---------- ----------
Expenses:
Cost of revenues:
Cost of processing and
related services:
Direct costs.......... 34,503 34,977 3,647 46,670 52,027 58,259
Amortization of
acquired software
(1).................. 2 -- 917 11,000 11,003 10,596
Amortization of
client contracts and
related intangibles
(1).................. 1,518 1,594 341 4,092 4,092 4,293
------- ------- --------- --------- ---------- ----------
Total cost of
processing and
related services.... 36,023 36,571 4,905 61,762 67,122 73,148
Cost of software
license and
maintenance fees...... -- -- -- -- 5,040 9,787
Cost of professional
services.............. -- -- -- -- 2,083 7,047
------- ------- --------- --------- ---------- ----------
Total cost of
revenues............ 36,023 36,571 4,905 61,762 74,245 89,982
------- ------- --------- --------- ---------- ----------
Gross margin............ 39,555 39,510 2,852 34,642 58,052 81,822
------- ------- --------- --------- ---------- ----------
Operating expenses:
Research and
development:
Research and
development........... 5,591 7,680 1,044 14,278 20,206 22,586
Charge for purchased
research and
development (1) (5)... -- -- 40,953 -- -- 105,484
Impairment of
capitalized software
development costs
(6)................... -- -- -- -- -- 11,737
Selling and marketing.. 2,012 3,054 293 3,770 8,213 10,198
General and
administrative:
General and
administrative........ 11,431 9,461 3,073 11,406 13,702 19,385
Amortization of
goodwill and other
intangibles (1)....... 1,052 826 547 5,680 6,392 6,927
Impairment of
intangible assets
(7)................... -- -- -- -- -- 4,707
Stock-based employee
compensation (1)...... -- -- -- 841 3,570 449
Depreciation........... 3,847 3,520 433 5,687 5,121 6,884
------- ------- --------- --------- ---------- ----------
Total operating
expenses............ 23,933 24,541 46,343 41,662 57,204 188,357
------- ------- --------- --------- ---------- ----------
Operating income
(loss)................. 15,622 14,969 (43,491) (7,020) 848 (106,535)
------- ------- --------- --------- ---------- ----------
Other income (expense):
Interest expense....... (1,941) (1,067) (769) (9,070) (4,168) (5,324)
Interest income........ 205 227 39 663 844 1,294
Other.................. -- -- -- -- -- 349
------- ------- --------- --------- ---------- ----------
Total other.......... (1,736) (840) (730) (8,407) (3,324) (3,681)
------- ------- --------- --------- ---------- ----------
Income (loss) before
income taxes,
extraordinary item and
discontinued
operations............. 13,886 14,129 (44,221) (15,427) (2,476) (110,216)
Income tax (provision)
benefit............... (5,539) (5,519) 3,757 -- -- --
------- ------- --------- --------- ---------- ----------
Income (loss) before
extraordinary item and
discontinued
operations............. 8,347 8,610 (40,464) (15,427) (2,476) (110,216)
Extraordinary loss from
early extinguishment
of debt (3) (5)....... -- -- -- -- (1,260) (577)
------- ------- --------- --------- ---------- ----------
Income (loss) from
continuing operations.. 8,347 8,610 (40,464) (15,427) (3,736) (110,793)
Discontinued operations
(4):
Loss from operations... -- -- (239) (3,093) -- --
Gain (loss) from
disposition........... -- -- -- (660) -- 7,922
------- ------- --------- --------- ---------- ----------
Total gain (loss)
from discontinued
operations.......... -- -- (239) (3,753) -- 7,922
------- ------- --------- --------- ---------- ----------
Net income (loss)....... $ 8,347 $ 8,610 $ (40,703) $ (19,180) $ (3,736) $ (102,871)
======= ======= ========= ========= ========== ==========
Net loss per common
share (basic and
diluted) (8):
Loss attributable to common stockholders......... $ (15.75) $ (5.51) $ (.14) $ (4.32)
Extraordinary loss from early extinguishment of
debt............................................ -- -- (.06) (.02)
Gain (loss) from discontinued operations......... (.09) (1.09) -- .31
--------- --------- ---------- ----------
Net loss attributable to common stockholders..... $ (15.84) $ (6.60) $ (.20) $ (4.03)
========= ========= ========== ==========
Weighted average common shares (basic and diluted)
(8).............................................. 2,587,500 3,450,415 21,872,860 25,497,033
========= ========= ========== ==========
</TABLE>
(footnotes appear on the following page)
14
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR (1) COMPANY (1) (2)
------------------------- ----------------------------------------
11 MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, ---------------------------
1993 1994 1994 1995 1996 1997
------------ ------------ ------------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA (AT PERIOD
END):
Number of clients'
customers processed .. 15,410 16,347 16,435 17,975 19,212 21,146
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents........... $ 61 $ 22 $ 6,650 $ 3,603 $ 6,134 $ 20,417
Working capital........ 7,570 8,356 4,681 2,359 4,430 3,518
Total assets (5)....... 64,298 65,695 130,160 105,553 114,910 179,793
Total debt (3) (5)..... 16,375 10,438 95,000 85,068 32,500 135,000
Redeemable convertible
preferred stock (3)... -- -- 59,363 62,985 -- --
Stockholders' equity
(deficit) (1) (3) (5)
(6)................... 35,980 43,031 (40,429) (61,988) 41,964 (33,086)
</TABLE>
- --------
(1) The Company was formed in October 1994 and acquired all of the outstanding
shares of CSG Systems, Inc., formerly Cable Services Group, Inc., from FDC
on November 30, 1994 (the "Acquisition"). The Company did not have any
substantive operations prior to 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. The
Company incurred certain acquisition-related charges as a result of the
Acquisition. These acquisition-related charges included an immediate
charge of $40.9 million as of the Acquisition date for purchased research
and development and recurring, periodic amortization of acquired software,
client contracts and related intangibles, noncompete agreement and
goodwill, and stock-based employee compensation.
(2) On June 28, 1996, the Company acquired all of the outstanding shares of
Bytel. The acquisition was accounted for using the purchase method of
accounting.
(3) The Company completed an initial public offering of its Common Stock in
March 1996. The Company sold 3,335,000 shares of Common Stock resulting in
net proceeds to the Company of $44.8 million. Such proceeds were used to
repay long-term debt of $40.3 million and to pay accrued dividends of $4.5
million on Preferred Stock. As of the closing of the IPO, all of the
Preferred Stock was automatically converted into 17,999,998 shares of
Common Stock. The Company incurred an extraordinary loss of $1.3 million
for the write-off of deferred financing costs attributable to the portion
of the long-term debt repaid.
(4) Contemporaneously with the Acquisition, the Company purchased from FDC all
of the outstanding capital stock of Anasazi. On August 31, 1995, the
Company completed a substantial divestiture of Anasazi, resulting in the
Company owning less than 20% of Anasazi. In September 1997, the Company
sold its remaining ownership interest in Anasazi for $8.6 million in cash.
The Company accounted for its ownership in Anasazi as discontinued
operations after its acquisition in 1994.
(5) In September 1997, the Company purchased certain SUMMITrak assets from TCI
and entered into the TCI Contract. The total purchase price for the assets
was approximately $159 million, $106.0 million of which was paid in cash
at closing, with approximately $105 million allocated to purchased
research and development with the remaining amount allocated to long-lived
assets. See Note 4 to the Consolidated Financial Statements for a
description of the balance of the purchase price. The purchased research
and development was charged to operations in the fourth quarter of 1997.
The Company financed the asset acquisition with the Term Credit Facility,
of which $27.5 million was used to retire the Company's previously
outstanding debt, resulting in an extraordinary loss of $.6 million for
the write-off of deferred financing costs attributable to such debt.
(6) During the fourth quarter of 1997, the Company recorded a non-recurring
charge of $11.7 million to reduce certain CSG Phoenix assets to their net
realizable value as of December 31, 1997.
(7) During the fourth quarter of 1997, the Company recorded a non-recurring
charge of $4.7 million for the impairment of certain intangible assets
related to software systems which the Company decided to no longer market
and support.
(8) Net loss per common share and the shares used in the per share computation
have been computed on the basis described in Note 2 to the Consolidated
Financial Statements.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Acquisition of CSG Systems, Inc. The Company was formed in October 1994 and
acquired all of the outstanding stock of CSG Systems, Inc. (formerly Cable
Services Group, Inc.) from FDC in November 1994 (the "Acquisition"). CSG
Systems, Inc. had been a subsidiary or division of FDC from 1982 until the
Acquisition. The Company acquired CSG Systems, Inc. for approximately $137
million in cash and accounted for the Acquisition using the purchase method of
accounting. See Note 3 to the Consolidated Financial Statements for additional
discussion.
Public Offering. The Company completed the IPO 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 Preferred Stock. As of the closing of the IPO,
all of the 8,999,999 outstanding shares of Preferred Stock were automatically
converted into 17,999,998 shares of Common Stock and all accrued dividends
were paid. See Notes 5 and 6 to the Consolidated Financial Statements for
additional information regarding the Company's Preferred Stock and long-term
debt.
Acquisition of Bytel Limited. On June 28, 1996, the Company acquired all of
the outstanding shares of 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 Consolidated
Financial Statements include Bytel's results of operations since the
acquisition date. Bytel, established in 1992, is the leading provider of
customer care and billing solutions in the United Kingdom to providers of
combined cable television and telephony (business and residential) services.
Acquisition of SUMMITrak Assets and TCI Contract. In September 1997, the
Company purchased certain SUMMITrak assets from TCI and entered into the TCI
Contract. The Company completed the accounting for these transactions in the
fourth quarter of 1997. The total purchase price was approximately $159
million, with approximately $105 million allocated to purchased research and
development ("R&D") and the remaining amount allocated to long-lived assets.
Purchased R&D represents R&D of software technologies which had not reached
technological feasibility as of the acquisition date, and had no other
alternative future use. Purchased R&D was charged to operations in the fourth
quarter of 1997. The Company financed the SUMMITrak asset acquisition with the
Term Credit Facility, of which $27.5 million was used to retire the Company's
previously outstanding debt. See Notes 4 and 6 to the Consolidated Financial
Statements for additional information regarding the SUMMITrak asset
acquisition and the related financing.
The Company intends to continue the development of certain software
technologies acquired from TCI and integrate such technologies into its
current products. The Company is currently developing several additional
products using the SUMMITrak next-generation, open system technologies to
increase the functionality of CCS. These products use a modern architecture
with relational databases, UNIX servers, object-oriented logic, and graphical
user interfaces, and are expected to be sold as optional add-on software
components to CCS, and include CSG Dispatch, CSG TechNet, IVR Services, and
Closed Loop Inventory. CSG Dispatch provides automated work order routing and
technician assignment and provides the dispatcher with a geographic
information system (GIS)-based method for monitoring and reassigning work
orders throughout the day. CSG TechNet is an optional add-on component to CSG
Dispatch that provides two-way data communications to the technician in the
field, allowing the technician to close work orders, send and receive
messages, and perform other functions. IVR Services allows customers to make
pay-per-view orders and perform other transactions over the telephone by
interacting with an Interactive Voice Response system ("IVR"). Closed Loop
Inventory provides a method for tracking client equipment in the field,
primarily the set top boxes that are used in the field for communication
services. The Company expects to complete these products by the end of 1998
and early 1999.
16
<PAGE>
OVERVIEW
The Company. The Company is a leading provider of customer care and billing
solutions for cable television and direct broadcast satellite providers, and
also serves on-line services and telecommunications providers. The Company's
products and services enable its clients to focus on their core businesses,
improve customer service, and enter new markets and operate more efficiently.
The Company offers its clients a full suite of processing and related
services, and software and professional services which automate customer care
and billing functions. These functions include set-up and activation of
customer accounts, sales support, order processing, invoice calculation,
production and mailing, management reporting, and customer analysis for target
marketing. The Company's products and services combine the reliability and
high volume transaction processing capabilities of a mainframe platform with
the flexibility of client/server architecture.
Revenues. The Company's revenues are derived principally from processing and
related services, which represented 99.9%, 85.8% and 76.5% of the Company's
total revenues for the years ended December 31, 1995, 1996 and 1997,
respectively. As a result of the expected conversions in 1998 of TCI's and
other clients' customers onto the Company's customer care and billing system,
the Company expects processing and related services as a percentage of total
revenues in 1998 to increase when compared to 1997. 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, and many of which include financial minimums. The Company's
processing and related services are derived principally from its CCS product
and services ancillary to CCS.
The Company passes through to its clients the cost of postage and the cost
of communication lines between client sites and the mainframe data processing
facility. Such reimbursements of cost are netted against the expense and are
not included in total revenues.
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, ACSR, ACSR Telephony,
CSG Vantage, and CSG VantagePoint. Revenue from these software products and
professional services, including revenue from the acquired software products
and related services of Bytel, were $.1 million, $18.9 million, and $40.4
million, or .1%, 14.2% and 23.5% of total revenues, for the years ended
December 31, 1995, 1996 and 1997, respectively. Software products and
professional services as a percentage of total revenues in 1998 are expected
to decrease when compared to 1997, due to the increased percentage of revenues
expected to be generated from processing and related services in 1998, as
discussed above. The Company licenses its software products under both
perpetual and multi-year term licenses. See "Business" for additional
discussion of the Company's products and services.
Cost of Revenues. Direct costs for processing and related services consist
primarily of: (i) the salaries and benefits of employees involved in certain
systems and programming, client and product support, and statement production;
(ii) the cost of data processing; and (iii) statement and envelope costs. The
Company's data processing services for CCS are provided by FDC under a five-
year agreement which expires December 31, 2001. The cost of such services
provided by FDC are based on usage and/or actual costs and were $16.9 million,
$19.6 million and $19.2 million for the years ended December 31, 1995, 1996
and 1997, respectively. The amortization of acquired software, client
contracts and related intangibles relates primarily to amortization of assets
acquired in the Acquisition. The acquired software was fully amortized in
November 1997.
The cost of software license and maintenance fees consists primarily of the
salaries and benefits of the systems and programming employees supporting the
Company's software products. The cost of professional services consists
primarily of the salaries and benefits of the employees performing such
services.
17
<PAGE>
Operating Expenses. R&D expense consists primarily of the salaries and
benefits of the employees involved in internal software and product
development. Software and product development costs have increased
significantly as resources have been added to develop new software products
and enhance existing products.
Selling and marketing expense consists primarily of the salaries,
commissions, and benefits of those employees involved in sales and marketing
activities, as well as travel, convention, and advertising expenses.
General and administrative expense consists primarily of the salaries and
benefits of management and administrative personnel and general office
administration expense. Amortization of noncompete agreements and goodwill
consists primarily of amortization of assets acquired in the Acquisition.
Stock-based employee compensation expense relates to purchases of the
Company's Common Stock by executive officers and key employees in 1994 and
1995, prior to the Company's IPO. See Notes 3 and 11 of the Consolidated
Financial Statements for additional discussion of these items.
Income Taxes. Although the Company has incurred net losses for the years
ended 1995, 1996, and 1997, the Company has paid U.S. income taxes for each of
these years and expects to pay United Kingdom income taxes for 1997, due
primarily to differences in the timing of recognition of the amortization of
intangible assets for financial reporting and tax purposes. For income tax
purposes, the amortization of the intangible assets related to the Acquisition
and the charge for purchased research and development related to the SUMMITrak
asset acquisition, are principally deductible over 15 years on a straight-line
basis. Based on its current projections, the Company expects to pay U.S.
income taxes for 1998.
At December 31, 1997, the Company 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 $7.4
million. The Company has recorded a valuation allowance of approximately $61.3
million against the remaining net deferred tax assets since realization of
these future benefits is not sufficiently assured as of December 31, 1997. The
Company intends to analyze the realizability of the net deferred tax assets at
each future quarterly reporting period. The current quarterly results of
operations, as well as the Company's projected results of operations, will
determine the required valuation allowance at the end of each quarter. Based
on its current projections of operating results for 1998, the Company expects
to realize additional deferred tax assets in 1998. As a result, the Company
does not expect income tax expense for 1998 to be significant.
ACQUISITION CHARGES
Acquisition Charges. As a result of the Acquisition, the Company has
recorded recurring, periodic amortization of acquired software, client
contracts and related intangibles, noncompete agreement, goodwill and stock-
based employee compensation (collectively, the "Acquisition Charges"). The
Acquisition Charges totaled $21.6 million, $24.4 million, and $20.7 million,
for the years ended December 31, 1995, 1996 and 1997, respectively. See Notes
3 and 11 to the Consolidated Financial Statements for additional information
regarding the Acquisition and the Acquisition Charges.
Discontinued Operations. Contemporaneously with the Acquisition, the Company
purchased from FDC all of the outstanding shares of Anasazi for $6.0 million
cash. Anasazi provides central reservation systems and services for the
hospitality and travel industries. The Company accounted for its ownership in
Anasazi as discontinued operations after its acquisition in 1994. On August
31, 1995, the Company completed a substantial divestiture of Anasazi,
resulting in the Company owning less than 20% of Anasazi. As a result, the
$3.1 million loss from discontinued operations included in the Company's 1995
financial statements consists of the net losses of Anasazi from January 1 to
August 31, 1995. Anasazi's results of operations subsequent to August 31, 1995
are not included in the Company's results of operations as the Company
accounted for its investment in Anasazi under the cost method subsequent to
August 31, 1995. In September 1997, the Company sold its remaining interest in
Anasazi for $8.6 million in cash. The loss of $.7 million in August 1995 and
the gain of $7.9 million in September 1997 relate to the Company's substantial
and then final disposition of its ownership interest in Anasazi. See Note 10
to the Consolidated Financial Statements for additional information regarding
Anasazi.
18
<PAGE>
NON-RECURRING CHARGES
Charge for Purchased Research and Development. During the fourth quarter of
1997, the Company recorded a charge of $105.5 million related primarily to the
portion of the SUMMITrak asset acquisition purchase price allocated to
purchased research and development related to software technologies which had
not reached technological feasibility and had no other alternative future use
as of the acquisition date. See Note 4 to the Consolidated Financial
Statements for additional discussion.
Impairment of Capitalized Software Development Costs. During the fourth
quarter of 1997, the Company recorded a charge of $11.7 million related to
certain CSG Phoenix assets. After the consideration of multiple factors and
events, consisting primarily of an increase in demand for the Company's
outsourced processing services and previously announced delays in the delivery
of CSG Phoenix, such assets were reduced to their estimated net realizable
value as of December 31, 1997. The charge primarily includes previously
capitalized internal development costs and purchased software incorporated
into the product. The Company intends to continue its development of CSG
Phoenix. See Notes 2 and 13 to the Consolidated Financial Statements for
additional discussion.
Impairment of Intangible Assets. During the fourth quarter of 1997, the
Company recorded a charge of $4.7 million for the impairment of certain
intangible assets related to software systems which the Company has decided to
no longer market and support. This impairment charge relates principally to
the Company's CableMAX product. CableMAX is a personal computer-based customer
management system targeted at smaller cable systems of 2,500 customers or
less. During the fourth quarter of 1997, the Company decided not to invest the
resources necessary to make the software year 2000 compliant, resulting in the
impairment of the CableMAX intangible assets. See Note 2 to the Consolidated
Financial Statements for additional discussion.
Extraordinary Loss From Early Extinguishment Of Debt. In September 1997, the
Company retired its outstanding bank indebtedness of $27.5 million in
conjunction with obtaining financing for the SUMMITrak asset acquisition. Upon
repayment of the outstanding debt, the Company recorded an extraordinary loss
of $.6 million for the write-off of deferred financing costs. In March 1996,
the Company recorded an extraordinary charge of $1.3 million for the write-off
of deferred financing costs related to repayment of $40.3 million of long-term
debt with proceeds from the IPO. See Note 6 to the Consolidated Financial
Statements for additional discussion.
ADJUSTED RESULTS OF OPERATIONS
Impact of Acquisition Charges and Non-recurring Charges on Earnings. As
discussed above, the Company has incurred Acquisition Charges and non-
recurring charges in each of the last three years. The total of these charges
was $25.4 million, $25.7 million and $135.3 million for the years ended
December 31, 1995, 1996 and 1997, respectively. The Company's adjusted results
of operations excluding these items is shown in the following table. In
addition to the exclusion of these expenses from the calculation, the adjusted
results of operations were computed using an effective income tax rate of
38.0%, and outstanding shares on a diluted basis.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Adjusted Results of Operations:
Operating income................ $14,593 $25,194 $36,131
Income before income taxes...... 6,186 21,870 32,450
Net income...................... 3,835 13,559 20,119
Earnings per diluted common
share.......................... .18 .54 .77
Weighted average diluted common
shares......................... 21,533 25,294 26,069
</TABLE>
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated. The results of Bytel's
operations since its acquisition on June 28, 1996 are included in the following
table and considered in the discussion of the Company's operations that
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------
1995 1996 1997
----------------- ----------------- ------------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- ------- -------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Processing and related
services.............. $ 96,343 99.9% $113,422 85.8% $ 131,399 76.5%
Software license and
maintenance fees...... 57 .1 14,736 11.1 26,880 15.6
Professional services.. 4 -- 4,139 3.1 13,525 7.9
-------- ----- -------- ----- --------- -----
Total revenues....... 96,404 100.0 132,297 100.0 171,804 100.0
-------- ----- -------- ----- --------- -----
Expenses:
Cost of revenues:
Cost of processing and
related services:
Direct costs.......... 46,670 48.4 52,027 39.3 58,259 33.9
Amortization of
acquired software.... 11,000 11.4 11,003 8.3 10,596 6.2
Amortization of
client contracts and
related
intangibles.......... 4,092 4.2 4,092 3.1 4,293 2.5
-------- ----- -------- ----- --------- -----
Total cost of
processing and
related services.... 61,762 64.0 67,122 50.7 73,148 42.6
Cost of software
license and
maintenance fees...... -- -- 5,040 3.8 9,787 5.7
Cost of professional
services.............. -- -- 2,083 1.6 7,047 4.1
-------- ----- -------- ----- --------- -----
Total cost of
revenues............ 61,762 64.0 74,245 56.1 89,982 52.4
-------- ----- -------- ----- --------- -----
Gross margin........... 34,642 36.0 58,052 43.9 81,822 47.6
-------- ----- -------- ----- --------- -----
Operating expenses:
Research and
development:
Research and
development.......... 14,278 14.8 20,206 15.3 22,586 13.2
Charge for purchased
research and
development.......... -- -- -- -- 105,484 61.4
Impairment of
capitalized software
development costs.... -- -- -- -- 11,737 6.8
Selling and marketing.. 3,770 3.9 8,213 6.2 10,198 5.9
General and
administrative:
General and
administrative........ 11,406 11.8 13,702 10.4 19,385 11.3
Amortization of
noncompete agreements
and goodwill.......... 5,680 5.9 6,392 4.8 6,927 4.0
Impairment of
intangible assets..... -- -- -- -- 4,707 2.7
Stock-based employee
compensation.......... 841 .9 3,570 2.7 449 .3
Depreciation........... 5,687 5.9 5,121 3.9 6,884 4.0
-------- ----- -------- ----- --------- -----
Total operating
expenses............ 41,662 43.2 57,204 43.3 188,357 109.6
-------- ----- -------- ----- --------- -----
Operating income
(loss)................. (7,020) (7.2) 848 .6 (106,535) (62.0)
-------- ----- -------- ----- --------- -----
Other income (expense):
Interest expense....... (9,070) (9.4) (4,168) (3.1) (5,324) (3.1)
Interest income........ 663 .7 844 .6 1,294 .7
Other.................. -- -- -- -- 349 .2
-------- ----- -------- ----- --------- -----
Total other.......... (8,407) (8.7) (3,324) (2.5) (3,681) (2.2)
-------- ----- -------- ----- --------- -----
Loss before income
taxes, extraordinary
item and discontinued
operations............. (15,427) (15.9) (2,476) (1.9) (110,216) (64.2)
Income tax provision... -- -- -- -- -- --
-------- ----- -------- ----- --------- -----
Loss before
extraordinary item and
discontinued
operations............. (15,427) (15.9) (2,476) (1.9) (110,216) (64.2)
Extraordinary loss from
early extinguishment
of debt............... -- -- (1,260) (.9) (577) (.3)
-------- ----- -------- ----- --------- -----
Loss from continuing
operations............. (15,427) (15.9) (3,736) (2.8) (110,793) (64.5)
-------- ----- -------- ----- --------- -----
Discontinued operations:
Loss from operations... (3,093) (3.2) -- -- -- --
Gain (loss) from
disposition........... (660) (.7) -- -- 7,922 4.6
-------- ----- -------- ----- --------- -----
Total gain (loss)
from discontinued
operations.......... (3,753) (3.9) -- -- 7,922 4.6
-------- ----- -------- ----- --------- -----
Net loss................ $(19,180) (19.8)% $ (3,736) (2.8)% $(102,871) (59.9)%
======== ===== ======== ===== ========= =====
</TABLE>
20
<PAGE>
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1996
Revenues. Total revenues increased $39.5 million, or 29.9%, to $171.8
million in 1997, from $132.3 million in 1996, due primarily to increased
revenues from the Company's processing and related services, as well as
increased revenues from software and related product sales and professional
consulting services.
Revenues from processing and related services increased $18.0 million, or
15.8%, to $131.4 million in 1997, from $113.4 million in 1996, due primarily
to an increase in the number of customers of the Company's clients which were
serviced by the Company and increased revenue per customer. Customers serviced
as of December 31, 1997 and 1996 were 21.1 million and 19.2 million,
respectively, an increase of 10.1%. 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
price increases included in client contracts and increased usage of ancillary
services by existing clients.
Revenues from software and related product sales and professional consulting
services increased $21.5 million, or 114.1%, to $40.4 million in 1997, from
$18.9 million in 1996. This increase relates to the introduction of the
Company's new software products, primarily ACSR and CSG VantagePoint, and
professional consulting services in early 1996 with continued expansion
throughout 1996 and 1997, and the inclusion of revenues from Bytel's
operations for all of 1997, whereas six months of revenues for Bytel were
included for 1996.
Amortization of Acquired Software. Amortization of acquired software
decreased $.4 million, or 3.7%, to $10.6 million in 1997, from $11.0 million
in 1996, due primarily to acquired software from the Acquisition becoming
fully amortized as of November 30, 1997. See Note 3 to the Consolidated
Financial Statements for additional discussion of the Acquisition and its
impact on operations.
Amortization of Client Contracts and Related Intangibles. Amortization of
client contracts and related intangibles increased $.2 million, or 4.9%, to
$4.3 million in 1997, from $4.1 million in 1996 due primarily to amortization
from the TCI Contract executed in September 1997.
Gross Margin. Gross margin increased $23.7 million, or 40.9%, to $81.8
million in 1997, from $58.1 million in 1996, due primarily to revenue growth.
The gross margin as a percentage of total revenues increased to 47.6% in 1997,
compared to 43.9% in 1996. The increase in the gross margin as a percentage of
total revenues is due primarily to: (i) a favorable change in revenue mix
which included more higher-margined software products; (ii) the increase in
revenues while the overall amount of amortization of acquired software and the
amortization of client contracts and related intangibles remained relatively
constant; and (iii) the increase in processing and related services revenue
per customer while controlling the cost of delivering such services.
Research and Development Expense. Research and development expense increased
$2.4 million, or 11.8%, to $22.6 million in 1997, from $20.2 million in 1996.
As a percentage of total revenues, R&D expense decreased to 13.2% in 1997 from
15.3% in 1996. The Company capitalized software development costs, related
primarily to CSG Phoenix, of approximately $9.7 million during 1997, which
consisted of $8.4 million of internal development costs and $1.3 million of
purchased software. The Company capitalized software development costs,
related primarily to CSG Phoenix, ACSR Telephony and CSG VantagePoint, of
approximately $3.1 million in 1996, which consisted of $2.5 million of
internal development costs and $.6 million of purchased software. As a result,
total R&D expenditures (i.e., the total R&D costs expensed, plus the
capitalized internal development costs) for 1997 and 1996 were $31.0 million,
or 18.0% of total revenues, and $22.7 million, or 17.2% of total revenues,
respectively. The overall increase in R&D expenditures is due primarily to
continued efforts on several products which are in development and
enhancements of the Company's existing products. The increased R&D
expenditures consist primarily of increases in salaries, benefits and other
programming-related expenses.
Selling and Marketing Expense. Selling and marketing expense increased $2.0
million, or 24.2%, to $10.2 million in 1997, from $8.2 million in 1996. As a
percentage of total revenues, selling and marketing expense decreased to 5.9%
in 1997, compared to 6.2% in 1996. The increase in expense is due primarily to
continued
21
<PAGE>
growth of the Company's direct sales force throughout 1996 and most of 1997.
The Company began building a new direct sales force in mid-1995 and continued
to expand its sales force until reaching its present level as of the end of
1997.
General and Administrative Expense. General and administrative ("G&A")
expense increased $5.7 million, or 41.5%, to $19.4 million in 1997, from $13.7
million in 1996. As a percentage of total revenues, G&A expense increased to
11.3% in 1997, from 10.4% in 1996. The increase in expense relates primarily
to: (i) the continued expansion of the Company's management team and related
administrative staff, added throughout 1996 and 1997, to support the Company's
overall growth; (ii) an increase in facility costs to support employee growth,
including the cost of relocating the Company's corporate headquarters; (iii)
expenses of $.7 million related to the closing of the TCI Contract and the
SUMMITrak asset purchase agreement; and (iv) the inclusion of G&A expenses
from Bytel's operations for all of 1997, whereas six months of G&A expenses
for Bytel were included for 1996.
Amortization of Noncompete Agreements and Goodwill. Amortization of
noncompete agreements and goodwill increased $.5 million, or 8.4%, to $6.9
million in 1997, from $6.4 million in 1996. The increase in expense relates to
amortization of goodwill from the Bytel acquisition and amortization of an
additional noncompete agreement executed 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 and recorded deferred compensation of $5.8 million related to
these purchases. 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, as the shares became vested as of this date. Upon completion of the
IPO, shares owned by certain executive officers of the Company became fully
vested. In addition, the vesting for the remaining performance stock shares
decreased to 20.0% annually over a five-year period. As a result,
approximately $3.2 million of stock-based employee compensation expense was
recorded when the IPO was completed in March 1996. Amortization of the stock-
based deferred compensation subsequent to 1997 will be approximately $.3
million per year. See Note 11 to the Consolidated Financial Statements for
additional discussion.
Depreciation Expense. Depreciation expense increased $1.8 million, or 34.4%,
to $6.9 million in 1997, from $5.1 million in 1996, with the increase
attributed to capital expenditures throughout 1996 and 1997 in support of the
overall growth of the Company.
Operating income (loss). Operating loss was $106.5 million for 1997,
compared to operating income of $.8 million for 1996. The change between years
relates primarily to the non-recurring charges recorded in the fourth quarter
of 1997, as discussed above.
Interest Expense. Interest expense increased $1.1 million, or 27.7%, to $5.3
million in 1997, from $4.2 million in 1996, with the increase attributable
primarily to new debt incurred under the Term Credit Facility. This increase
was partially offset by the effects of: (i) scheduled principal payments on
the Company's long-term debt; (ii) the retirement of $40.3 million of long-
term debt with the proceeds from the IPO in March 1996; and (iii) a decrease
in the Company's interest rate spread on LIBOR, as a result of the Company
favorably amending its long-term credit facility in April 1996.
TWELVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1995
Revenues. Total revenues increased $35.9 million, or 37.2%, to $132.3
million in 1996, from $96.4 million in 1995, due primarily to increased
revenues from the Company's processing and related services, as well as
increased revenues from software and related product sales and professional
consulting services.
Revenues from processing and related services increased $17.1 million, or
17.7%, to $113.4 million in 1996, from $96.3 million in 1995, due primarily to
an increase in the number of customers of the Company's clients
22
<PAGE>
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 introduced in early 1996,
primarily ACSR and CSG VantagePoint, and professional services, as well as
revenue from the software products and related services of Bytel for six
months in 1996, were $18.9 million in 1996 compared to $.1 million in 1995.
Gross Margin. Gross margin increased $23.5 million, or 67.6%, to $58.1
million in 1996, from $34.6 million in 1995, due primarily to revenue growth.
The gross margin as a percentage of total revenues increased to 43.9% in 1996,
compared to 36.0% in 1995. The increase in the gross margin as a percentage of
total revenues is due primarily to: (i) a favorable change in revenue mix
which included more higher-margined software products; (ii) the increase in
revenues while the overall amount of amortization of acquired software and the
amortization of client contracts and related intangibles remained relatively
constant; and (iii) the increase in processing and related services revenue
per customer while controlling the cost of delivering such services.
Research and Development Expense. Research and development expense increased
$5.9 million, or 41.5%, to $20.2 million in 1996, from $14.3 million in 1995.
As a percentage of total revenues, R&D expense increased to 15.3% in 1996 from
14.8% in 1995. The Company capitalized software development costs, related
primarily to CSG Phoenix, ACSR Telephony and CSG VantagePoint, of
approximately $3.1 million in 1996, which consisted of $2.5 million of
internal development costs and $.6 million of purchased software. No software
development costs were capitalized during 1995. As a result, total R&D
expenditures (i.e., the total R&D costs expensed, plus the capitalized
internal development costs) for 1996 were $22.7 million, or 17.2% of total
revenues. The overall increase in R&D expenditures is due primarily to
continued efforts on several products which are in development and
enhancements of the Company's existing products. The increased R&D
expenditures consist primarily of increases in salaries, benefits, and other
programming-related expenses.
Selling and Marketing Expense. Selling and marketing expense increased $4.4
million, or 117.9%, to $8.2 million in 1996, from $3.8 million in 1995. As a
percentage of total revenues, selling and marketing expense increased to 6.2%
in 1996, from 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. G&A expense increased $2.3 million, or
20.1%, to $13.7 million in 1996, from $11.4 million 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. As a percentage of total revenues, G&A expense decreased to
10.4% in 1996, from 11.8% in 1995.
Amortization of Noncompete Agreements and Goodwill. Amortization of
noncompete agreements and goodwill increased $.7 million, or 12.5%, to $6.4
million in 1996, 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 executed in April 1996.
Stock-Based Employee Compensation. Stock-based employee compensation expense
for the years ended December 31, 1996 and 1995, of $3.6 million and $.8
million, respectively, relates to purchases of the Company's Common Stock by
executive officers and key employees. The increase between years relates to
the accelerated vesting for certain employees effective as of the closing of
the IPO in March 1996, as discussed above.
23
<PAGE>
Depreciation Expense. Depreciation expense decreased $.6 million, or 10.0%,
to $5.1 million in 1996, from $5.7 million in 1995, with the decrease
attributed to certain fixed assets becoming fully depreciated in 1995.
Operating income (loss). Operating income was $.8 million for 1996, compared
to an operating loss of $7.0 million for 1995. The change between years
relates to the factors discussed above.
Interest Expense. Interest expense decreased $4.9 million, or 54.0%, to $4.2
million in 1996, from $9.1 million in 1995. The decrease was attributable to:
(i) scheduled principal payments on the Company's long-term debt; (ii) the
retirement of $40.3 million of long-term debt with proceeds from the IPO in
March 1996; and (iii) a decrease in the Company's interest rate spread on
LIBOR, as a result of the Company favorably amending its long-term credit
facility in April 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $20.4 million. The Company's working
capital as of December 31, 1996 and 1997 was $4.4 million and $3.5 million,
respectively. The Company also has a revolving credit facility with a bank in
the amount of $40.0 million, of which there were no borrowings outstanding as
of December 31, 1997. The Company's ability to borrow under the revolving
credit facility is subject to maintenance of certain levels of eligible
receivables. At December 31, 1997, $30.6 million of the $40.0 million
revolving credit facility was available to the Company based on the current
level of eligible receivables. The revolving credit facility expires in
September 2002.
The Company's net cash flows from operating activities for the years ended
December 31, 1995, 1996 and 1997 were $11.8 million, $29.1 million and $31.4
million, respectively. The increase of $2.3 million, or 7.8%, in 1997 over
1996 relates to a $9.2 million increase in net cash flows from operations,
offset by an increase in the net change in operating assets and liabilities of
$6.9 million. The increase of $17.3 million, or 147.3%, in 1996 over 1995
relates to a $14.4 million increase in net cash flows from operations and a
decrease in the net change in operating assets and liabilities of $2.9
million.
The Company's net cash flows used in investing activities totaled $117.4
million in 1997, compared to $14.7 million in 1996, an increase in $102.7
million. The increase between years relates primarily to the cash payments of
$106.5 million for the SUMMITrak assets acquired in September 1997 and an
increase of $6.6 million in capitalized software development costs between
years, with these increases offset by proceeds of $8.6 million from the final
disposition of Anasazi. The Company's net cash flow used in investing
activities totaled $5.3 million in 1995. The increase of $9.4 million between
1995 and 1996 relates primarily to: (i) an increase of $3.0 million in 1996
for capital expenditures to support Company growth; (ii) acquisitions of
businesses in 1996 of $4.9 million, which relates primarily to Bytel; and
(iii) $3.5 million in capitalized software development costs in 1996. These
increases were offset by $2.0 million of cash received from Anasazi for a note
receivable in January 1996.
The Company's net cash flow from financing activities was $100.7 million in
1997, compared to a use of net cash flows of $12.1 million in 1996, an
increase of $112.8 million. The significant increase between years relates
primarily to the net change in the Company's long-term debt between years. In
1997, the Company generated $150.0 million from a new debt agreement entered
into primarily to fund the SUMMITrak asset acquisition, and repaid long-term
debt of $47.5 million, which included: (i) $5.0 million of scheduled payments
on the previous debt agreement; (ii) $27.5 million of existing debt which was
refinanced as part of the new debt agreement; and (iii) an optional prepayment
of $15.0 million on the new debt, which was made in December 1997. The net
cash flows used in financing activities totaled $9.5 million for 1995. The
increase of $2.6 million between 1995 and 1996 relates primarily to an
increase in scheduled debt payments in 1995 over 1996. In addition, 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 Preferred Stock.
As of the closing of the IPO in March
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<PAGE>
1996, all of the 8,999,999 outstanding shares of the Preferred Stock were
automatically converted into 17,999,998 shares of Common Stock, at which time
the accrued dividends became payable.
The Company financed the SUMMITrak asset acquisition in September 1997 with
the $150.0 million Term Credit Facility, of which $27.5 million was used to
retire the Company's previously outstanding debt. Interest rates under the new
agreement are chosen at the option of the Company and are based on the LIBOR
rate or the prime rate, plus an additional percentage spread, with the spread
dependent upon the Company's leverage ratio. For the period from September
1997 through December 31, 1997, the spread on the LIBOR rate and prime rate
was 1.75% and .5%, respectively. Based on the Company's leverage ratio as of
December 31, 1997, the spread on the LIBOR rate and prime rate was reduced to
1.0% and 0%, respectively, effective January 1, 1998. As a result of this
additional debt, the Company expects interest expense to increase in 1998 when
compared to 1997. See Note 6 to the Consolidated Financial Statements for
additional discussion of the Term Credit Facility.
The Term Credit Facility requires maintenance of certain financial ratios
and contains other restrictive covenants, including restrictions on payment of
dividends, a fixed charge coverage ratio, a leverage ratio and restrictions on
capital expenditures. As of December 31, 1997, the Company was in compliance
with all covenants. The payment of dividends or other types of distributions
on any class of the Company's stock is restricted unless the Company's
leverage ratio, as defined in the Term Credit Facility, is less than 1.50. As
of December 31, 1997, the leverage ratio was 2.80.
The purchase price for the SUMMITrak assets acquired in September 1997
includes up to $26.0 million in conversion incentive payments. The timing of
the conversion incentive payments is based upon the achievement of certain
milestones by TCI and the Company, as specified in the SUMMITrak asset
acquisition agreement. The milestones are based principally upon the number of
TCI's customers converted to, and the total number of TCI customers processed
on, the Company's customer care and billing system. Based on the conversions
scheduled as of December 31, 1997, the Company expects to pay $17.8 million to
TCI in 1998 and $8.2 million in 1999.
The Company believes that cash generated from operations, together with the
current cash and cash equivalents and the amount available under the revolving
credit facility, will be sufficient to meet its anticipated cash requirements
for operations (including research and development expenditures), income
taxes, debt service, conversion incentive payments and capital expenditures
for both its short and long-term purposes.
YEAR 2000
In 1995, the Company began efforts to identify and assess any issues
associated with its software's ability to properly utilize dates and process
data beyond the year 2000. The Company recognizes that the failure to properly
and timely address issues surrounding the year 2000 could have a material
impact on its operations, and as a result it appointed a project team to
undertake a Company-wide study to determine the full scope and related costs
to the Company of ensuring that its systems can continue to meet the Company's
internal needs, as well as those of its customers. The Company's year 2000
project team is communicating with vendors and customers to coordinate year
2000 conversion and will provide the Company's management with a report that
includes an estimate of costs to be incurred by the Company in properly
addressing this issue. The Company currently believes that it will be able to
effectively mitigate risks associated with the year 2000 and that its Company-
wide year 2000 project will be substantially complete by the end of the fourth
quarter of 1998. The Company does not expect the costs to make its systems
year 2000 compliant to be material to its financial condition or results of
operations.
25
<PAGE>
BUSINESS
GENERAL
The Company is a leading provider of customer care and billing solutions for
cable television and DBS providers, and also serves on-line services and
telecommunications providers. The Company's products and services enable its
clients to focus on their core businesses, improve customer service, and enter
new markets and operate more efficiently. The Company offers its clients a
full suite of processing and related services, and software and professional
services which automate customer care and billing functions. These functions
include set-up and activation of customer accounts, sales support, order
processing, invoice calculation, production and mailing, management reporting,
and customer analysis for target marketing. The Company's products and
services combine the reliability and high volume transaction processing
capabilities of a mainframe platform with the flexibility of client/server
architecture. The Company generated revenue of $171.8 million in 1997 compared
to $132.3 million in 1996, an increase of 29.9%, and revenue grew at a
compound annual growth rate of 27.0% over the three year period ended December
31, 1997.
The Company has established a leading presence by developing strategic
relationships with major participants in the cable television and DBS
industries, and derived approximately three-quarters of its revenues in 1997
from the U.S. cable television industry. The Company's U.S. clients include
six of the ten largest cable television service providers, four RBOCs for
video services, two DBS service providers, and an on-line services company.
During 1997, the Company derived approximately 77% of its total revenues from
processing and related services. At December 31, 1997, the Company was
servicing client sites having an aggregate of 21.1 million customers in the
U.S., compared to 19.2 million customers serviced as of December 31, 1996. The
Company has contracts to convert a significant number of additional customers
to its customer care and billing systems. From January 1, 1998 through
February 28, 1998, the Company converted and processed approximately 1.6
million additional customers on its systems.
The convergence of communications markets and growing competition are
increasing the complexity and cost of managing the interaction between
communications service providers and their customers. Customer care and
billing systems coordinate all aspects of the customer's interaction with a
service provider, from initial set-up and activation, to service activity
monitoring, through billing and accounts receivable management. The growing
complexity of communications services and the manner in which they are
packaged and priced, has created increased demand for customer care and
billing systems which deliver enhanced flexibility and functionality. Because
of the significant level of technological expertise and capital resources
required to develop and implement such systems successfully, the majority of
cable television, DBS, and wireless service providers have elected to
outsource customer care and billing.
The Company entered into the TCI Contract during the third quarter of 1997.
Subject to performance of the Company's obligations, the contract provides
for: (i) the Company to be TCI's exclusive provider of customer care and
billing solutions for analog and digital cable television, on-line services,
wireline residential telephony, and print and mail services; and (ii) minimum
financial commitments by TCI based on a minimum of 13.0 million TCI cable
television customers, of which approximately 4 million were on the Company's
system prior to the execution of the TCI Contract.
The Company expanded its operations internationally through the acquisition
of Bytel in June 1996. Bytel, established in 1992, is the leading provider of
customer care and billing solutions in the United Kingdom to providers of
combined cable television and telephony (business and residential) services.
Bytel serves a total of approximately 1 million customers, approximately 48%
of whom receive multiple services. During 1997, the Company derived 9.6% of
its total revenues from international sources.
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GROWTH STRATEGY
The Company's growth strategy is designed to provide revenue and profit
growth. The key elements of the strategy include:
Expand Core Processing Business. The Company will continue to leverage its
investment and expertise in high-volume transaction processing to expand its
processing business. The processing business provides highly predictable
recurring revenues through multi-year contracts with a client base which
includes leading communications service providers in growing markets. The
Company increased the number of customers processed on its systems from 16.4
million as of December 31, 1994 to 21.1 million as of December 31, 1997, with
approximately 11 million additional customers under contract to be converted.
The Company's approach to customer care and billing provides a full suite of
products and services which combines the reliability and high volume
transaction processing capabilities of a mainframe platform with the
flexibility of client/server architecture.
Introduce New Products and Services. The Company has a significant installed
client base to which it can sell additional value-added products and services.
Through the introduction of new client/server software applications, including
ACSR, ESP and CSG VantagePoint, the Company has increased its annual revenue
per customer from $5.30 in 1994 to $7.73 in 1997. The Company will continue to
develop software applications, which will enhance and extend the functionality
of its customer care and billing solution and also provide additional revenue
opportunities.
Enter New Markets. As communications markets converge, the Company's
products and services can facilitate efficient entry into new markets by
existing or new clients. For example, as the cable television providers expand
into on-line services and telephony, the Company will continue to offer the
customer care and billing solutions necessary to meet their needs. The Company
also seeks to identify other industries, such as utilities, that with
modifications to the Company's existing technology, could be served by the
Company's customer care and billing solutions.
Enhance Growth Through Focused Acquisitions. The Company follows a
disciplined approach to acquire assets and businesses which provide the
technology and technical personnel to expedite the Company's product
development efforts, provide complementary products or services, or provide
access to new markets or clients.
Continue Technology Leadership. The Company believes that its technology in
customer care and billing solutions gives communications service providers a
competitive advantage. The Company's continuing investment in research and
development is designed to position the Company to meet the growing and
evolving needs of existing and potential clients.
Pursue International Opportunities. The Company believes that privatization
and deregulation in international markets presents new opportunities for
customer care and billing providers. In the United Kingdom, Bytel is the
leading provider of customer care and billing solutions to providers of
combined cable television and telephony (business and residential) services.
The Company expects to complete major project enhancements to Bytel's customer
care and billing system in 1998, including UNIX/Oracle platform conversion and
internationalization to accommodate various currencies, postal codes, and tax
requirements. The Company intends to market the product in European and other
international markets.
CSG SERVICES AND PRODUCTS
The Company serves the converging communications markets through processing
and related services (offered in a service bureau environment) and software
products and professional services.
Processing and Related Services
The Company's primary processing and related services products are as
follows:
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<PAGE>
Communications Control System and Related Products. CCS is a customer care
and billing 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
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 at the clients' location. 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
service activation, pay-per-view, and archival of data. 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, 1995, 1996, and 1997, the
Company generated 84.8%, 77.3%, and 76.7%, respectively, of its total revenues
from CCS and related services and software products.
Financial Services. The Company offers a comprehensive set of processing-
related financial services (e.g., credit card processing, electronic funds
transfer, automated refund check processing, and electronic lockbox service)
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 clients. The Company also provides
specialized printing and mailing for clients not on the Company's customer
care and billing systems. The Company's statement processing center handles
multiple billing cycles for all clients and, during the year ended December
31, 1997 printed and mailed in excess of 21 million pieces per month on
average. The Company offers its clients a number of marketing services based
on information contained in the client's CCS customer database, including
insert design and printing, direct mailing, and data downloads used to support
market research.
Enhanced Statement Presentation. ESP enables clients to customize all
aspects of their billing statements, create a unique identity, and build a
stronger relationship with 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 and Professional Services
The Company's currently available software products include the following:
Advanced Customer Service Representative and related modules. ACSR is a
client/server, front end to the CCS product that employs a graphical user
interface. ACSR features include a customizable reference library, e-mail, a
news bulletin board, and pull-down items and an icon toolbar that makes
navigation easy. ACSR runs on a local area network at the client's service
center, which is connected to the CCS mainframe. Customer Interaction Tracking
("CIT") 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
provides clients with an integrated solution for billing and servicing
telephony and on-line services customers independently or in conjunction with
other business lines.
CSG Vantage. CSG Vantage is a software 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. CSG VantagePoint is the Company's data marketing and
management warehouse product which can be licensed for use at the client's own
facility. The database structure facilitates the analysis and identifications
of the demographic, psychographic and transactional parameters of the client
data. The
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<PAGE>
product offers a modular approach, enabling a provider to select the
applications most appropriate for its individual situation.
CSG.web. CSG.web provides clients with a secure World Wide Web ("WWW")
interactive interface for their 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 its 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, cable service activation,
collections, equipment inventory, call record processing, rating, dispatch,
trouble tickets, call record mediation, billing, fault management, sales and
marketing, and management reporting. Bytel expects to complete major project
enhancements to its SMS system in 1998, including year 2000 compliance,
UNIX/Oracle platform conversion, and internationalization to accommodate
various currencies, postal codes, and tax requirements.
Professional Services. The Company offers professional services to address
the needs of clients through specialized services such as technical
consulting, custom application development, business process definition,
project management, decision support systems, training, and software and
systems integration. The Company 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.
SOFTWARE MAINTENANCE AND SUPPORT
The Company provides maintenance services on all of its software products.
Maintenance fees are typically based upon a percentage of the software license
fee paid by the customer. Virtually all new software customers purchase
maintenance services. Maintenance services are typically sold for multi-year
periods in 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
The following software products are in development and not currently
available:
Acquisition of SUMMITrak Assets. In September 1997, and contemporaneously
with the effectiveness of the TCI Contract, the Company acquired certain
SUMMITrak assets, a client/server, open systems, in-house customer care and
billing system in development. The assets purchased consisted primarily of
software, hardware, assembled workforce and intellectual property. The total
purchase price was approximately $159 million, with approximately $105 million
allocated to purchased R&D and the remaining amount allocated to long-lived
assets. Purchased R&D represents R&D of software technologies which had not
reached technological feasibility as of the acquisition date, and had no other
alternative future use. Purchased R&D was charged to operations in the fourth
quarter of 1997.
The Company intends to continue the development of certain software
technologies acquired from TCI and integrate such technologies into its
current products. The Company is currently developing several additional
products using the SUMMITrak next-generation, open system technologies to
increase the functionality of CCS. These products use a modern architecture
with relational databases, UNIX servers, object-oriented logic, and graphical
user interfaces, and are expected to be sold as optional add-on software
components to CCS, and include CSG Dispatch, CSG TechNet, IVR Services, and
Closed Loop Inventory. CSG Dispatch provides automated work order routing and
technician assignment and provides the dispatcher with a geographic
information system (GIS)-based method for monitoring and reassigning work
orders throughout the day. CSG
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TechNet is an optional add-on component to CSG Dispatch that provides two-way
data communications to the technician in the field, allowing the technician to
close work orders, send and receive messages, and perform other functions. IVR
Services allows customers to make pay-per-view orders and perform other
transactions over the telephone by interacting with an IVR. Closed Loop
Inventory provides a method for tracking client equipment in the field,
primarily the set top boxes that are used in the field for communication
services. The Company expects to complete these products by the end of 1998 and
early 1999.
Usage Handling System. The Usage Handling System ("UHS") is a highly
scalable, highly configurable rating component that allows usage events such as
telephone calls and data connection events to be rated and billed via CCS.
CSG Phoenix. The Company is developing CSG Phoenix, a customer care and
billing system which 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Non-Recurring Charges."
CLIENTS
The Company's business is concentrated in the U.S. within the cable
television, DBS and on-line services industries. Based on 1997 revenues, all of
the Company's largest clients are cable television providers except Echostar
(DBS) and Prodigy Services Company (on-line services), and all of such clients
are in the U.S. except Telewest and Bell Cable Media. The Company's largest
clients based on 1997 revenues are listed below in alphabetical order:
Bell Cable Media Prodigy Services Company
Century Communications Corporation TCI and TCI Satellite Entertainment,
Comcast Corporation Inc.
Echostar Telewest
Falcon Cable TV Time Warner
US West Media Group
During the years ended December 31, 1995, 1996, and 1997, revenues from TCI
represented approximately 25.2%, 25.9% and 32.9% of total revenues, and
revenues from Time Warner represented approximately 27.9%, 22.9% and 20.1% of
total revenues, respectively. The Company has separate processing agreements
with multiple affiliates of Time Warner and provides products and services to
them under separately negotiated and executed contracts. See "Risk Factors--
Dependence on Major Clients," "--Requirements of the TCI Contract," and "--
Renewal of Time Warner Contracts."
CLIENT AND PRODUCT SUPPORT
The Company's clients typically rely on CSG for ongoing support and training
needs relating to the Company's products. The Company has a multi-level support
environment for its clients. The Company's Product Support Center operates 24
hours a day, seven days a week. Clients call an 800 number and through an
automated voice response unit, direct their calls to the specific product
support representative who can answer their question. In addition, each client
has a dedicated account manager. This professional helps clients resolve
strategic and business issues. The Company has a full-time training staff and
conducts ongoing training sessions both in the field and at its training
facility located in Omaha, Nebraska.
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
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responsible for new revenues and renewal of existing contracts within an
account. Account managers are supported by direct sales and sales support
personnel who are experienced in the various products and services that the
Company provides.
FDC DATA PROCESSING FACILITY
The Company outsources to FDC data processing and related services required
for operation of the CCS system. The Company's proprietary software is run in
FDC's facility to obtain the necessary mainframe computer capacity and support
without making the substantial capital investment that would be necessary for
the Company to provide this service internally. The Company's clients are
connected to the FDC facility through a combination of private and
commercially provided networks. FDC provides the services to the Company
pursuant to a five year agreement which is scheduled to expire December 31,
2001. The Company believes it could obtain data processing services from
alternative sources, if necessary.
RESEARCH AND DEVELOPMENT
The Company's product development efforts are focused on developing new
products and improving existing products. The Company believes that the timely
development of new applications and enhancements is essential to maintaining
its competitive position in the marketplace.
The Company's total research and development expense, excluding purchased
research and development, was $14.3 million, $20.2 million, and $22.6 million
for the years ended December 31, 1995, 1996, and 1997, or 14.8%, 15.3%, and
13.2% of total revenues, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
COMPETITION
The market for customer care and billing systems in the converging
communications industries is highly competitive. The Company competes with
both independent providers and in-house developers of customer management
systems. The Company believes its most significant competitors are USCS
International, Inc. ("USCS"), Cincinnati Bell Information Systems ("CBIS"),
and in-house systems. As the Company enters additional market segments, it
expects to encounter additional competitors. Some of the Company's actual and
potential competitors have substantially greater financial, marketing and
technological resources than the Company.
The Company believes that the principal competitive factors in its markets
include time to market, flexibility and architecture of the system, breadth of
product features, product quality, customer service and support, quality of
research and development effort, and price. See "Risk Factors--Competition."
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of trade secrets and copyright laws,
patents, license agreements, non-disclosure and other contractual provisions,
and technical measures to protect its proprietary rights. The Company
distributes its products under service and software license agreements which
typically grant clients non-exclusive licenses to use the products. Use of the
software products is restricted and subject to terms and conditions
prohibiting unauthorized reproduction or transfer of the software products.
The Company also seeks to protect the source code of its software as a trade
secret and as a copyrighted work. Despite these precautions, there can be no
assurance that misappropriation of the Company's software products and
technology will not occur. The Company also incorporates via licenses or
reselling arrangements a variety of third party technology and software
products that provide specialized functionality within its own products and
services. Although the Company believes that its product and service offerings
conform with such arrangements and do not infringe upon the intellectual
property rights of the other parties to such arrangements or of other third
parties, there can be no assurance that any third parties will not assert
contractual or infringement claims against the Company.
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EMPLOYEES
As of December 31, 1997, the Company had a total of 1,141 employees, an
increase of 249 from December 31, 1996. 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.
LEGAL PROCEEDINGS
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 $2.0 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. The
trial is currently scheduled to commence in July 1998.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. In the opinion
of the Company's management, after consultation with outside counsel, the
Company is not presently a party to any material pending or threatened legal
proceedings except as described above.
----------------
The Company was incorporated in Delaware in 1994. The Company's principal
executive offices are located at 7887 East Belleview Avenue, Suite 1000,
Englewood, Colorado 80111, and the telephone number at that address is (303)
796-2850.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Neal C. Hansen.......... 57 Chairman of the Board and Chief Executive Officer
John P. Pogge........... 44 President, Chief Operating Officer and Director
Greg A. Parker.......... 40 Vice President and Chief Financial Officer
Larry G. Fendley........ 56 Executive Vice President, Product Delivery Services
George F. Haddix,
Ph.D................... 59 Director
Rockwell A. Schnabel.... 61 Director
Frank V. Sica........... 47 Director
Royce J. Holland........ 49 Director
Bernard W. Reznicek..... 61 Director
Janice Obuchowski....... 46 Director
</TABLE>
Mr. Hansen is a co-founder of the Company and has been the Chairman of the
Board and Chief Executive Officer and a director of the Company since its
inception in 1994. From 1991 until founding the Company, Mr. Hansen served as
a consultant to several software companies, including FDC. From 1989 to 1991,
Mr. Hansen was a General Partner of Hansen, Haddix and Associates, a
partnership which provided advisory management services to suppliers of
software products and services. From 1985 to 1989, Mr. Hansen was Chairman and
Chief Executive Officer of US WEST Applied Communications, Inc., and President
of US WEST Data Systems Group.
Mr. Pogge joined the Company in 1995 and has served as President, Chief
Operating Officer and a director of the Company since September 1997. Prior to
that time, Mr. Pogge was an Executive Vice President of the Company and
General Manager, Business Units. From 1992 to 1995, Mr. Pogge was Vice
President, Corporate Development for US WEST, Inc. From 1987 to 1991, Mr.
Pogge served as Vice President and General Counsel of Applied Communications,
Inc. Mr. Pogge holds a J.D. degree from Creighton University School of Law and
a BBA in Finance from the University of Houston. Mr. Pogge and Mr. Parker are
brothers-in-law.
Mr. Parker assumed his current position on April 1, 1997, upon the
retirement of David I. Brenner, the Company's former Executive Vice President
and Chief Financial Officer. Mr. Parker joined the Company in July 1995 as
Vice President, Finance. Previously, Mr. Parker was with Banc One for thirteen
years and was Chief Financial Officer for Banc One in Houston and San Antonio.
Mr. Parker received a BBA in Business Administration from the University of
Iowa in 1980. Mr. Pogge and Mr. Parker are brothers-in-law.
Mr. Fendley was named Executive Vice President of Product Delivery Services
in December 1996. Mr. Fendley joined the Company in April 1996 as Executive
Vice President of Systems Operations. From 1985 to 1996 Mr. Fendley held
various domestic and international executive positions with Citibank. Mr.
Fendley earned his Ph.D. and MSE degrees in Industrial Engineering at Arizona
State University, and his Bachelor of Science in Industrial Engineering at
Texas Technological University.
Dr. Haddix is a co-founder of the Company and served as the President of the
Company from its inception in 1994 until 1997. Dr. Haddix has been a director
of the Company since its inception. Dr. Haddix currently serves as a
consultant to the Company with respect to technology research and development.
From 1989 to 1991, Dr. Haddix was a General Partner in Hansen, Haddix and
Associates, a partnership which provided advisory management services to
suppliers of software products and services. From 1987 to 1988, Dr. Haddix
served as President and Chief Executive Officer of US WEST Network Systems
Inc. Dr. Haddix presently serves on the Board of Directors of American
Business Information, Inc. Dr. Haddix received a Ph.D. in Mathematics from
Iowa State University in 1968 and has served on the faculties of three
universities.
Mr. Schnabel has served as a director of the Company since its inception in
1994. Mr. Schnabel has been a Co-Chairman of Trident Capital, Inc. since 1993.
He served as the Acting Secretary of Commerce and the
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<PAGE>
Deputy Secretary of Commerce during the Bush administration and was the U.S.
Ambassador to Finland from 1985 to 1989. From 1965 to 1983, Mr. Schnabel
served in various positions, including president of Bateman, Eichler, Hill,
Richards Group (Everen Securities), a member of the New York Stock Exchange.
He presently serves on the Board of Directors of Cyprus Amax Minerals Co.,
International Game Technology, Inc. and Pegasus Systems, Inc.
Mr. Sica has served as a director of the Company since its inception in
1994. Mr. Sica was with Morgan Stanley & Co. Incorporated from 1981 until
March 31, 1998, originally in the Mergers and Acquisition Department, and from
1988 with the Merchant Banking Division. Mr. Sica resigned on March 31, 1998
from his positions as a Managing Director of Morgan Stanley & Co. Incorporated
and a Vice Chairman and a director of the general partner of MSCP III, L.P.
and from his positions with certain entities affiliated with MSCP III, L.P.
See "Principal and Selling Stockholders" and "Underwriters." He currently
serves on the Board of Directors of Kohl's Corporation and SITA
Telecommunications Holdings, N.V.
Mr. Holland was elected to the Company's Board of Directors in January 1997.
Mr. Holland has been Chairman and Chief Executive Officer of Allegiance
Telecom, Inc. since March 1997. Mr. Holland served as the President of MFS
Communications Company, Inc., a competitive local exchange carrier, from 1990
until MFS's acquisition by WorldCom, Inc. at the end of 1996.
Mr. Reznicek was elected to the Company's Board of Directors in January
1997. Mr. Reznicek has served as National Director of Utility Marketing for
Central States Indemnity Company of Omaha, a Berkshire Hathaway company, since
January 1997. Mr. Reznicek was Dean of the College of Business Administration
at Creighton University from 1994 to 1996. Previously, Mr. Reznicek was
Chairman and CEO of Boston Edison Company, an electric utility company, from
1987 to 1994. Mr. Reznicek is also a director of CalEnergy Co., Stone &
Webster, Inc., Guarantee Life Insurance Co., and State Street Boston
Corporation.
Ms. Obuchowski was elected to the Company's Board of Directors in November
1997. Since December 1996, Ms. Obuchowski has been an Executive Vice President
of Next Wave Telecom, Inc., a provider of wireless personal communications
services utilizing digital CDMA technology. From 1992 to 1996, Ms. Obuchowski
was the President of Freedom Technologies, Inc. Ms. Obuchowski served as
Assistant Secretary for Communications and Information for the Department of
Commerce and Administrator for the National Telecommunications and Information
Administration during the Bush administration. Ms. Obuchowski presently serves
on the Board of Directors for Orbital Sciences Corp.
COMPOSITION AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors is divided into three classes of directors and is
comprised of eight persons as of the date of this Prospectus. Each class
serves for a term of three years and consists, as nearly as possible, of one-
third of the total number of directors fixed by the Board of Directors. The
Board of Directors has a standing Audit Committee, composed of Mr. Schnabel
(Chairman), Mr. Reznicek and Ms. Obuchowski. The Audit Committee's functions
are to recommend to the Board of Directors the firm to be appointed as the
Company's independent accountants, to review and approve the scope of the
Company's annual audit, to review the audit report and recommendations to
management of the Company's independent accountants, to consult with the
Company's independent accountants concerning the Company's financial controls,
accounting procedures, and internal auditing functions, and to consider and
review such other matters relating to the financial and accounting affairs of
the Company as the Audit Committee may deem appropriate. The Board of
Directors also has a standing Compensation Committee, composed of Messrs. Sica
(Chairman), Holland and Schnabel. The Compensation Committee's functions are
to provide oversight with respect to the compensation and benefit policies,
plans, and programs of the Company for the executive officers of the Company
and, to the extent not otherwise determined by contract or formal plan, to
review and recommend to the Board of Directors salaries, bonuses, and other
benefits and compensation for the executive officers of the Company. The
Compensation Committee also is responsible for the administration of and the
granting of stock options, stock purchase rights, and other awards under the
Company's stock incentive plans.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 28, 1998, by: (i) each person
known by the Company to own beneficially 5% or more of the outstanding shares
of its Common Stock; (ii) each director of the Company; (iii) each of the
Company's five most highly compensated executive officers; (iv) all directors
and executive officers as a group; and (v) the Selling Stockholders. Except as
indicated in the footnotes to this table, the Company believes that the
persons and entities named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
THE OFFERING OFFERING
----------------- SHARES ---------------------
NUMBER BEING
NAME OF SHARES PERCENT OFFERED NUMBER PERCENT
- ---- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
General Motors 2,601,616 10.2% 2,243,464 (3) 358,152 (3) 1.4%
Investment
Management Corporation
(1)....................
767 Fifth Avenue
New York, NY 10153
MSCP III, L.P. (2)...... 1,829,860 7.2 1,121,505 (3) 708,355 (3) 2.8
1221 Avenue of the
Americas
New York, NY 10020
Scott Halsted........... 26,482 * 6,187 (3) 20,295 (3) *
c/o Morgan Stanley,
Dean
Witter, Discover & Co.
1221 Avenue of the
Americas
New York, NY 10020
AMVESCAP PLC (4)........ 1,379,200 5.4 -- 1,379,200 5.4
11 Devonshire Square
London EC24 4YR
England
Neal C. Hansen (5)...... 1,708,282 6.7 70,044 1,638,238 6.4
Larry G. Fendley (6).... 86,667 * -- 86,667 *
George F. Haddix 1,149,320 4.5 57,500 1,091,820 4.3
(7)(8).................
Royce J. Holland (9).... 4,000 * -- 4,000 *
Janice I. Obuchowski.... -- -- -- -- --
Gregory A. Parker 39,175 * -- 39,175 *
(8)(10)................
John P. Pogge (8)(11)... 170,300 * -- 170,300 *
Bernard W. Reznicek 5,500 * -- 5,500 *
(12)...................
Rockwell A. Schnabel 273,381 1.1 -- 273,381 1.1
(13)...................
Frank V. Sica (14)...... 120,841 * -- 120,841 *
All directors and
executive officers as a
group (10 persons)
(15)................... 3,557,466 13.9 127,544 3,429,922 13.4
</TABLE>
- --------
*Less than 1% of the outstanding Common Stock.
(1) General Motors Investment Management Corporation ("GMIMCo") has shared
voting power and shared dispositive power with respect to 2,601,616
shares, and Mellon Bank, N.A., as the trustee (the "Trustee") for the
First Plaza Group Trust, the General Motors Hourly-Rate Employes Pension
Trust and the General Motors Salaried Employes Pension Trust (the
"Trusts"), has shared voting power and shared dispositive
35
<PAGE>
power with respect to these shares. Each Trust is a trust formed under and
for the benefit of one or more employee benefit plans (the "Plans") of
General Motors Corporation ("GM") and its subsidiaries. GMIMCo is
registered as an investment adviser under the Investment Advisers Act of
1940. GMIMCo's principal business is providing investment advice and
investment management services with respect to the assets of the Plans and
of certain direct and indirect subsidiaries of GM and associated entities.
GMIMCo has the responsibility to select and terminate investment managers
with respect to the Plans. It also itself manages certain assets of the
Plans. One investment manager acting with respect to the Plans is J.P.
Morgan (the "External Manager"). GMIMCo and the External Manager have
discretionary voting and investment power with respect to shares of the
Company included among such assets. Of the 2,601,616 shares, 8,900 shares
are under management by the External Manager, which GMIMCo has the
authority to terminate, and 2,592,716 shares are under management by
GMIMCo, for the benefit of the Plans. Because of the Trustee's limited
role, beneficial ownership of the shares by the Trustee is disclaimed.
(2) MSCP III, L.P. holds 1,143,424 shares of Common Stock prior to the
Offering. Certain entities affiliated with MSCP III, L.P. hold an
aggregate of 686,436 shares of Common Stock as follows: MSCP III
Holdings, Inc. holds 577,969 shares and Morgan Stanley Venture Capital
II, Inc. holds 108,467 shares. MSCP III, L.P. and such affiliated
entities are each affiliated with Morgan Stanley & Co. Incorporated and
Morgan Stanley & Co. International Limited, representatives of the U.S.
Underwriters and the International Underwriters, respectively, in the
Offering.
(3) Assumes no exercise of the U.S. Underwriters' over-allotment option as to
524,805 shares of Common Stock held by certain Selling Stockholders. If
the U.S. Underwriters' over-allotment option is exercised in full, an
additional 349,252 shares will be sold by GMIMCo, 82,124 shares will be
sold by MSCP III, L.P., 77,855 shares will be sold by MSCP III Holdings,
Inc., 14,611 shares will be sold by Morgan Stanley Venture Capital II,
Inc. and 963 shares will be sold by Mr. Halsted.
(4) Based on a Schedule 13G dated February 9, 1998, which indicates that
AMVESCAP PLC and its subsidiaries AVZ, Inc., AIM Management Group, Inc.,
AMVESCAP Group Services, Inc., INVESCO, Inc., INVESCO North American
Holdings, Inc., INVESCO Capital Management, Inc., INVESCO Funds Group,
Inc., INVESCO Management and Research, Inc., and INVESCO Realty Advisers,
Inc. have shared voting power and shared dispositive power with respect
to all of these shares.
(5) Includes 39,900 shares subject to currently exercisable options and
20,000 shares subject to options which are exercisable within 60 days
after February 28, 1998. Also includes 700,000 shares owned by Hansen
Partnership, Ltd. of which Mr. Hansen is General Partner, as well as
51,204 shares owned by Mr. Hansen's spouse. Mr. Hansen disclaims
beneficial ownership of the shares owned by his spouse and, except to the
extent of his pecuniary interest therein, the shares owned by Hansen
Partnership, Ltd. Mr. Hansen's business address is 7887 East Belleview,
Suite 1000, Englewood, Colorado 80111.
(6) Includes 53,334 shares subject to currently exercisable options and
33,333 shares subject to options exercisable within 60 days after
February 28, 1998 which are held by Mr. Fendley.
(7) Includes 21,400 shares owned by Dr. Haddix and his spouse as joint
tenants.
(8) Certain shares were purchased by Dr. Haddix (42,800) and Messrs. Parker
(18,000) and Pogge (66,000), respectively, pursuant to stock purchase
agreements with the Company and remain subject to a stock repurchase
option on the part of the Company, effective upon termination of services
as an employee of or a consultant to the Company. The shares are released
from the repurchase option in equal increments over a five-year period;
60% of Dr. Haddix's shares and 40% of Messrs. Parker's and Pogge's shares
originally purchased have been released from the repurchase option as of
February 28, 1998.
(9) Includes 4,000 shares subject to currently exercisable options which are
held by Mr. Holland.
(10) Includes 9,175 shares subject to currently exercisable options which are
held by Mr. Parker.
(11) Includes 20,300 shares subject to currently exercisable options which are
held by Mr. Pogge.
36
<PAGE>
(12) Includes 4,000 shares subject to currently exercisable options which are
held by Mr. Reznicek.
(13) Excludes 2,214 shares owned by Trident Capital, L.P. and 2,045 shares
owned by Trident Administrator, N.V. Mr. Schnabel is a Co-Chairman of
Trident Capital, Inc. Trident Capital L.P. and Trident Administrator,
N.V. are affiliates of Trident Capital, Inc., and Mr. Schnabel may be
deemed to be the beneficial owner of such shares. Except to the extent of
his pecuniary interest therein, Mr. Schnabel disclaims beneficial
ownership with respect to such shares.
(14) Except for 108,283 shares held by MSCP III, L.P. which have been
designated for but not yet distributed to Mr. Sica, excludes shares owned
by MSCP III, L.P. and certain entities affiliated with MSCP III, L.P.
Until his resignation from Morgan Stanley on March 31, 1998, Mr. Sica
held various positions with MSCP III, L.P. and certain affiliates of MSCP
III, L.P. Except for such 108,283 shares, Mr. Sica disclaims beneficial
ownership of the shares owned by MSCP III, L.P. and certain entities
affiliated with MSCP III, L.P.
(15) Includes 130,709 shares subject to currently exercisable options and
53,333 shares subject to options exercisable within 60 days after
February 28, 1998 which are held by all directors and officers as a
group.
37
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation ("Certificate of Incorporation")
provides that the authorized capital stock of the Company consists of
100,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000
shares of preferred stock, par value $0.01 per share.
COMMON STOCK
As of January 31, 1998, there were 25,485,780 shares of Common Stock
outstanding (excluding 2,540,835 shares of Common Stock issuable upon the
exercise of all outstanding options). The outstanding shares were held of
record by 253 stockholders.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. Subject to preferences applicable
to any preferred stock outstanding at the time, holders of Common Stock are
entitled to receive ratably such dividends, if any, as the Board of Directors
lawfully may declare from time to time. Upon the dissolution of the Company,
the holders of Common Stock are entitled to share ratably in the assets
remaining after payment of the Company's liabilities and subject to the
liquidation preference of any outstanding preferred stock. Holders of Common
Stock, as such, have no preemptive, subscription, redemption, or conversion
rights. The outstanding shares of Common Stock are fully paid and non-
assessable. The rights, preferences, and privileges of holders of Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which the Company may designate and
issue from time to time in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without any further stockholder approval, to issue from
time to time up to 10,000,000 shares of preferred stock in one or more series
and to fix or alter the designations, rights, powers, preferences, and any
qualifications, limitations, or restrictions on the shares of each such series
thereof including the consideration to be received therefor, dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences, and the number of shares constituting any series or designation
of such series. The issuance of preferred stock may have the effect of
delaying, deferring, or preventing a change of control of the Company.
REGISTRATION RIGHTS
Certain rights with respect to registration under the Securities Act exist
for holders of shares of Common Stock which were issued upon conversion of
Preferred Stock (the "Registrable Securities") and their permitted
transferees. The registration rights arise pursuant to an agreement between
the Company and the holders of Registrable Securities entered into at the time
of the sale of the Preferred Stock. Subject to certain limitations in the
agreement, holders of greater than 40% of the outstanding Registrable
Securities may demand that the Company register for sale not less than 15% of
the then outstanding Registrable Securities. The Company is not required to
effect more than four such registrations at the request of holders of
Registrable Securities. Subject to certain limitations, at such time as the
Company is eligible to register the Registrable Securities on Form S-3,
holders of Registrable Securities may demand that the Company register the
Registrable Securities on that form, provided that the reasonably anticipated
aggregate offering price to the public would exceed $5,000,000. Furthermore,
if the Company shall determine to register any of its securities, either for
its own account or the account of a security holder or holders, subject to
certain limitations, the Company is required to notify holders of Registrable
Securities and to include in such registration all the shares requested to be
included by those holders. The Company is generally obligated to bear the
expenses, other than underwriting discounts, selling commissions, and stock
transfer taxes, of all these registrations and to indemnify each holder of
Registrable Securities against certain liabilities, including liabilities
under the Securities Act.
In addition, the Company granted a TCI affiliate registration rights with
respect to shares of Common Stock issuable upon the exercise of warrants
granted to the TCI affiliate.
38
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides that the directors of
the Company will not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director; provided,
however, that this provision will not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the General Corporation Law of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit.
Delaware law does not permit a corporation to eliminate a director's duty of
care, and this provision of the Company's Certificate of Incorporation has no
effect on the availability of equitable remedies, such as injunction or
rescission, based upon a director's breach of the duty of care. The Company's
Certificate of Incorporation further provides that if the General Corporation
Law of the State of Delaware is amended to authorize a corporation to further
eliminate or limit the liability of its directors, then a director of the
Company, in addition to the circumstances in which he is not liable
immediately prior to such amendment, shall be free of liability to the fullest
extent permitted by the General Corporation Law of Delaware, as so amended.
The Company's By-Laws require the Company, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its directors and officers against expenses (including attorneys' fees),
judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding arising by reason of the fact that
the person is or was an agent of the Company. For purposes of this provision,
a "director" or "officer" of the Company includes any person (i) who is or was
a director or officer of the Company, (ii) who is or was serving at the
request of the Company as a director or officer of another corporation,
partnership, joint venture, trust, or other enterprise, or (iii) who was a
director or officer of a corporation that was a predecessor corporation of the
Company or of another enterprise at the request of the predecessor
corporation. The Company may, to the extent and in the manner permitted by the
General Corporation Law of Delaware, indemnify each of its employees and
agents (other than directors and officers) against expenses (including
attorneys' fees), judgments, fines, settlements, and other amounts actually
and reasonably incurred in connection with any proceeding arising by reason of
the fact that the person is or was an agent of the Company. For purposes of
this provision, an "employee" or "agent" of the Company (other than a director
or officer) includes any person (i) who is or was an employee or agent of the
Company, (ii) who is or was serving at the request of the Company as an
employee or agent of another corporation, partnership, joint venture, trust,
or other enterprise, or (iii) who was an employee or agent of a corporation
which was a predecessor corporation of the Company or of another enterprise at
the request of the predecessor corporation. The Company maintains directors
and officers liability insurance for the benefit of its directors and
officers.
The Company has entered into separate indemnification agreements with each
of its directors and certain executive and other officers pursuant to which
the Company agreed, among other things, and subject to certain limited
exceptions: (i) to indemnify them to the fullest extent permitted by law
against any claims and expenses incurred in connection therewith arising out
of any event or occurrence relating to their status as director, officer,
employee, agent, or fiduciary of the Company or of any other entity as to
which they served at the request of the Company or by reason of any action or
inaction while serving in such capacity, and (ii) to advance any such expenses
no later than five days after demand.
At present, except as disclosed in "Business--Legal Proceedings," there is
no pending litigation or proceeding involving any director, officer, employee
or agent as to which indemnification will be required or permitted under the
Company's By-Laws. The Company is not aware of any other threatened litigation
or proceeding which may result in a claim for such indemnification.
CERTAIN ANTI-TAKEOVER PROVISIONS
Under Section 203 of the Delaware General Corporation Law ("Section 203"),
certain "business combinations" between a Delaware corporation whose stock
generally is publicly traded or held of record by more than 2,000 stockholders
and an "interested stockholder" are prohibited for a three-year period
following the date that the interested stockholder became an interested
stockholder, unless (i) the corporation has elected in its original
certificate of incorporation not to be governed by Section 203 (the Company
did not make such an
39
<PAGE>
election), (ii) the business combination was approved by the board of
directors of the corporation before the other party to the business
combination became an interested stockholder, (iii) upon consummation of the
transaction that made it an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan) or
(iv) the business combination was approved by the board of directors of the
corporation and ratified by two-thirds of the voting stock which the
interested stockholder did not own. The three-year prohibition also does not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of the majority of the corporation's
directors. In addition, the provisions of Section 203 will not apply to
restrict a business combination between the Company and an interested
stockholder of the Company, if the interested stockholder became such prior to
completion of the Initial Public Offering. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an "interested stockholder," transactions with an "interested
stockholder" involving the assets or stock of the corporation or its majority-
owned subsidiaries and transactions which increase an interested stockholder's
percentage ownership of stock. The term "interested stockholder" is defined
generally as a stockholder who, together with affiliates and associates, owns
(or, within three years prior, did own) 15% or more of a Delaware
corporation's voting stock. Section 203 could prohibit or delay a merger,
takeover or other change in control of the Company and therefore could
discourage attempts to acquire the company.
Certain provisions of the Company's Certificate of Incorporation and By-laws
also may have the effect of prohibiting or delaying a change of control of the
Company. The Company's Certificate of Incorporation and By-laws provide that
(i) the Board of Directors be divided into three classes, as nearly equal in
number as possible, each of whose members, after an interim arrangement, will
serve for a term of three years, with the members of one class being elected
each year; (ii) directors may be removed by the stockholders only for cause,
and only by the affirmative vote of the holders of at least seventy-five
percent (75%) of the voting power of all outstanding shares of the Company's
capital stock entitled to vote in an election of directors, voting as a single
class; (iii) any vacancy on the Board may be filled only by a majority vote of
the remaining directors then in office, although less than a quorum; (iv) the
Board shall consist of not fewer than five members and not more than thirteen
members, with the exact number of members within such range to be determined
by a majority vote of the total number of authorized directors most recently
fixed by the Board; and (v) a stockholder desiring to nominate a person for
election to the Board must deliver written notice thereof to the Secretary of
the Company not less than 120 days in advance of the date which is one year
later than the date of the proxy statement of the Company released to
stockholders in connection with the previous year's annual meeting (or by
other specified dates in certain circumstances, including a meeting which is
not an annual meeting). Certain information must be provided to the Company
with respect to stockholder nominees and the stockholder making the
nomination.
The Certificate of Incorporation requires the affirmative vote of the
holders of at least seventy-five percent (75%) of the voting power of all
outstanding shares of the Company's capital stock then entitled to vote in an
election of directors, voting as a single class, to alter, amend or repeal the
provisions of the Certificate of Incorporation discussed above or to adopt any
provision of the Certificate of Incorporation or By-laws inconsistent with the
provisions discussed above.
In addition, the Company's By-laws provide that (i) stockholders seeking to
bring business before an annual meeting of stockholders must provide advance
notice, (ii) special meetings of stockholders may be called only by the Board
of Directors, the Chairman of the Board or the President, and (iii) no
business may be conducted at a special meeting of the stockholders other than
business brought before the meeting by the Board of Directors, the Chairman of
the Board or the President.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Common Stock is Norwest Bank
Minnesota, N.A.
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<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-U.S. HOLDERS
GENERAL
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a
person or entity that, for U.S. federal income tax purposes, is a non-resident
alien individual, a foreign corporation, a foreign partnership, or a foreign
estate or trust.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), and administrative interpretations as of the date hereof, all of
which are subject to change, including changes with retroactive effect. This
discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant to Non-U.S. Holders in light of their particular
circumstances or to holders subject to special rules, such as certain
financial institutions, insurance companies, dealers in securities or persons
holding Common Stock in connection with a hedging transaction, "straddle,"
conversion transaction or other integrated transaction. In addition, this
discussion does not address any tax consequences arising under the laws of any
state, local or foreign jurisdiction. Prospective holders should consult their
tax advisors with respect to the particular tax consequences to them of owning
and disposing of Common Stock, including the consequences under the laws of
any state, local or foreign jurisdiction.
DIVIDENDS
Subject to the discussion below, dividends paid to a Non-U.S. Holder of
Common Stock generally will be subject to withholding tax at a rate of 30% of
the gross amount of the dividends or such lower rate as may be specified by an
applicable income tax treaty. For purposes of determining whether tax is to be
withheld at a 30% rate or at a reduced rate as specified by an income tax
treaty, the Company ordinarily will presume, under current United States
Treasury Regulations, that dividends paid on or before December 31, 1998 to an
address in a foreign country are paid to a resident of such country absent
knowledge that such presumption is not warranted. Under such Regulations,
dividends paid on or before December 31, 1998 to a holder with an address
within the United States generally will be presumed to be paid to a holder who
is not a Non-U.S. Holder and will not be subject to the 30% withholding tax,
unless the Company has actual knowledge that the holder is a Non-U.S. Holder.
Recently finalized United States Treasury Regulations applicable to
dividends paid after December 31, 1998 (the "Final Regulations") provide for
certain presumptions (which differ from those described above) upon which the
Company may generally rely to determine whether, in the absence of certain
documentation, a holder should be treated as a Non-U.S. Holder for purposes of
the 30% withholding tax described above. The presumptions would not apply for
purposes of granting a reduced rate of withholding under a treaty. Under the
Final Regulations, to obtain a reduced rate of withholding under a treaty, a
Non-U.S. Holder will generally be required either (i) to provide an Internal
Revenue Service Form W-8 certifying such Non-U.S. Holder's entitlement to
benefits under a treaty together with, in certain circumstances, additional
information or (ii) satisfy certain other applicable certification
requirements. The Final Regulations also provide special rules to determine
whether, for purposes of determining the applicability of a tax treaty and for
purposes of the 30% withholding tax described above, dividends paid to a Non-
U.S. Holder that is an entity should be treated as paid to the entity or those
holding an interest in that entity.
The Company will not withhold tax on dividends paid to a Non-U.S. Holder
that are effectively connected with the Non-U.S. Holder's conduct of a trade
or business within the United States if a Form 4224 is properly filed with the
Company or its paying agent. Whether a Non-U.S. Holder is deemed to be engaged
in a U.S. trade or business is a question of facts and circumstances
determined by reference to the nexus of business activity. Whether a dividend
is effectively connected with such a business is also a question of facts and
circumstances which examines the relationship of the dividend and the Non-U.S.
Holder's trade or business. If a dividend is
41
<PAGE>
effectively connected, it will be subject to regular U.S. income tax in the
same manner as if the Non-U.S. Holder were a U.S. resident. Effectively
connected dividends may be subject to a different treatment under an
applicable tax treaty depending on whether such dividends are attributable to
a permanent establishment of the Non-U.S. Holder in the United States. The
Final Regulations will replace Form 4224 with From W-8 and certain additional
information. A non-U.S. corporation receiving effectively connected dividends
may also be subject to an additional "branch profits tax" that is imposed,
under certain circumstances, at a rate of 30% (or such lower rate as may be
specified by any applicable treaty) of the non-U.S. corporation's effectively
connected earnings and profits, subject to certain adjustments.
A Non-U.S. Holder eligible for a reduced rate of United States withholding
tax pursuant to a tax treaty may obtain a refund of any excess amounts
currently withheld by filing an appropriate claim for refund with the United
States Internal Revenue Service ("IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of Common Stock
unless (i) the gain is effectively connected with a trade or business of such
holder in the United States; (ii) in the case of certain Non-U.S. Holders who
are non-resident alien individuals and hold the Common Stock as a capital
asset, such individuals are present in the United States for 183 or more days
in the taxable year of the disposition, and either the non-resident alien
individual has a "tax home" in the United States or the sale is attributable
to an office or other fixed place of business maintained by the non-resident
alien individual in the United States; (iii) the Non-U.S. Holder is subject to
tax pursuant to the provisions of the Code regarding the taxation of U.S.
expatriates; or (iv) the Company is or has been a "U.S. real property holding
corporation" within the meaning of Section 897(c)(2) of the Code at any time
within the shorter of the five-year period preceding such disposition or such
holder's holding period (the "determination period").
A domestic corporation is a U.S. real property holding company ("USRPHC") if
the fair market value of its U.S. real property interests ("USRPI") comprises
a sufficiently large percentage of the corporation's overall assets. In
particular, a domestic corporation is a USRPHC if the fair market value of its
USRPIs exceeds 50% of the sum of the corporation's (i) USRPIs, (ii) interests
in non-U.S. real property, and (iii) any other of the corporation's assets
which are used or held for use in a trade or business. For purposes of these
determinations, USRPIs are broadly defined to include, among other things,
real property located in the United States as well as stock in a corporation
which is itself a USRPHC.
The Company believes that it is not, and is not likely to become, a U.S.
real property holding corporation for federal income tax purposes. Even if the
Company were a U.S. real property holding corporation for federal income tax
purposes at any time during the determination period, the disposition of
Common Stock by a Non-U.S. Holder that did not own more than five percent of
the Common Stock during the determination period would not be treated as a
disposition of an interest in a United States real property holding
corporation if the Common Stock were treated as "regularly traded on an
established securities market" during the calendar year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax
withheld. The information reporting requirements apply regardless of whether
withholding was reduced by an applicable tax treaty or if withholding was not
required because the dividends were effectively connected with a trade or
business in the United States of the Non-U.S. Holder. A similar report is sent
to the holder. Pursuant to tax treaties or other agreements, the IRS may make
its reports available to tax authorities in the recipient's country of
residence.
Under current United States Treasury Regulations, unless the Company has
actual knowledge that a holder is a Non-U.S. Holder, dividends paid on or
before December 31, 1998 to a holder at an address within the United
42
<PAGE>
States may be subject to backup withholding at a rate of 31% and additional
information reporting if the holder is not an "exempt recipient" as defined in
Treasury Regulations (which includes corporations) and fails to provide a
correct taxpayer identification number and other information to the Company.
In addition, backup withholding and such additional information reporting will
generally not apply to dividends paid on or before December 31, 1998 to
holders at an address outside the United States (unless the Company has
knowledge that the holder is a United States person) or to dividends paid on
or before December 31, 1998 to Non-U.S. Holders that are either subject to the
United States withholding tax (whether at 30% or a reduced rate) or that are
exempt from such withholding because such dividends constitute effectively
connected income. For dividends paid after December 31, 1998, the Final
Regulations provide certain presumptions and other rules under which Non-U.S.
Holders may be subject to backup withholding and related information reporting
in the absence of required certifications.
Under current United States Treasury Regulations, information reporting and
backup withholding imposed at a rate of 31% will apply to the proceeds of a
disposition of Common Stock by a Non-U.S. Holder effected by or through a U.S.
office of a broker unless the disposing holder certifies as to its name,
address and status as a Non-U.S. Holder or otherwise establishes as exemption.
Generally, U.S. information reporting and backup withholding will not apply to
a payment of disposition proceeds where the transaction is effected outside
the United States through a non-U.S. office of a non-U.S. broker. However,
U.S. information reporting requirements (but not backup withholding) will
apply to a payment of disposition proceeds where (a) the transaction is
effected outside the United States by or through an office outside the United
States of a broker that is either (i) a U.S. person, (ii) a foreign person
that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, (iii) a "controlled
foreign corporation" for U.S. federal income tax purposes or (iv) effective
after December 31, 1998, certain brokers that are foreign partnerships with
U.S. partners or that are engaged in a U.S. trade or business, and (b) the
broker fails to maintain documentary evidence that the holder is a Non-U.S.
Holder and that certain conditions are met, or that the holder otherwise is
entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
FEDERAL ESTATE TAX
The value of an interest in the Common Stock will be included in the gross
estate for U.S. federal estate tax purposes of any individual Non-U.S. Holder
who is treated as the owner of, or has made certain lifetime transfers of,
that interest. The interest therefore may be subject to U.S. federal estate
tax unless an applicable estate tax treaty provides otherwise.
43
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated and BT
Alex. Brown Incorporated are acting as U.S. Representatives, and the
International Underwriters named below for whom Morgan Stanley & Co.
International Limited and BT Alex. Brown International, a division of Bankers
Trust International PLC, are acting as International Representatives, have
severally agreed to purchase, and the Selling Stockholders have agreed to sell
to them, severally, the respective number of shares of Common Stock set forth
opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated................................. 979,480
BT Alex. Brown Incorporated....................................... 979,480
BancAmerica Robertson Stephens.................................... 120,000
Hambrecht & Quist LLC............................................. 120,000
Janco Partners, Inc. ............................................. 120,000
Jefferies & Company, Inc. ........................................ 120,000
Lehman Brothers Inc. ............................................. 120,000
Piper Jaffray Inc. ............................................... 120,000
Smith Barney Inc. ................................................ 120,000
---------
Subtotal........................................................ 2,798,960
---------
International Underwriters:
Morgan Stanley & Co. International Limited........................ 349,870
BT Alex. Brown International, a division of Bankers Trust
International PLC................................................ 349,870
---------
Subtotal........................................................ 699,740
---------
Total......................................................... 3,498,700
=========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively
referred to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those covered by the U.S. Underwriters' over-allotment option described below)
if any such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly,
any Shares or distribute any prospectus relating to the Shares outside the
United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement between U.S. and International Underwriters,
each International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares for the account of any United
States or Canadian Person and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares in the United States or Canada or to any United States
or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter
and an International Underwriter, the foregoing representations and agreements
(i) made by it in its capacity as a U.S. Underwriter apply only to it in its
capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply
44
<PAGE>
only to it in its capacity as an International Underwriter. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions specified in the Agreement between U.S. and International
Underwriters. As used herein, "United States or Canadian Person" means any
national or resident of the United States or Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the
laws of the United States or Canada or of any political subdivision thereof
(other than a branch located outside the United States and Canada of any
United States or Canadian Person), and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person.
All shares of Common Stock to be purchased by the Underwriters under the
Underwriting Agreement are referred to herein as the "Shares."
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of
any number of Shares as may be mutually agreed. The per share price of any
Shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any Shares, directly or indirectly, in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in contravention of the securities laws
thereof and has represented that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing
such Shares, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any of such Shares
in any province or territory of Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such Shares a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the closing date for
the sale of the Shares to the International Underwriters, will not offer or
sell, any Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the Shares in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and
will only issue or pass on in the United Kingdom any document received by it
in connection with the offering of the Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document
may otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions of
Japanese law. Each International Underwriter has further agreed to send to any
dealer who purchases from it any of the Shares a notice stating in substance
that, by purchasing such Shares, such dealer represents and agrees that it has
not offered or sold, and will not offer or sell, any of such Shares, directly
or indirectly, in Japan or to or for the account of any resident thereof
except for
45
<PAGE>
offers or sales to Japanese International Underwriters or dealers and except
pursuant to any exemption from the registration requirements of the Securities
and Exchange Law and otherwise in compliance with applicable provisions of
Japanese law, and that such dealer will send to any other dealer to whom it
sells any of such Shares a notice containing substantially the same statement
as is contained in this sentence.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $1.3125 a share under the public offering price.
Any Underwriter may allow, and such dealers may reallow, a concession not in
excess of $.10 a share to other Underwriters or to certain other dealers.
After the initial offering of the shares of Common Stock, the offering price
and other selling terms may from time to time be varied by the
Representatives.
Certain Selling Stockholders have granted to the U.S. Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase
up to an aggregate of 524,805 additional shares of Common Stock at the public
offering price set forth on the cover page hereof, less underwriting discounts
and commissions. The U.S. Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Common Stock offered hereby. To the extent such
option is exercised, each U.S. Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as the number set forth next to such U.S.
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock set forth next to the names of all U.S. Underwriters in the
preceding table.
The Company and certain of the Selling Stockholders have each agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the Underwriters, it will not, during the period ending 90 days
after the date of this Prospectus, (i) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities,
in cash or otherwise. The restrictions described in this paragraph do not
apply to (x) the sale of the Shares to the Underwriters, (y) the issuance by
the Company of shares of Common Stock upon the exercise of an option or a
warrant or the conversion of a security outstanding on the date of this
Prospectus of which the Underwriters have been advised in writing, issuances
pursuant to the Company's employee stock purchase plan or the issuance by the
Company of options or warrants to employees or directors of the Company
pursuant to the Company's stock-based incentive compensation plans existing on
the date of this Prospectus which are not exercisable within such 90 day
period or (z) transactions by any person other than the Company relating to
shares of Common Stock or other securities acquired in open market
transactions after the completion of the offering of the Shares.
The Common Stock is listed on the Nasdaq National Market under the symbol
"CSGS."
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
The Underwriters have agreed to pay all expenses, other than underwriting
discounts and commissions, incurred in connection with the Offering.
46
<PAGE>
Each of the Company and the Selling Stockholders have agreed to indemnify
the Underwriters, and the Underwriters have agreed to indemnify each of the
Company and the Selling Stockholders, against certain liabilities, including
liabilities under the Securities Act.
From time to time, certain of the Underwriters and their affiliates have
provided, and continue to provide, investment and commercial banking services
to the Company and certain of its affiliates.
Affiliates of Morgan Stanley & Co. Incorporated and Morgan Stanley & Co.
International Limited are selling shares in the Offering. Upon consummation of
the Offering, such affiliates will own approximately 2.8% of the outstanding
shares of Common Stock (2.1% if the U.S. Underwriters' over-allotment option
is exercised in full). See "Principal and Selling Stockholders."
In excess of 10% of the net proceeds of the Offering are intended to be paid
to affiliates of Morgan Stanley & Co. Incorporated. Accordingly, the Offering
is being made pursuant to the provisions of Section (c)(8) of Rule 2710 of the
NASD Conduct Rules.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Baker & McKenzie, Chicago, Illinois. Certain legal matters will be
passed upon for the Underwriters by Davis Polk & Wardwell, New York, New York.
Certain partners of Baker & McKenzie beneficially own in the aggregate 3,000
shares of Common Stock of the Company.
EXPERTS
The financial statements included in this Prospectus, and the financial
statements and schedule incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included and/or incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving such reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices maintained by the Commission:
Seven World Trade Center, Suite 1300, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
can be obtained from the Public Reference Section of the Commission, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy statements and other
information regarding registrants, such as the Company, that file
electronically with the Commission. Such reports, proxy statements and other
information concerning the Company can also be inspected at the offices of the
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006, on which the
Company's Common Stock is quoted.
The Company has filed with the Commission a Registration Statement on Form
S-3 (of which this Prospectus is a part) under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or any other
document are not necessarily complete, and in each instance, reference is made
to the copy of such contract or document filed as an exhibit or schedule to
the Registration Statement,
47
<PAGE>
each such statement being qualified in all respects by such reference. Copies
of the Registration Statement and the exhibits thereto are on file with the
Commission and the Nasdaq National Market and may be obtained at the above
locations.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, heretofore filed by the Company with the Commission
(File No. 0-27512) pursuant to the Exchange Act, are incorporated herein by
reference and made a part of this Prospectus:
1.The Company's Annual Report on Form 10-K for the year ended December 31,
1997.
2. The description of the Common Stock as contained in the Company's
Registration Statement on Form 8-A, dated January 11, 1996.
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of this offering shall be deemed to be incorporated by
reference in this Prospectus. Any statement contained herein, or in a document
incorporated or deemed to be incorporated by reference herein, shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained in this Prospectus or in any subsequently filed
document which also is or is deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any document incorporated herein by reference, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should
be directed to Investor Relations, CSG Systems International, Inc., 7887 E.
Belleview Avenue, Suite 1000, Englewood, Colorado 80111, telephone number
(303) 796-2850.
48
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997..................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<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 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Omaha, Nebraska
January 26, 1998
F-2
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 6,134 $ 20,417
Accounts receivable--
Trade--
Billed, net of allowance of $819 and $1,394............ 33,141 45,122
Unbilled............................................... 5,220 2,080
Other................................................... 1,342 1,400
Deferred income taxes.................................... 45 443
Other current assets..................................... 2,574 2,664
-------- ---------
Total current assets.................................. 48,456 72,126
-------- ---------
Property and equipment, net............................... 13,093 17,157
Investment in discontinued operations..................... 732 --
Software, net............................................. 13,629 1,959
Noncompete agreements and goodwill, net................... 25,730 13,938
Client contracts and related intangibles, net............. 9,752 64,640
Deferred income taxes..................................... 1,356 6,909
Other assets.............................................. 2,162 3,064
-------- ---------
Total assets.......................................... $114,910 $ 179,793
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt..................... $ 10,000 $ 6,750
Customer deposits........................................ 6,450 7,002
Trade accounts payable................................... 12,620 11,795
Accrued liabilities...................................... 8,627 11,023
Deferred revenue......................................... 5,384 11,063
Conversion incentive payments............................ -- 17,768
Accrued income taxes..................................... 945 3,207
-------- ---------
Total current liabilities............................. 44,026 68,608
-------- ---------
Non-current liabilities:
Long-term debt, net of current maturities................ 22,500 128,250
Deferred revenue......................................... 6,420 7,789
Conversion incentive payments............................ -- 8,232
-------- ---------
Total non-current liabilities......................... 28,920 144,271
-------- ---------
Commitments and contingencies (Note 9)
Stockholders' equity (deficit):
Preferred stock, par value $.01 per share; 10,000,000
shares authorized; zero shares issued and outstanding... -- --
Common stock, par value $.01 per share; 100,000,000
shares authorized; 2,890,522 and 5,996,563 shares
reserved for common stock warrants, employee stock
purchase plan and stock incentive plans; 25,488,876
shares and 25,479,968 shares issued and outstanding..... 255 255
Common stock warrants; zero and 1,500,000 warrants issued
and outstanding......................................... -- 26,145
Additional paid-in capital............................... 111,367 112,870
Deferred employee compensation........................... (1,207) (636)
Notes receivable from employee stockholders.............. (861) (685)
Cumulative translation adjustments....................... 573 (1)
Accumulated deficit...................................... (68,163) (171,034)
-------- ---------
Total stockholders' equity (deficit).................. 41,964 (33,086)
-------- ---------
Total liabilities and stockholders' equity............ $114,910 $ 179,793
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Processing and related services........... $ 96,343 $ 113,422 $ 131,399
Software license and maintenance fees..... 57 14,736 26,880
Professional services..................... 4 4,139 13,525
--------- ---------- ----------
Total revenues.......................... 96,404 132,297 171,804
--------- ---------- ----------
Expenses:
Cost of revenues:
Cost of processing and related services:
Direct costs............................. 46,670 52,027 58,259
Amortization of acquired software........ 11,000 11,003 10,596
Amortization of client contracts and
related intangibles..................... 4,092 4,092 4,293
--------- ---------- ----------
Total cost of processing and related
services............................... 61,762 67,122 73,148
Cost of software license and maintenance
fees..................................... -- 5,040 9,787
Cost of professional services............. -- 2,083 7,047
--------- ---------- ----------
Total cost of revenues.................. 61,762 74,245 89,982
--------- ---------- ----------
Gross margin.............................. 34,642 58,052 81,822
--------- ---------- ----------
Operating expenses:
Research and development:
Research and development................. 14,278 20,206 22,586
Charge for purchased research and
development............................. -- -- 105,484
Impairment of capitalized software
development costs....................... -- -- 11,737
Selling and marketing..................... 3,770 8,213 10,198
General and administrative:
General and administrative............... 11,406 13,702 19,385
Amortization of noncompete agreements
and goodwill............................ 5,680 6,392 6,927
Impairment of intangible assets.......... -- -- 4,707
Stock-based employee compensation........ 841 3,570 449
Depreciation.............................. 5,687 5,121 6,884
--------- ---------- ----------
Total operating expenses................ 41,662 57,204 188,357
--------- ---------- ----------
Operating income (loss).................... (7,020) 848 (106,535)
--------- ---------- ----------
Other income (expense):
Interest expense.......................... (9,070) (4,168) (5,324)
Interest income........................... 663 844 1,294
Other..................................... -- -- 349
--------- ---------- ----------
Total other............................. (8,407) (3,324) (3,681)
--------- ---------- ----------
Loss before income taxes, extraordinary
item and discontinued operations.......... (15,427) (2,476) (110,216)
Income tax (provision) benefit............ -- -- --
--------- ---------- ----------
Loss before extraordinary item and
discontinued operations................... (15,427) (2,476) (110,216)
Extraordinary loss from early
extinguishment of debt................... -- (1,260) (577)
--------- ---------- ----------
Loss from continuing operations............ (15,427) (3,736) (110,793)
--------- ---------- ----------
Discontinued operations:
Loss from operations...................... (3,093) -- --
Gain (loss) from disposition.............. (660) -- 7,922
--------- ---------- ----------
Total gain (loss) from discontinued
operations............................. (3,753) -- 7,922
--------- ---------- ----------
Net loss................................... $ (19,180) $ (3,736) $ (102,871)
========= ========== ==========
Net loss per common share (basic and
diluted):
Loss attributable to common stockholders.. $ (5.51) $ (.14) $ (4.32)
Extraordinary loss from early
extinguishment of debt................... -- (.06) (.02)
Gain (loss) from discontinued operations.. (1.09) -- .31
--------- ---------- ----------
Net loss attributable to common
stockholders.............................. $ (6.60) $ (.20) $ (4.03)
========= ========== ==========
Weighted average common shares (basic and
diluted).................................. 3,450,415 21,872,860 25,497,033
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
COMMON ADDITIONAL DEFERRED FROM CUMULATIVE STOCKHOLDERS'
PREFERRED COMMON STOCK PAID-IN EMPLOYEE EMPLOYEE TRANSLATION ACCUMULATED EQUITY
STOCK STOCK WARRANTS CAPITAL COMPENSATION STOCKHOLDERS ADJUSTMENTS DEFICIT (DEFICIT)
--------- ------ -------- ---------- ------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Purchase of 5,753
shares of common
stock pursuant to
employee stock
purchase plan
(ranging from
$13.07 per share
to $17.21 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
Issuance of 1,683
shares of common
stock for
purchase of
assets ($44.56
per share)....... -- -- -- 75 -- -- -- -- 75
Issuance of
1,500,000 common
stock warrants,
granted as part
of the SUMMITrak
asset acquisition
(exercise price
of $24 per
share)........... -- -- 26,145 -- -- -- -- -- 26,145
Amortization of
deferred stock-
based employee
compensation
expense.......... -- -- -- -- 449 -- -- -- 449
Purchase and
cancellation of
104,550 shares of
common stock
(ranging from
$.22 per share to
$4.25 per
share)........... -- -- -- (344) 122 176 -- -- (46)
Exercise of stock
options for
74,300 shares of
common stock
(ranging from
$1.25 per share
to $29.75 per
share)........... -- -- -- 1,018 -- -- -- -- 1,018
Purchase of 19,659
shares of common
stock pursuant to
employee stock
purchase plan
(ranging from
$14.34 per share
to $34.00 per
share)........... -- -- -- 439 -- -- -- -- 439
Translation
adjustments...... -- -- -- -- -- -- (574) -- (574)
Tax benefit of
stock options
exercised........ -- -- -- 315 -- -- -- -- 315
Net loss.......... -- -- -- -- -- -- -- (102,871) (102,871)
----- ---- ------- -------- ------- ----- ----- --------- ---------
BALANCE, DECEMBER
31, 1997......... $ -- $255 $26,145 $112,870 $ (636) $(685) $ (1) $(171,034) $ (33,086)
===== ==== ======= ======== ======= ===== ===== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(19,180) $ (3,736) $(102,871)
Adjustments to reconcile net loss to net cash
provided by operating activities--
Depreciation.................................. 5,687 5,121 6,884
Amortization.................................. 21,686 22,180 23,035
Deferred income taxes......................... (296) (1,455) (5,891)
Charge for purchased research and
development.................................. -- -- 105,484
Impairment of capitalized software development
costs........................................ -- -- 11,737
Impairment of intangible assets............... -- -- 4,707
Stock-based employee compensation............. 841 3,570 449
Extraordinary loss from early extinguishment
of debt...................................... -- 1,260 577
Loss (gain) from discontinued operations...... 3,753 -- (7,922)
Changes in operating assets and liabilities:
Trade accounts and other receivables, net.... (3,108) (12,090) (9,511)
Other current and noncurrent assets.......... 179 (2,914) 11
Trade accounts payable and other
liabilities................................. 2,215 17,194 4,723
-------- -------- ---------
Net cash provided by operating activities.. 11,777 29,130 31,412
-------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net....... (5,202) (8,181) (9,389)
Acquisition of TCI related assets.............. -- -- (106,500)
Acquisition of businesses, net of cash
acquired...................................... -- (4,918) --
Additions to software.......................... -- (3,553) (10,185)
Proceeds from disposition of discontinued
operations.................................... (92) 2,000 8,654
-------- -------- ---------
Net cash used in investing activities...... (5,294) (14,652) (117,420)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 402 44,883 1,457
Payment of note receivable from employee
stockholder................................... -- 110 --
Purchase and cancellation of common stock...... -- (25) (46)
Payment of dividends for redeemable convertible
preferred stock............................... -- (4,497) --
Proceeds from long-term debt................... -- -- 150,000
Payments on long-term debt..................... (9,932) (52,568) (47,500)
Payment of deferred financing costs............ -- -- (3,181)
-------- -------- ---------
Net cash provided by (used in) financing
activities................................ (9,530) (12,097) 100,730
-------- -------- ---------
Effect of exchange rate fluctuations on cash.... -- 150 (439)
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents.................................... (3,047) 2,531 14,283
Cash and cash equivalents, beginning of period.. 6,650 3,603 6,134
-------- -------- ---------
Cash and cash equivalents, end of period........ $ 3,603 $ 6,134 $ 20,417
======== ======== =========
Supplemental disclosures of cash flow
information:
Cash paid (received) during the period for--
Interest...................................... $ 8,463 $ 4,000 $ 4,767
Income taxes.................................. $ 1,176 $ (655) $ 3,357
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During 1995, the Company issued common stock in connection with an
employee stock purchase plan and received full recourse promissory notes
from employees totaling $1.0 million.
During 1996, the Company converted 8,999,999 shares of redeemable
convertible preferred stock into 17,999,998 shares of common stock.
During 1997, the Company granted 1.5 million common stock warrants,
valued at $26.1 million, and recorded a liability for $26.0 million for
conversion incentive payments as part of the purchase price for the
SUMMITrak asset acquisition.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
CSG Systems International, Inc. (the "Company" or "CSG"), a Delaware
corporation, was formed on October 17, 1994, for the purpose of acquiring all
of the outstanding shares 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 shares of Anasazi Inc. ("Anasazi") (Note 10). On June 28, 1996,
the Company purchased all of the outstanding shares of Bytel Limited ("Bytel")
(Note 3).
The Company is a leading provider of customer care and billing solutions for
cable television and direct broadcast satellite providers, and also serves on-
line services and telecommunications providers. The Company's products and
services enable its clients to focus on their core businesses, improve
customer service, and enter new markets and operate more efficiently. The
Company offers its clients a full suite of processing and related services,
and software and professional services which automate customer care and
billing functions. These functions include set-up and activation of customer
accounts, sales support, order processing, invoice calculation, production and
mailing, management reporting, and customer analysis for target marketing. The
Company's products and services combine the reliability and high volume
transaction processing capabilities of a mainframe platform with the
flexibility of client/server architecture.
The Company operates in one business segment, generating 88.8 percent, 76.6
percent, and 73.1 percent of its total revenues from U.S. cable television
providers during the years ended December 31, 1995, 1996 and 1997,
respectively. The Company generated zero percent, 8.1 percent, and 9.6 percent
of its total revenues from sources outside the U.S., primarily in Europe,
during the years ended December 31, 1995, 1996 and 1997, respectively.
The Company derived approximately 84.8 percent, 77.3 percent and 76.7
percent of its total revenues in the years ended December 31, 1995, 1996 and
1997, respectively, from its core product, Communications Control System
("CCS") and related products and ancillary services.
The Company has two significant clients which, in the aggregate, represented
approximately 53.1 percent, 48.8 percent, and 53.0 percent of total revenues
for the years ended December 31, 1995, 1996 and 1997, respectively. The
largest single client contributed approximately 27.9 percent, 25.9 percent and
32.9 percent of total revenues for the years ended December 31, 1995, 1996 and
1997, 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 ("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 6) and to pay $4.5 million of accrued
dividends on the Preferred Stock (Note 5).
In September 1997, the Company acquired certain SUMMITrak assets from Tele-
Communications, Inc. ("TCI") and entered into a 15-year processing contract
with TCI (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 for all periods presented and the accounts of
Bytel since June 28, 1996. All material intercompany accounts and transactions
have been eliminated.
F-7
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 delivery, depending upon the nature and extent of the installation and/or
customization services, if any, to be provided by the Company. Term license
fees and maintenance fees are recognized ratably over the contract term.
Professional services are recognized as the related services are performed.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. SOP 97-2 is effective for software
transactions entered into by the Company beginning in fiscal year 1998. The
Company believes that its current revenue recognition accounting policies are
in compliance with SOP 97-2.
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 for financial reporting purposes. Depreciation
for income tax purposes is computed using accelerated methods.
Property and equipment at December 31 consists of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Computer equipment..................................... $ 15,546 $ 21,734
Leasehold improvements................................. 1,205 2,347
Operating equipment.................................... 4,156 5,205
Furniture and equipment................................ 1,971 3,834
Construction in process................................ 857 358
Other.................................................. 22 22
-------- --------
23,757 33,500
Less-accumulated depreciation.......................... (10,664) (16,343)
-------- --------
Property and equipment, net............................ $ 13,093 $ 17,157
======== ========
</TABLE>
F-8
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Realizability of Long-Lived and Intangible Assets
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of long-lived and
intangible assets may warrant revision or that the remaining balance of these
assets may not be recoverable. The Company evaluates the recoverability of its
long-lived and intangible assets by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows of certain long-lived and intangibles assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to their
estimated fair values.
Software
Software at December 31 consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Acquired software...................................... $ 33,422 $ 33,516
Internally developed software.......................... 3,131 2,547
-------- --------
36,553 36,063
Less-accumulated amortization.......................... (22,924) (34,104)
-------- --------
Software, net.......................................... $ 13,629 $ 1,959
======== ========
</TABLE>
Acquired software resulted from the Acquisition and is stated at cost.
Amortization expense related to acquired software for the years ended December
31, 1995, 1996 and 1997 was $11.0 million, $11.0 million and $10.6 million,
respectively.
The Company capitalizes certain software development costs when the
resulting products reach technological feasibility and begins amortization of
such costs upon the general availability of the products for licensing. The
Company capitalized costs of $3.1 million and $9.7 million for 1996 and 1997,
which included $2.5 million and $8.4 million of internal development costs and
$0.6 million and $1.3 million of purchased software, respectively.
Amortization of internally developed software and acquired software costs
begins when the products are available for general release to clients and is
computed separately for each product as the greater of 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
five years are used in the calculation of amortization. Amortization expense
related to capitalized software development costs for the years ended December
31, 1995, 1996 and 1997 was zero, $0.01 million and $0.6 million,
respectively.
The Company continually evaluates the carrying value of its unamortized
capitalized software development costs. The amount by which the unamortized
capitalized costs exceed the net realizable value of the asset is expensed.
During the fourth quarter of 1997, the Company recorded a charge of $11.7
million related to certain CSG Phoenix(TM) assets. After the consideration of
multiple factors and events, consisting primarily of an increase in demand for
the Company's outsourced processing services and previously announced delays
on the delivery of CSG Phoenix, such assets were reduced to their estimated
net realizable value as of December 31, 1997. The charge primarily includes
previously capitalized internal development costs and purchased software
incorporated into the product.
F-9
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Noncompete Agreements and Goodwill
Noncompete agreements and goodwill as of December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Noncompete agreements.................................. $ 26,812 $ 25,340
Goodwill............................................... 11,490 8,088
-------- --------
38,302 33,428
Less-accumulated amortization.......................... (12,572) (19,490)
-------- --------
Noncompete agreements and goodwill, net................ $ 25,730 $ 13,938
======== ========
</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).
During the fourth quarter of 1997, the Company recorded a charge of $4.7
million for the impairment of certain intangible assets related to software
systems which the Company has decided to no longer market and support. This
impairment charge relates principally to the Company's CableMAX product.
CableMAX is a personal computer based customer management system that is
targeted at smaller cable systems of 2,500 customers or less. During the
fourth quarter of 1997, the Company decided not to invest the resources
necessary to make the software year 2000 compliant, resulting in the
impairment to the CableMAX intangible assets. The estimated fair value of the
CableMAX intangible assets was based upon an analysis of expected future cash
flows and a quoted purchase price from an independent buyer.
Client Contracts and Related Intangibles
Client contracts and client conversion methodologies from the Acquisition
are being amortized over their estimated lives of five and three years,
respectively. The value assigned to the TCI processing contract (Note 4) is
being amortized over the 15-year life of the contract in proportion to the
guaranteed processing revenues under the contract. As of December 31, 1996 and
1997, accumulated amortization for client contracts and related intangibles
was $8.5 million and $12.8 million, respectively.
Customer Deposits
The Company requires postage and communications deposits from its clients
based on contractual arrangements. These amounts are reflected as current
liabilities regardless of the contract period.
Financial Instruments with Market Risk and Concentrations of Credit Risk
In the normal course of business, the Company is exposed to credit risk
resulting from the possibility that a loss may occur from the failure of
another party to perform according to the terms of a contract. The Company
regularly monitors credit risk exposures and takes steps to mitigate the
likelihood of these exposures resulting in a loss. The primary counterparties
to the Company's accounts receivable and sources of the Company's revenues
consist of cable television providers throughout the United States. The
Company generally does not require collateral or other security to support
accounts receivable.
Financial Instruments
The Company's balance sheet financial instruments as of December 31, 1996
and 1997 include cash and cash equivalents, accounts receivable, accounts
payable, conversion incentive payments, and long-term debt.
F-10
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Because of their short maturities, the carrying amounts of cash equivalents,
accounts receivable, accounts payable, and conversion incentive payments
approximate fair value. The carrying amount of the Company's long-term debt
(including current maturities) approximates fair value due to its variable
interest rates.
In December 1997, the Company entered into a three-year interest rate collar
with a major bank to manage its risk from its variable rate long-term debt.
The underlying notional amount covered by the collar agreement is $75.0
million as of December 31, 1997, and decreases over the three-year term in
relation to the scheduled principal payments on the long-term debt. Any
payment on the 4.9 percent (LIBOR) interest rate floor, or receipt on the 7.5
percent (LIBOR) interest rate cap component of the collar, would be recognized
as additional interest expense or as a reduction to interest expense,
respectively, in the period incurred. There are no amounts due or receivable
under this agreement as of December 31, 1997, and the agreement had no effect
on the Company's interest expense for 1997. The fair value of the collar
agreement at December 31, 1997, based on a quoted market price, was not
significant.
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 Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
which specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS"). SFAS 128 is effective for periods ending after
December 15, 1997, and requires retroactive restatement of EPS for all prior
periods presented. The statement replaces the previous "primary earnings per
share" computation with a "basic earnings per share" and redefines the
"diluted earnings per share" computation. Basic EPS is computed by dividing
income attributable to Common Stockholders by the weighted average number of
common shares outstanding during the period. Diluted EPS is consistent with
the calculation of basic EPS while giving effect to any dilutive potential
common shares outstanding during the period.
A reconciliation of the net loss attributable to common stockholders in
total dollars (in thousands) and on a per share basis is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Loss before extraordinary item and
discontinued operations............... $ (15,427) $ (2,476) $ (110,216)
Preferred stock dividends.............. (3,586) (614) --
--------- ---------- ----------
Loss attributable to common
stockholders.......................... (19,013) (3,090) (110,216)
Extraordinary item..................... -- (1,260) (577)
Gain (loss) from discontinued
operations............................ (3,753) -- 7,922
--------- ---------- ----------
Net loss attributable to common
stockholders.......................... $ (22,766) $ (4,350) $ (102,871)
========= ========== ==========
Loss before extraordinary item and
discontinued operations............... $ (4.47) $ (.11) $ (4.32)
Preferred stock dividends.............. (1.04) (.03) --
--------- ---------- ----------
Loss attributable to common
stockholders.......................... (5.51) (.14) (4.32)
Extraordinary item..................... -- (.06) (.02)
Gain (loss) from discontinued
operations............................ (1.09) -- .31
--------- ---------- ----------
Net loss attributable to common
stockholders.......................... $ (6.60) $ (.20) $ (4.03)
========= ========== ==========
Weighted average common shares......... 3,450,415 21,872,860 25,497,033
========= ========== ==========
</TABLE>
F-11
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following weighted average dilutive potential common shares are excluded
from the diluted EPS calculation as their effect was antidilutive.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1996 1997
---------- --------- -------
<S> <C> <C> <C>
Redeemable convertible preferred stock.......... 17,999,998 3,115,384 --
Common stock options............................ 82,465 305,818 571,967
Common stock warrants........................... -- -- 152,718
---------- --------- -------
Total dilutive potential common shares.......... 18,082,463 3,421,202 724,685
========== ========= =======
</TABLE>
In previously reported periods, the Company followed Staff Accounting
Bulletin ("SAB") No. 83 in calculating EPS for the periods prior to the
Company's IPO. Pursuant to SAB No. 83, all preferred and common stock and
options outstanding for periods prior to the IPO had been treated as if they
were outstanding for all periods presented, including periods in which the
effect was antidilutive. SAB No. 98, released in February 1998, requires that
SFAS 128 now be followed in determining the outstanding shares for purposes of
calculating EPS for all periods. As a result, the Company has restated its EPS
(and all other per share computations) for the periods prior to and including
the IPO following the guidelines of SFAS 128. The changes in the weighted
average common shares and the EPS are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Previously reported weighted average common
shares............................................ 22,494,748 24,988,244
Restated weighted average common shares............ 3,450,415 21,872,860
Previously reported net loss per share attributable
to common stockholders............................ $ (.86) $ (.15)
Restated net loss per share attributable to common
stockholders...................................... $ (6.60) $ (.20)
</TABLE>
Stock-Based Compensation
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations, and follows the disclosure provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"). See Note 12 for the required disclosures
under SFAS 123.
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 and 1996 amounts have been reclassified to conform
to the December 31, 1997 presentation.
3. BUSINESS ACQUISITIONS
CSG Systems
On November 30, 1994, the Company acquired all of the outstanding shares 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
5) and long-term debt (Note 6).
F-12
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Acquisition 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, and had no other alternative future use. 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.
Bytel Limited
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.
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,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Total revenues................................. $ 105,275 $ 136,536
Loss attributable to common stockholders....... (21,246) (4,464)
Pro forma loss per share attributable to common
stockholders (basic and diluted).............. (6.16) (.20)
</TABLE>
The pro forma financial information shown above does not purport to be
indicative of results of operations that would have occurred had the
acquisition taken place at the beginning of the periods presented or of the
future results of operations.
F-13
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUMMITRAK ASSET ACQUISITION
On August 10, 1997, the Company signed a 15-year exclusive contract with a
TCI affiliate to consolidate 13.0 million TCI customers onto the Company's
customer care and billing system (the "TCI Contract"). On August 10, 1997, the
Company also entered into an agreement with TCI affiliates to acquire certain
SUMMITrak assets, a client/server, open systems, in-house customer care and
billing system in development (the "SUMMITrak Acquisition"). The SUMMITrak
assets purchased consisted primarily of software, hardware, assembled
workforce and intellectual property. Both the SUMMITrak Acquisition and the
TCI Contract closed and became effective September 19, 1997. The purchase
price for the SUMMITrak Acquisition was determined as follows (in thousands):
<TABLE>
<S> <C>
Cash paid at closing............................................. $106,000
Transaction-related costs........................................ 500
Common Stock warrants granted.................................... 26,145
Conversion incentive payments.................................... 26,000
--------
Total purchase price........................................... $158,645
========
</TABLE>
The conversion incentive payments represent payments to TCI to i) incent TCI
to timely convert its customers to the Company's system, and ii) reimburse TCI
for the cost of converting to the Company's system. TCI will receive a monthly
payment of $0.15 per customer for the first 24 months after the customer is
converted to the Company's system (total of $3.60 per customer), up to a total
of $14.0 million. A total of 3.89 million TCI customers converted to the
Company's systems equates to the $14.0 million. TCI will be paid an additional
$12.0 million when the Company processes a total of 13.0 million TCI customers
on its system. Based on the conversions scheduled as of December 31, 1997, the
Company expects to pay TCI $17.8 million and $8.2 million in 1998 and 1999,
respectively.
The Company granted 1.5 million warrants to TCI as part of the overall
purchase price. The warrants have a five-year life with a $24 per share
exercise price. The fair value of the warrants included in the purchase price
was estimated as of the date of the grant using the Black-Scholes pricing
model. TCI will be able to exercise 1.0 million of the warrants when the
Company processes a total of 13.0 million TCI customers on its customer care
and billing system. The remaining 0.5 million warrants are exercisable at
various increments as additional TCI customers are converted to the Company's
systems. The total 1.5 million warrants are exercisable when the total number
of TCI customers processed on the Company's systems reaches 14.25 million.
The Company has included the conversion incentive payments and the estimated
fair value of the warrants in the overall purchase price as the Company
believes that such consideration is assured beyond a reasonable doubt as i)
TCI currently has the necessary customers under its control to meet the
milestones described above, ii) the Company believes it has the means to
timely convert the necessary customers to its systems to meet the milestones
described above, iii) both the Company and TCI are financially incented to
timely convert the necessary customers to the Company's system to meet the
milestones described above and iv) TCI's minimum financial commitments are
based on a minimum of 13.0 million customers.
The Company engaged an independent party to assist in the allocation of the
purchase price to the assets acquired. The Company allocated the purchase
price as follows (in thousands):
<TABLE>
<S> <C>
Purchased research and development............................... $105,000
15-Year Contract................................................. 51,575
Other assets..................................................... 2,070
--------
Total allocated purchase price................................... $158,645
========
</TABLE>
F-14
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Purchased research and development represents research and development of
software technologies which had not reached technological feasibility as of
the acquisition date, and had no other alternative future use. Purchased
research and development was charged to operations in the fourth quarter of
1997. The value assigned to the 15-Year Contract will be amortized over the
life of the contract in proportion to the guaranteed processing revenues under
the contract. The other assets will be depreciated over their estimated useful
lives of three years.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The following table represents the 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>
In conjunction with the Acquisition (Note 3), the Company sold for cash
8,999,999 shares of 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 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 Preferred Stock were converted. All
Preferred Stock converted into 17,999,998 shares of the Company's Common Stock
upon completion of the IPO in March 1996.
Prior to completion of the IPO, the holders of the outstanding shares of
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.
Upon completion of the IPO and the resulting conversion into Common Stock, the
Company paid dividends on the Preferred Stock of $4.5 million.
Prior to completion of the IPO, the Company was required to redeem 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.
6. DEBT
The Acquisition discussed in Note 3 was partially funded with debt placed
through a $100.0 million debt agreement with a bank (the "1994 Debt"). The
1994 Debt consisted of term loans of $95.0 million, and a revolving credit
facility in the amount of $5.0 million. The Company made early payments on the
1994 Debt of $2.4 million and $2.0 million in 1995 and 1996, respectively. In
conjunction with the IPO, the Company
F-15
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
refinanced its 1994 Debt with its bank in April 1996. The Company repaid
approximately $40.6 million of the outstanding 1994 Debt, principally with IPO
proceeds. The remaining balance of the 1994 Debt was refinanced with a single
$40.0 million term note with the bank (the "1996 Debt"). In conjunction with
this refinancing, 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. Under the 1996 Debt
agreement, the Company retained its $5.0 million revolving credit facility.
The Company paid an annual commitment fee of .375 percent on its unused
portion of the revolving credit facility. Interest rates for the 1994 and 1996
Debt 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 SUMMITrak Acquisition, the Company entered into a
$190.0 million debt agreement with a bank in September 1997 (the "1997 Debt"),
which consists of a $150.0 million term facility (the "Term Credit Facility")
and a $40.0 million revolving credit facility. The proceeds from the Term
Credit Facility were used to pay the $106.0 million cash purchase price for
the SUMMITrak assets, retire the Company's existing 1996 Debt of $27.5
million, and pay transaction costs of $3.4 million. The remaining proceeds
were used for general corporate purposes. In conjunction with this
refinancing, the Company recorded an extraordinary loss of $0.6 million for
the write-off of deferred financing costs. The Company did not recognize any
income tax benefit related to the extraordinary loss. In December 1997, the
Company made an optional principal payment on the Term Credit Facility of
$15.0 million.
Interest rates for the 1997 Debt, including the term and revolving credit
facilities, are chosen at the option of the Company and are based on the LIBOR
rate or the prime rate, plus an additional percentage spread, with the spread
dependent upon the Company's leverage ratio. For the period from September
1997 through December 31, 1997, the spread on the LIBOR rate and prime rate
was 1.75 percent and 0.5 percent, respectively. Based on the Company's
leverage ratio as of December 31, 1997, the spread on the LIBOR rate and prime
rate was reduced to 1.0 percent and 0 percent, respectively, effective January
1, 1998. As required by the 1997 Debt agreement, the Company entered into an
interest rate collar agreement in December 1997 to manage its risk from the
variable rate features of the 1997 Debt agreement (Note 2).
The 1997 Debt agreement is collateralized by all of the Company's assets and
the stock of its subsidiaries. The 1997 Debt agreement requires maintenance of
certain financial ratios and contains other restrictive covenants, including
restrictions on payment of dividends, a fixed charge coverage ratio, a
leverage ratio, and restrictions on capital expenditures. As of December 31,
1997, the Company was in compliance with all covenants. The payment of
dividends or other types of distributions on any class of the Company's stock
is restricted unless the Company's leverage ratio, as defined in the 1997 Debt
agreement, is under 1.50. As of December 31, 1997, the leverage ratio was
2.80.
Long-term debt as of December 31 consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Term Credit Facility, due September 2002, quarterly
payments beginning June 30, 1998, ranging from $2.3
million to $18.0 million, interest at adjusted LIBOR plus
1.75 percent (7.4375 percent at December 31, 1997)........ $ -- $135,000
1996 Debt, due December 2000, quarterly principal payments
ranging from $1.6 million to $2.5 million, interest at
adjusted LIBOR plus 1.0 percent (6.375 percent at December
31, 1996)................................................. 32,500 --
Revolving credit facilities, due September 2002, interest
at adjusted LIBOR plus 1.75 percent (7.4375 percent at
December 31, 1997)........................................ -- --
-------- --------
32,500 135,000
Less-current portion....................................... (10,000) (6,750)
-------- --------
Long-term debt, net of current maturities.................. $ 22,500 $128,250
======== ========
</TABLE>
F-16
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
There were no borrowings made on the revolving credit facilities during the
years ended December 31, 1995, 1996 and 1997. Under the 1997 Debt agreement,
the Company pays an annual commitment fee on the unused portion of the
revolving credit facility, based upon the Company's leverage ratio. For the
period from September 1997 through December 31, 1997, the fee was .375
percent. The Company's ability to borrow under the current revolving credit
facility is subject to maintenance of certain levels of eligible receivables.
At December 31, 1997, $30.6 million of the $40.0 million revolving credit
facility was available to the Company based on the level of eligible
receivables.
As of December 31, 1996 and 1997, unamortized deferred financing costs were
$0.9 million and $2.9 million, respectively. Deferred financing costs are
amortized to interest expense over the related term of the debt agreement
using a method which approximates the effective interest rate method. Interest
expense for the years ended December 31, 1995, 1996 and 1997, includes
amortization of deferred financing costs of approximately $0.9 million, $0.6
million, and $0.5 million, respectively.
As of December 31, 1997, scheduled maturities of the Company's long-term
debt for each of the years ending December 31 are (in thousands):
<TABLE>
<S> <C>
1998.............................................................. $ 6,750
1999.............................................................. 19,125
2000.............................................................. 29,250
2001.............................................................. 34,875
2002.............................................................. 45,000
--------
$135,000
========
</TABLE>
7. 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>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $ 249 $ 1,225 $ 4,466
State......................................... 47 230 615
Foreign....................................... -- -- 810
------- ------- --------
296 1,455 5,891
------- ------- --------
Deferred:
Federal....................................... (6,329) (2,305) (38,298)
State......................................... (1,188) (433) (5,276)
Foreign....................................... -- 503 393
------- ------- --------
(7,517) (2,235) (43,181)
------- ------- --------
Change in valuation allowance.................. 7,221 780 37,290
------- ------- --------
Net income tax provision (benefit)............. $ -- $ -- $ --
======= ======= ========
</TABLE>
F-17
<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 provision (benefit) for
income taxes is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Benefit at federal rate of 34 percent in
1995 and 1996, and 35 percent in 1997...... $(6,521) $(1,270) $(36,005)
Change in valuation allowance............... 6,656 1,283 37,290
Effective state income taxes................ (694) (134) (3,030)
Basis differences from acquisition.......... -- (1,346) --
Amortization of nondeductible goodwill...... 227 231 1,582
Stock-based employee compensation........... 286 1,214 157
Other....................................... 46 22 6
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</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 1997
-------- --------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accrued expenses and reserves......................... $ 744 $ 1,325
Deferred revenue...................................... -- 3,033
-------- --------
744 4,358
Valuation allowance................................... (699) (3,915)
-------- --------
$ 45 $ 443
======== ========
Noncurrent deferred tax assets (liabilities):
Purchased research and development.................... $ 13,040 $ 51,224
Software.............................................. 4,743 8,345
Investment in discontinued operations................. 2,053 --
Client contracts and related intangibles.............. 1,766 1,508
Noncompete agreements................................. 2,467 3,965
Property and equipment................................ (262) 443
Other................................................. 883 (1,168)
-------- --------
24,690 64,317
Valuation allowance................................... (23,334) (57,408)
-------- --------
$ 1,356 $ 6,909
======== ========
</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.
At December 31, 1997, management evaluated its recent operating results, as
well as projections for 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 $7.4 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, 1997.
F-18
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE RETIREMENT BENEFIT PLANS
Defined Benefit Retirement Plan
Effective December 1, 1994, as part of the Acquisition, the Company
established a replacement plan for certain former employees of FDC which
transferred their service credit to CSG. 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 years ended December 31, 1995, 1996 and 1997, was $0.2 million each year.
The net pension liability recognized in the accompanying consolidated balance
sheets as of December 31, 1996 and 1997 is $0.2 million and $0.3 million,
respectively.
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, 1995, 1996 and 1997, were
approximately $1.3 million, $1.5 million and $2.0 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 obligations expected to be paid
under the plan. As of December 31, 1996 and 1997, the Company has recorded a
liability for this obligation of $0.1 million and $0.6 million, respectively.
The Company's expense for this plan for the years ended December 31, 1996 and
1997, which includes Company contributions and interest expense, was $0.02
million and $0.1 million, respectively. The plan is unfunded.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain office and production facilities under operating
leases which run through 2007. Future aggregate minimum lease payments under
these agreements for the years ending December 31, including a lease entered
into subsequent to December 31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 3,949
1999............................................................... 3,884
2000............................................................... 3,191
2001............................................................... 2,653
2002............................................................... 2,320
Thereafter......................................................... 6,516
-------
$22,513
=======
</TABLE>
F-19
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total rent expense for the years ended December 31, 1995, 1996 and 1997, was
approximately $1.8 million, $1.9 million and $3.4 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. 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 total amount paid under the service agreements for the
years ended December 31, 1995, 1996 and 1997, was approximately $16.9 million,
$19.6 million and $19.2 million, respectively. The Company believes it could
obtain data processing services from alternative sources, if necessary.
Legal Proceedings
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.
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 $2.0 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. The
trial is currently scheduled to commence in July 1998.
In addition, from time to time, the Company is involved in other litigation
relating to claims arising out of its operations in the normal course of
business. In the opinion of the Company's management, after consultation with
outside legal counsel, the ultimate dispositions of such matters will not have
a materially adverse effect on the Company's consolidated financial position
or results of operations.
10. DISCONTINUED OPERATIONS
Contemporaneously with the Acquisition, the Company purchased all of the
outstanding shares 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
F-20
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. 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. In June 1996, the Company converted the remaining $0.7 million
note balance into convertible preferred stock and stock warrants of Anasazi.
In September 1997, the Company sold its remaining interest in Anasazi for $8.6
million cash.
The Company accounted for its ownership in Anasazi as discontinued
operations after its acquisition in 1994. As a result, the loss from
discontinued operations included in the Company's Consolidated Financial
Statements consists of the net losses of Anasazi prior to September 1, 1995.
The loss of $0.7 million in August 1995, and the gain of $7.9 million in
September 1997 relates to the Company's partial and then final disposition of
its ownership interest in Anasazi. Revenues from Anasazi's operations for the
eight months ended August 31, 1995 were $5.8 million. The Company did not
recognize any income tax benefit or provision related to the loss or gain from
discontinued operations.
11. 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 12).
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, 1997:
<TABLE>
<CAPTION>
STOCK PURCHASE RESTRICTED PERFORMANCE TOTAL
AGREEMENT SHARES STOCK 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 repurchased and
canceled in 1997..... -- (44,400) (60,150) (104,550)
--------- ------- --------- ---------
Shares outstanding,
December 31, 1997...... 1,150,000 523,000 2,359,850 4,032,850
========= ======= ========= =========
Shares subject to
repurchase, December
31, 1997............... -- 165,640 369,360 535,000
========= ======= ========= =========
</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.
F-21
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 originally scheduled to be released from the repurchase
option not later than November 30, 2001. Upon completion of the IPO,
160,000 shares owned 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 and 1997, the Company repurchased 25,600 unvested
shares and 44,400 unvested shares, respectively, from terminated employees.
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
originally 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 and 1997, the Company repurchased 80,000 unvested shares and
60,150 unvested shares, respectively, from terminated employees.
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 and 1997, the outstanding balance of the promissory notes is
approximately $861,000 and $685,000, respectively, 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, 1995, 1996 and 1997, was $0.8
million, $3.6 million and $0.4 million, respectively. Deferred compensation of
$1.2 million and $0.6 million, respectively, as of December 31, 1996 and 1997,
is reflected as a component of stockholders' equity. Amortization of the
stock-based deferred compensation subsequent to 1997 will be approximately
$0.3 million per year.
F-22
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For discussion of outstanding rights to acquire additional Common Stock, see
Notes 4 and 12.
12. 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 170,400
options outstanding under the 1995 Plan at December 31, 1997, vest annually
over 5 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. In December 1997, upon shareholder
approval, the number of shares authorized for issuance under the 1996 Plan was
increased to 4,000,000. As of December 31, 1997, 100,000, 947,150 and 810,560
options outstanding under the 1996 Plan vest annually over 3, 4 and 5 years,
respectively.
During 1997, the Company adopted the Stock Option Plan for Non-Employee
Directors (the "Director Plan") whereby 100,000 shares of the Company's Common
Stock have been reserved for issuance to non-employee Directors of the Company
in the form of stock options. Stock options under the Director 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. The
48,000 options outstanding under the Director Plan at December 31, 1997, vest
annually over 3 years.
A summary of the stock options issued under the 1996 Plan, the Director
Plan, and 1995 Plan and changes during the years ending December 31 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1995 1996 1997
---------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year................ -- $ -- 251,750 $ 1.35 1,434,730 $ 18.62
Granted................ 251,750 1.35 1,223,380 21.78 1,111,700 23.21
Exercised.............. -- -- (4,800) 1.33 (74,300) 13.59
Forfeited.............. -- -- (35,600) 7.36 (396,020) 20.70
------- ------ --------- ------- --------- -------
Outstanding, end of
year................... 251,750 $ 1.35 1,434,730 $ 18.62 2,076,110 $ 20.86
======= ====== ========= ======= ========= =======
Options exercisable at
year-end............... -- 42,150 265,076
======= ========= =========
Weighted average fair
value of options
granted during the
year................... $ .30 $ 9.77 $ 9.20
======= ========= =========
Options available for
grant.................. 5,250 1,211,545 2,195,865
======= ========= =========
</TABLE>
F-23
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about the Company's stock options
as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.25-$ 3.75........... 170,400 7.65 $ 1.37 58,350 $ 1.40
$15.00-$22.125.......... 1,254,450 8.83 18.17 111,500 17.33
$23.50-$29.875.......... 514,760 8.81 29.17 95,226 29.27
$33.56-$46.75........... 136,500 9.82 38.62 -- --
--------- ---- ------- ------- -------
$ 1.25-$46.75........... 2,076,110 8.79 $ 20.86 265,076 $ 18.11
========= ==== ======= ======= =======
</TABLE>
In January 1998, the Company granted 489,300 options at a weighted average
price per share of $42.22 under the 1996 Plan, with 468,000 shares and 21,300
shares vesting over four and two years, respectively. These options are not
reflected in the above tables as they were granted subsequent to December 31,
1997.
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 of the purchase period. Purchases are made at the end of
each month. During 1996 and 1997, respectively, 5,753 shares and 19,659 shares
have been purchased under the plan for $83,000 ($13.07 to $17.21 per share)
and $439,000 ($14.34 to $34.00 per share).
Stock-Based Compensation Plans
At December 31, 1997, the Company had four stock-based compensation plans,
as described above. The Company accounts for these plans under APB Opinion No.
25, under which no compensation expense has been recognized in 1995, 1996 or
1997, except for $89,000 recognized in 1996 for 5,925 shares granted as stock
bonus awards under the 1996 Plan.
Had compensation expense for the Company's four stock-based compensation
plans been based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS 123, the Company's net loss and net
loss per share attributable to common stockholders for 1995, 1996 and 1997
would approximate the pro forma amounts as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- ------- ---------
<S> <C> <C> <C>
Net loss:
As reported............................... $(22,766) $(4,350) $(102,871)
Pro forma................................. (22,770) (5,263) (104,776)
Net loss per common share (basic and dilut-
ed):
As reported............................... (6.60) (.20) (4.03)
Pro forma................................. (6.60) (.24) (4.11)
</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 1995, 1996 and 1997, respectively: risk-
free interest rates of 6.3 percent, 6.1 percent and 6.3 percent; dividend
yield of zero percent for
F-24
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
all years; expected lives of 4.0, 5.0, and 3.9 years; and volatility of zero
percent, 40.0 percent, and 40.0 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 1995, 1996 and 1997,
and additional awards in future years are anticipated.
13. 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:
Total revenues..................... $26,757 $30,431 $35,320 $ 39,789
Gross margin....................... 10,153 12,288 15,722 19,889
Operating income (loss)(1)(2)...... (4,992) (82) 1,541 4,381
Income (loss) attributable to
common stockholders............... (7,117) (696) 948 3,775
Extraordinary item(1)............. (1,260) -- -- --
Net income (loss) attributable to
common stockholders............... (8,377) (696) 948 3,775
Net income (loss) per share (basic
and diluted):
Income (loss) attributable to
common stockholders.............. (.65) (.03) .04 .15
Extraordinary item................ (.11) -- -- --
Net income (loss) attributable to
common stockholders.............. (.76) (.03) .04 .15
1997:
Total revenues..................... $38,582 $41,030 $43,278 $ 48,914
Gross margin....................... 16,094 18,862 21,235 25,631
Operating income (loss)(4)......... 1,327 2,117 3,740 (113,719)
Income (loss) attributable to
common stockholders............... 1,164 1,731 3,113 (116,224)
Extraordinary item(3)............. -- -- (577) --
Discontinued operations(3)........ -- -- 7,922 --
Net income (loss) attributable to
common stockholders............... 1,164 1,731 10,458 (116,224)
Net income (loss) per share (basic
and diluted):
Income (loss) attributable to
common stockholders.............. .05 .07 .12 (4.56)
Extraordinary item................ -- -- (.02) --
Discontinued operations........... -- -- .30 --
Net income (loss) attributable to
common stockholders.............. .05 .07 .40 (4.56)
</TABLE>
- --------
(1) The first quarter of 1996 includes a $3.2 million non-recurring charge, or
$0.29 per share, to record stock-based compensation expense for certain
employees vesting in their performance stock purchase agreements effective
with the closing of the IPO (Note 11). In addition, the first quarter of
1996 includes a $1.3 million extraordinary charge for early extinguishment
of debt (Note 6).
(2) During the fourth quarter of 1996, the Company recorded a reduction in
operating expenses of approximately $1.4 million, or $0.05 per share,
related to favorable pricing adjustments for processing services
previously recorded as expense ratably over the first three quarters of
1996.
(3) The third quarter of 1997 includes a $0.6 million extraordinary charge for
early extinguishment of debt (Note 6). In addition, the third quarter of
1997 includes a $7.9 million gain on disposition of discontinued
operations (Note 10).
F-25
<PAGE>
(4) The fourth quarter of 1997 includes the following non-recurring items:
(a) The Company recorded a $105.5 million charge, or $4.14 per share, for
purchased research and development related primarily to the SUMMITrak asset
acquisition (Note 4).
(b) The Company recorded a $11.7 million charge, or $0.46 per share, for
impairment of certain capitalized software development costs (Note 2). This
charge includes internal software development costs of $8.4 million which
were previously capitalized over the first three quarters of 1997 at $2.8
million per quarter.
(c) The Company recorded a $4.7 million charge, or $0.18 per share, for
impairment of certain intangible assets (Note 2).
F-26
<PAGE>
[LOGO OF CSG]
<PAGE>
RULE NO. 424(b)(1)
REGISTRATION NO. 333-48135
PROSPECTUS
3,498,700 Shares
LOGO
CSG Systems International, Inc.
COMMON STOCK
----------------
ALL OF THE 3,498,700 SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE BEING
SOLD BY THE SELLING STOCKHOLDERS. SEE "PRINCIPAL AND SELLING
STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM
THE SALE OF SHARES OF COMMON STOCK BY THE SELLING STOCKHOLDERS. OF
THE 3,498,700 SHARES OF COMMON STOCK BEING OFFERED HEREBY,
699,740 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE
UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS AND 2,798,960 SHARES ARE BEING OFFERED
INITIALLY IN THE UNITED STATES AND CANADA BY THE
U.S. UNDERWRITERS. SEE "UNDERWRITERS." THE
COMMON STOCK OF THE COMPANY IS QUOTED ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"CSGS." ON APRIL 6, 1998, THE REPORTED
LAST SALE PRICE OF THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET WAS
$47 3/16 PER SHARE.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
PRICE $47 3/16 A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS (1) STOCKHOLDERS (2)
------------ --------------- ----------------
<S> <C> <C> <C>
Per Share......................... $47.1875 $2.1875 $45.00
Total (3)......................... $165,094,906 $7,653,406 $157,441,500
</TABLE>
- --------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) See "Underwriters" for information relating to the payment of expenses in
connection with the Offering.
(3) Certain Selling Stockholders have granted to the U.S. Underwriters an
option, exercisable within 30 days of the date hereof, to purchase up to
an aggregate of 524,805 additional Shares of Common Stock at the price to
public less underwriting discounts and commissions for the purpose of
covering over-allotments, if any. If the U.S. Underwriters exercise such
option in full, the total price to public, underwriting discounts and
commissions and proceeds to selling stockholders will be $189,859,142,
$8,801,417 and $181,057,725, respectively. The Company will not receive
any proceeds from the sale of Shares by the Selling Stockholders. See
"Principal and Selling Stockholders" and "Underwriters."
----------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Davis Polk & Wardwell, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about April 13, 1998 at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.
----------------
MORGAN STANLEY DEAN WITTER BT ALEX. BROWN INTERNATIONAL
April 6, 1998
