<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number 0-27512
CSG SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0783182
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7887 EAST BELLEVIEW, SUITE 1000
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices, including zip code)
(303) 796-2850
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Shares of common stock outstanding at August 7, 1998: 25,622,562
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PAGE NO.
--------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 ................................... 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1998 and 1997 ....... 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 ................. 5
Notes to Condensed Consolidated Financial Statements .... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 8
Part II - OTHER INFORMATION
Item 1. Legal Proceedings........................................ 15
Item 4. Submission of Matters to a Vote of Security Holders...... 15
Item 5. Other Information........................................ 15
Item 6. Exhibits and Reports on Form 8-K......................... 16
Signatures............................................... 17
Index to Exhibits........................................ 18
2
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CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 26,174 $ 20,417
Accounts receivable-
Trade-
Billed, net of allowance of $1,783 and $1,394.................................. 55,332 44,678
Unbilled....................................................................... 1,400 2,080
Other.............................................................................. 1,193 1,400
Deferred income taxes................................................................. 911 443
Other current assets.................................................................. 3,360 2,664
--------- ---------
Total current assets............................................................... 88,370 71,682
--------- ---------
Property and equipment, net of depreciation of $19,926 and $16,343...................... 19,991 17,157
Software, net of amortization of $34,446 and $34,104.................................... 3,041 1,959
Noncompete agreements and goodwill, net of amortization of $22,192 and $19,490.......... 10,300 13,938
Client contracts and related intangibles, net of amortization of $15,066 and $12,822.... 62,396 64,640
Deferred income taxes................................................................... 12,816 6,909
Other assets............................................................................ 2,939 3,064
--------- ---------
Total assets...................................................................... $ 199,853 $ 179,349
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................................. $ 12,375 $ 6,750
Customer deposits..................................................................... 8,456 7,002
Trade accounts payable................................................................ 9,363 11,795
Accrued liabilities................................................................... 14,111 11,023
Deferred revenue...................................................................... 8,723 10,619
Conversion incentive payments......................................................... 22,526 17,768
Accrued income taxes.................................................................. 6,662 3,207
--------- ---------
Total current liabilities.......................................................... 82,216 68,164
--------- ---------
Non-current liabilities:
Long-term debt, net of current maturities............................................. 120,375 128,250
Deferred revenue...................................................................... 8,264 7,789
Conversion incentive payments......................................................... 2,834 8,232
--------- ---------
Total non-current liabilities...................................................... 131,473 144,271
--------- ---------
Stockholders' 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;
25,602,226 shares and 25,479,968 shares outstanding................................ 256 255
Common stock warrants; 1,500,000 warrants issued and outstanding..................... 26,145 26,145
Additional paid-in capital............................................................ 116,706 112,870
Deferred employee compensation........................................................ (476) (636)
Notes receivable from employee stockholders........................................... (539) (685)
Cumulative translation adjustments.................................................... 68 (1)
Treasury stock, at cost, 33,000 shares and zero shares................................ (97) -
Accumulated deficit................................................................... (155,899) (171,034)
--------- ---------
Total stockholders' deficit........................................................ (13,836) (33,086)
--------- ---------
Total liabilities and stockholders' deficit........................................ $ 199,853 $ 179,349
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues................................................................. $ 54,244 $ 41,030 $ 103,552 $ 79,612
Expenses:
Cost of revenues:
Direct costs............................................................ 23,916 18,253 45,998 36,834
Amortization of acquired software....................................... - 2,892 - 5,776
Amortization of client contracts and related intangibles................ 1,176 1,023 2,244 2,046
----------- ----------- ----------- -----------
Total cost of revenues............................................ 25,092 22,168 48,242 44,656
----------- ----------- ----------- -----------
Gross margin............................................................... 29,152 18,862 55,310 34,956
----------- ----------- ----------- -----------
Operating expenses:
Research and development................................................ 6,781 5,799 13,306 10,654
Selling and marketing................................................... 2,639 2,760 5,036 5,101
General and administrative:
General and administrative........................................... 5,616 4,658 11,218 8,787
Amortization of noncompete agreements and goodwill................... 1,347 1,732 2,688 3,463
Stock-based employee compensation.................................... 74 85 148 287
Depreciation............................................................ 1,988 1,711 3,830 3,220
----------- ----------- ----------- -----------
Total operating expenses.......................................... 18,445 16,745 36,226 31,512
----------- ----------- ----------- -----------
Operating income............................................................... 10,707 2,117 19,084 3,444
----------- ----------- ----------- -----------
Other income (expense):
Interest expense........................................................ (2,462) (616) (5,008) (1,257)
Interest income......................................................... 473 166 1,133 377
Other................................................................... (67) 64 (74) 331
----------- ----------- ----------- -----------
Total other....................................................... (2,056) (386) (3,949) (549)
----------- ----------- ----------- -----------
Income before income taxes..................................................... 8,651 1,731 15,135 2,895
Income tax (provision) benefit............................................. - - - -
----------- ----------- ----------- -----------
Net income..................................................................... $ 8,651 $ 1,731 $ 15,135 $ 2,895
=========== =========== =========== ===========
Basic net income per common share:
Net income available to common stockholders................................ $ 0.34 $ 0.07 $ 0.59 $ 0.11
=========== =========== =========== ===========
Weighted average common shares.............................................. 25,562,570 25,492,658 25,537,456 25,490,958
=========== =========== =========== ===========
Diluted net income per common share:
Net income available to common stockholders................................ $ 0.33 $ 0.07 $ 0.57 $ 0.11
=========== =========== =========== ===========
Weighted average common shares.............................................. 26,420,226 25,839,546 26,394,256 25,795,028
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
Six months ended
---------------------
June 30, June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 15,135 $ 2,895
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation...................................................................... 3,830 3,220
Amortization...................................................................... 5,897 11,773
Deferred income taxes............................................................. (4,294) (2,373)
Stock-based employee compensation................................................. 148 287
Changes in operating assets and liabilities:
Trade accounts and other receivables, net....................................... (9,685) (1,365)
Other current and noncurrent assets............................................. (1,180) (896)
Accounts payable and other liabilities.......................................... 3,446 174
-------- --------
Net cash provided by operating activities..................................... 13,297 13,715
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net............................................. (6,647) (5,964)
Additions to software................................................................ (1,410) (6,875)
-------- --------
Net cash used in investing activities......................................... (8,057) (12,839)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock............................................... 2,741 377
Repurchase of common stock........................................................... (2) (24)
Payments on long-term debt........................................................... (2,250) (5,000)
-------- --------
Net cash provided by (used in) financing activities........................... 489 (4,647)
-------- --------
Effect of exchange rate fluctuations on cash........................................... 28 (343)
-------- --------
Net increase (decrease) in cash and cash equivalents................................... 5,757 (4,114)
Cash and cash equivalents, beginning of period......................................... 20,417 6,134
-------- --------
Cash and cash equivalents, end of period............................................... $ 26,174 $ 2,020
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest........................................................................... $ 4,534 $ 1,049
Income taxes....................................................................... $ 828 $ 1,958
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements at June 30, 1998, and for the
three and six months then ended are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim period. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and analysis
of financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, filed with the
Securities and Exchange Commission. The results of operations for the three and
six months ended June 30, 1998, are not necessarily indicative of the results
for the entire year ending December 31, 1998.
2. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted net income per common share is consistent with the
calculation of basic net income per common share while giving effect to dilutive
potential common shares outstanding during the period. For all periods
presented, dilutive potential common shares consisted entirely of stock options.
For the three and six months ended June 30, 1998, the weighted average dilutive
potential common shares from Common Stock Warrants of 671,770 and 642,232,
respectively, are excluded from the diluted net income per common share
calculation as the events necessary to allow the exercise of the warrants had
not been satisfied as of June 30, 1998.
3. COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", which establishes standards for reporting
and display of comprehensive income and its components in a financial statement
for the period in which they are recognized. The Company's comprehensive income
was as follows (in thousands):
Three months ended Six months ended
-------------------- -------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
--------- --------- --------- --------
Net income $8,651 $1,731 $15,135 $2,895
Foreign currency
translation adjustments (11) 39 69 (504)
--------- --------- --------- --------
Comprehensive income $8,640 $1,770 $15,204 $2,391
========= ========= ========= ========
4. 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 claimed that certain amendments to stock
agreements between the plaintiff and the Company were unenforceable, and that
the plaintiff's rights were otherwise violated in connection with those
amendments. The plaintiff was seeking
6
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damages of approximately $2.0 million, and in addition, sought to have such
damages trebled under certain Colorado statutes that the plaintiff claimed were
applicable. In June 1998, the Company settled this matter, the effect of which
was not material to the Company.
5. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS
Certain December 31, 1997 amounts have been reclassified to conform with the
June 30, 1998 presentation.
6. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and for Hedging Activities" (SFAS No. 133). The Statement establishes
accounting and reporting standards requiring every derivative instrument, as
defined, to be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal
quarters for all fiscal years beginning after June 15, 1999. Adoption of the
Statement is not expected to have a significant effect on the Company's
consolidated financial statements.
7. SUBSEQUENT EVENT
On July 30, 1998, the Company acquired substantially all of the assets of US
Telecom Advanced Technology Systems, Inc. (USTATS) for approximately $6.0
million in cash and assumption of certain liabilities of approximately $1.2
million. USTATS, a South Carolina-based company, specializes in open systems,
client/server customer care and billing systems serving the telecommunications
markets. The cash portion of the purchase price was paid out of corporate
funds. The Company expects a significant portion of the purchase price will be
allocated to in-process R&D, and accordingly, will be expensed in the third
quarter of 1998. In-process R&D represents research and development of software
technologies which have not reached technological feasibility as of the
acquisition date, and have no other alternative future use.
7
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CSG SYSTEMS INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------------------- ----------------------------------------
1998 1997 1998 1997
------------------ ------------------ ------------------- ------------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
-------- ------- -------- ------- --------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......................... $ 54,244 100.0% $ 41,030 100.0% $ 103,552 100.0% $ 79,612 100.0%
Expenses:
Cost of revenues:
Direct costs......................... 23,916 44.1 18,253 44.5 45,998 44.4 36,834 46.3
Amortization of acquired software.... - - 2,892 7.0 - - 5,776 7.3
Amortization of client contracts
and related intangibles............. 1,176 2.2 1,023 2.5 2,244 2.2 2,046 2.6
-------- ----- -------- ----- --------- ----- -------- -----
Total cost of revenues............ 25,092 46.3 22,168 54.0 48,242 46.6 44,656 56.2
-------- ----- -------- ----- --------- ----- -------- -----
Gross margin.......................... 29,152 53.7 18,862 46.0 55,310 53.4 34,956 43.8
-------- ----- -------- ----- --------- ----- -------- -----
Operating expenses:
Research and development............. 6,781 12.5 5,799 14.1 13,306 12.9 10,654 13.4
Selling and marketing................ 2,639 4.9 2,760 6.7 5,036 4.9 5,101 6.4
General and administrative:
General and administrative.......... 5,616 10.3 4,658 11.4 11,218 10.8 8,787 11.0
Amortization of noncompete
agreements and goodwill............ 1,347 2.5 1,732 4.2 2,688 2.6 3,463 4.3
Stock-based employee compensation... 74 0.1 85 0.2 148 0.1 287 0.4
Depreciation......................... 1,988 3.7 1,711 4.2 3,830 3.7 3,220 4.0
-------- ----- -------- ----- --------- ----- -------- -----
Total operating expenses.......... 18,445 34.0 16,745 40.8 36,226 35.0 31,512 39.5
-------- ----- -------- ----- --------- ----- -------- -----
Operating income........................ 10,707 19.7 2,117 5.2 19,084 18.4 3,444 4.3
-------- ----- -------- ----- --------- ----- -------- -----
Other income (expense):
Interest expense..................... (2,462) (4.5) (616) (1.5) (5,008) (4.8) (1,257) (1.6)
Interest income...................... 473 0.8 166 0.4 1,133 1.1 377 0.5
Other................................ (67) (0.1) 64 0.2 (74) (0.1) 331 0.4
-------- ----- -------- ----- --------- ----- -------- -----
Total other....................... (2,056) (3.8) (386) (0.9) (3,949) (3.8) (549) (0.7)
-------- ----- -------- ----- --------- ----- -------- -----
Income before income taxes.............. 8,651 15.9 1,731 4.3 15,135 14.6 2,895 3.6
Income tax (provision) benefit........ - - - - - - - -
-------- ----- -------- ----- --------- ----- -------- -----
Net income.............................. $ 8,651 15.9% $ 1,731 4.3% $ 15,135 14.6% $ 2,895 3.6%
======== ===== ======== ===== ========= ===== ======== =====
</TABLE>
8
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THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues. Total revenues for the three months ended June 30, 1998, increased
32.2% to $54.2 million, from $41.0 million for the three months ended June 30,
1997, due to increased revenues from the Company's processing and related
services, and increased revenues from software and related product sales and
professional consulting services.
Revenues from processing and related services for the three months ended June
30, 1998, increased 36.8% to $44.1 million, from $32.2 million for the three
months ended June 30, 1997. Of the total increase in revenue, approximately 70%
resulted from an increase in the number of customers of the Company's clients
which were serviced by the Company and approximately 30% was due to increased
revenue per customer. Customers serviced as of June 30, 1998, and 1997,
respectively, were 25.4 million and 20.0 million, an increase of 26.7%. The
increase in the number of customers serviced was due to the conversion of
additional customers by new and existing clients to the Company's systems, and
internal customer growth experienced by existing clients. From April 1, 1998
through June 30, 1998, the Company converted and processed approximately 1.9
million additional customers on its systems. Revenue per customer increased due
primarily to (i) the 15-year Tele-Communications, Inc. (TCI) processing contract
(the TCI Contract) executed in September 1997, (ii) increased usage of ancillary
services by clients, and (iii) price increases included in client contracts.
Revenues from software and related product sales and professional consulting
services for the three months ended June 30, 1998, increased 15.4% to $10.1
million, from $8.8 million for the three months ended June 30, 1997. This
increase relates primarily to the continued growth of the Company's software
products and related product sales.
Amortization of Acquired Software. Amortization of acquired software decreased
to zero for the three months ended June 30, 1998, from $2.9 million for the
three months ended June 30, 1997, due to acquired software from the Company's
leveraged buy-out of CSG Systems, Inc. (the Acquisition) in November 1994
becoming fully amortized as of November 30, 1997.
Amortization of Client Contracts and Related Intangibles. Amortization of
client contracts and related intangibles for the three months ended June 30,
1998, increased 15.0% to $1.2 million, from $1.0 million for the three months
ended June 30, 1997. The increase in expense is due to $0.4 million of
amortization of the value assigned to the TCI Contract, offset by a decrease of
$0.2 million of amortization due to client conversion methodologies from the
Acquisition becoming fully amortized as of November 30, 1997.
Gross Margin. Gross margin for the three months ended June 30, 1998, increased
54.6% to $29.2 million, from $18.9 million for the three months ended June 30,
1997, due primarily to revenue growth. The gross margin percentage increased to
53.7% for the three months ended June 30, 1998, compared to 46.0% for the three
months ended June 30, 1997. The overall increase in the gross margin percentage
is due primarily to the increase in revenues while the amount of amortization of
acquired software and amortization of client contracts and related intangibles
decreased, and to a lesser degree, the improvement in the gross margin
percentage for processing and related services, due primarily to the increase in
revenue per customer while controlling the cost of delivering such services.
Research and Development Expense. Research and development (R&D) expense for
the three months ended June 30, 1998, increased 16.9% to $6.8 million, from $5.8
million for the three months ended June 30, 1997. As a percentage of total
revenues, R&D expense decreased to 12.5% for the three months ended June 30,
1998, from 14.1% for the three months ended June 30, 1997.
During the three months ended June 30, 1997, the Company capitalized software
development costs of approximately $3.7 million, which consisted of $2.8 million
of internal development costs and $0.9 million of purchased software. The
Company capitalized third party, contracted costs of approximately $0.8 million
during the three months ended June 30, 1998, related primarily to enhancements
to existing products. As a
9
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result, total R&D development expenditures (i.e., the total R&D costs expensed,
plus the capitalized development costs) for the three months ended June 30, 1998
and 1997, were $7.6 million, or 14.1% of total revenues, and $8.6 million, or
21.0% of total revenues, respectively. The overall decrease in the R&D
expenditures between periods is due primarily to effective control of
development costs, primarily the reduction of third-party, contracted
programming services.
Selling and Marketing Expense. Selling and marketing (S&M) expense for the
three months ended June 30, 1998, decreased 4.4% to $2.6 million, from $2.8
million for the three months ended June 30, 1997. As a percentage of total
revenues, S&M expense decreased to 4.9% for the three months ended June 30,
1998, from 6.7% for the three months ended June 30, 1997. The overall decrease
in S&M expenses as a percentage of total revenues is due primarily to increased
revenues, while controlling S&M costs.
General and Administrative Expense. General and administrative (G&A) expense
for the three months ended June 30, 1998, increased 20.6% to $5.6 million, from
$4.7 million for the three months ended June 30, 1997. As a percentage of total
revenues, G&A expense decreased to 10.3% for the three months ended June 30,
1998, from 11.4% for the three months ended June 30, 1997. The increase in G&A
expenses relates primarily to the continued expansion of the Company's
administrative staff and other administrative costs to support the Company's
overall growth. The decrease in G&A expenses as a percentage of total revenues
is due primarily to increased revenues, while controlling G&A costs.
Amortization of Noncompete Agreements and Goodwill. Amortization of noncompete
agreements and goodwill for the three months ended June 30, 1998, decreased
22.2%, to $1.3 million, from $1.7 million for the three months ended June 30,
1997. The decrease in amortization expense is due primarily to a write-down of
certain intangible assets in the fourth quarter of 1997.
Depreciation Expense. Depreciation expense for the three months ended June 30,
1998, increased 16.2% to $2.0 million, from $1.7 million for the three months
ended June 30, 1997. The increase in expense relates to capital expenditures
made throughout 1997 and the first six months of 1998 in support of the overall
growth of the Company, consisting principally of computer hardware and related
equipment and statement processing equipment and related facilities.
Operating Income. Operating income for the three months ended June 30, 1998,
was $10.7 million or 19.7% of total revenues, compared to $2.1 million or 5.2%
of total revenues for the three months ended June 30, 1997. The increase
between years relates to the factors discussed above.
The Company incurred certain one-time or acquisition-related charges
(Acquisition Charges) in connection with the Acquisition in November 1994. The
Acquisition Charges include amortization of acquired software, client contracts
and related intangibles, noncompete agreement, goodwill, and stock-based
compensation. Operating income for the three months ended June 30, 1998 and
1997, excluding Acquisition Charges of $2.1 million and $5.4 million, was $12.8
million or 23.5% of total revenues, and $7.5 million or 18.4% of total revenues,
respectively. See the Company's "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, for additional
discussion regarding the Acquisition Charges and the impact of such charges on
operations.
Interest Expense. Interest expense for the three months ended June 30, 1998,
increased 299.7% to $2.5 million, from $0.6 million for the three months ended
June 30, 1997, with the increase attributable primarily to the financing of the
Company's acquisition of the SUMMITrak assets in September 1997.
Interest Income. Interest income for the three months ended June 30, 1998,
increased 184.9% to $0.5 million, from $0.2 million for the three months ended
June 30, 1997, with the increase attributable primarily to an increase in
operating funds available for investment and, to a lesser degree, an increase in
interest charges on aged customer accounts.
10
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues. Total revenues for the six months ended June 30, 1998, increased
30.1% to $103.5 million, from $79.6 million for the six months ended June 30,
1997, due to increased revenues from the Company's processing and related
services, and increased revenues from software and related product sales and
professional consulting services.
Revenues from processing and related services for the six months ended June 30,
1998, increased 33.3% to $83.9 million, from $63.0 million for the six months
ended June 30, 1997. Of the total increase in revenue, approximately 64%
resulted from an increase in the number of customers of the Company's clients
which were serviced by the Company and approximately 36% was due to increased
revenue per customer. The increase in the number of customers serviced was due
to the conversion of additional customers by new and existing clients to the
Company's systems, and internal customer growth experienced by existing clients.
From January 1, 1998 through June 30, 1998, the Company converted and processed
approximately 4.2 million additional customers on its systems. Revenue per
customer increased due primarily to (i) the TCI Contract executed in September
1997, (ii) increased usage of ancillary services by clients, and (iii) price
increases included in client contracts.
Revenues from software and related product sales and professional consulting
services for the six months ended June 30, 1998, increased 17.9% to $19.6
million, from $16.6 million for the six months ended June 30, 1997. This
increase relates to the continued growth of the Company's software products and
related product sales and professional consulting services.
Amortization of Acquired Software. Amortization of acquired software decreased
to zero for the six months ended June 30, 1998, from $5.8 million for the six
months ended June 30, 1997, due to acquired software from the Acquisition in
November 1994 becoming fully amortized as of November 30, 1997.
Amortization of Client Contracts and Related Intangibles. Amortization of
client contracts and related intangibles for the six months ended June 30, 1998,
increased 9.7% to $2.2 million, from $2.0 million for the six months ended June
30, 1997. The increase in expense is due to $0.7 million of amortization of the
value assigned to the TCI Contract, offset by a decrease of $0.5 million of
amortization due to client conversion methodologies from the Acquisition
becoming fully amortized as of November 30, 1997.
Gross Margin. Gross margin for the six months ended June 30, 1998, increased
58.2% to $55.3 million, from $35.0 million for the six months ended June 30,
1997, due primarily to revenue growth. The gross margin percentage increased to
53.4% for the six months ended June 30, 1998, compared to 43.8% for the six
months ended June 30, 1997. The overall increase in the gross margin percentage
is due primarily to the increase in revenues while the amount of amortization of
acquired software and amortization of client contracts and related intangibles
decreased, and to a lesser degree, the improvement in the gross margin
percentage for processing and related services, due primarily to the increase in
revenue per customer while controlling the cost of delivering such services.
Research and Development Expense. R&D expense for the six months ended June 30,
1998, increased 24.9% to $13.3 million, from $10.7 million for the six months
ended June 30, 1997. As a percentage of total revenues, R&D expense decreased
to 12.9% for the six months ended June 30, 1998, from 13.4% for the six months
ended June 30, 1997.
During the six months ended June 30, 1997, the Company capitalized software
development costs of approximately $6.8 million, which consisted of $5.6 million
of internal development costs and $1.2 million of purchased software. The
Company capitalized third party, contracted costs of approximately $1.4 million
during the six months ended June 30, 1998, related primarily to enhancements to
existing products. As a result, total R&D development expenditures (i.e., the
total R&D costs expensed, plus the capitalized development costs) for the six
months ended June 30, 1998 and 1997, were $14.7 million, or 14.2% of total
11
<PAGE>
revenues, and $16.3 million, or 20.4% of total revenues, respectively. The
overall decrease in the R&D expenditures between periods is due primarily to
effective control of development costs, primarily the reduction of third-party,
contracted programming services.
Selling and Marketing Expense. S&M expense for the six months ended June 30,
1998, decreased 1.3% to $5.0 million, from $5.1 million for the six months ended
June 30, 1997. As a percentage of total revenues, S&M expense decreased to 4.9%
for the six months ended June 30, 1998, from 6.4% for the six months ended June
30, 1997. The overall decrease in S&M expenses as a percentage of total
revenues is due primarily to increased revenues, while controlling S&M costs.
General and Administrative Expense. G&A expense for the six months ended June
30, 1998, increased 27.7% to $11.2 million, from $8.8 million for the six months
ended June 30, 1997. As a percentage of total revenues, G&A expense decreased
to 10.8% for the six months ended June 30, 1998, from 11.0% for the six months
ended June 30, 1997. The increase in G&A expenses relates primarily to the
continued expansion of the Company's administrative staff and other
administrative costs to support the Company's overall growth. The decrease in
G&A expenses as a percentage of total revenues is due primarily to increased
revenue, while controlling G&A costs.
Amortization of Noncompete Agreements and Goodwill. Amortization of noncompete
agreements and goodwill for the six months ended June 30, 1998, decreased 22.4%,
to $2.7 million, from $3.5 million for the six months ended June 30, 1997. The
decrease in amortization expense is due primarily to a write-down of certain
intangible assets in the fourth quarter of 1997.
Depreciation Expense. Depreciation expense for the six months ended June 30,
1998, increased 18.9% to $3.8 million, from $3.2 million for the six months
ended June 30, 1997. The increase in expense relates to capital expenditures
made throughout 1997 and the first six months of 1998 in support of the overall
growth of the Company, consisting principally of computer hardware and related
equipment and statement processing equipment and related facilities.
Operating Income. Operating income for the six months ended June 30, 1998, was
$19.1 million or 18.4% of total revenues, compared to $3.4 million or 4.3% of
total revenues for the six months ended June 30, 1997. The increase between
years relates to the factors discussed above.
Operating income for the six months ended June 30, 1998 and 1997, excluding
Acquisition Charges of $4.1 million and $11.0 million, was $23.2 million or
22.4% of total revenues, and $14.4 million or 18.1% of total revenues,
respectively.
Interest Expense. Interest expense for the six months ended June 30, 1998,
increased 298.4% to $5.0 million, from $1.3 million for the six months ended
June 30, 1997, with the increase attributable primarily to the financing of the
Company's acquisition of the SUMMITrak assets in September 1997.
Interest Income. Interest income for the six months ended June 30, 1998,
increased 200.5% to $1.1 million, from $0.4 million for the six months ended
June 30, 1997, with the increase attributable primarily to an increase in
operating funds available for investment and an increase in interest charges on
aged customer accounts.
Significant Customers
- ---------------------
During the six months ended June 30, 1998 and 1997, revenues from TCI
represented approximately 38.5% and 25.4% of total revenues, and
revenues from Time Warner Cable and its affiliated companies (Time Warner)
represented 17.8% and 19.5% of total revenues, respectively. The increase in
the TCI percentage between periods relates primarily to the additional TCI
customers converted to the Company's systems as a result of the 15-year TCI
Contract executed in September 1997. The decrease in the Time Warner percentage
between periods results from a larger total revenue base for the Company, as
total revenues from Time Warner increased between periods. The Company has
separate processing
12
<PAGE>
agreements with multiple affiliates of Time Warner and provides products and
services to them under separately negotiated and executed contracts.
Income Taxes
- ------------
At June 30, 1998, 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 approximately $13.7 million.
The Company has recorded a valuation allowance of approximately $53.8 million
against the remaining net deferred tax assets since realization of these future
benefits is not sufficiently assured as of June 30, 1998.
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
pay U.S. income taxes and realize additional deferred tax assets in 1998. As a
result, the Company does not expect income tax expense for 1998 to be
significant.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 1998, the Company's principal sources of liquidity included cash
and cash equivalents of $26.2 million. The Company also has a revolving credit
facility in the amount of $40.0 million, of which there were no borrowings
outstanding. The Company's ability to borrow under the revolving credit
facility is subject to maintenance of certain levels of eligible receivables.
At June 30, 1998, $39.2 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.
As of June 30, 1998 and December 31, 1997, respectively, the Company had $55.3
million and $44.7 million in net trade accounts receivable, an increase of $10.6
million, with the increase primarily a result of the Company's revenue growth.
The Company's trade accounts receivable balance includes billings for several
non-revenue items, such as postage, communication lines, travel and
entertainment reimbursements, sales tax, and deferred items. As a result, the
Company evaluates its performance in collecting its accounts receivable through
its calculation of days billings outstanding (DBO) rather than a typical days
sales outstanding (DSO) calculation. DBO is calculated based on the billing for
the period (including non-revenue items) divided by the average net trade
accounts receivable balance for the period. Some of the Company's most recent
DBO calculations are as follows:
For the Month For the Quarter
Ended Ended
------------- ---------------
June 30, 1998............. 54 58
March 31, 1998............ 59 59
December 31, 1997......... 58 54
During the six months ended June 30, 1998, the Company generated $13.3 million
of net cash flow from operating activities. Cash generated from these sources
and the proceeds of $2.7 million from the issuance of common stock through the
Company's stock incentive plans were used (i) to fund capital expenditures of
$6.6 million, (ii) to fund additions to software of $1.4 million, and (iii) to
repay long-term debt of $2.3 million.
Earnings from operations before interest, taxes, depreciation and amortization
(EBITDA) for the six months ended June 30, 1998 was $28.4 million or 27.4% of
total revenues, compared to $18.8 million or 23.7% of total revenues for the six
months ended June 30, 1997. EBITDA is presented here as a measure of the
Company's debt service ability and is not intended to represent cash flows for
the periods.
The Company financed the SUMMITrak asset acquisition with a $150.0 million term
credit facility in
13
<PAGE>
September 1997. In December 1997, the Company made an optional principal payment
on the term credit facility of $15.0 million. Interest rates for 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 three
months ended March 31, 1998, the spread on the LIBOR rate and prime rate was 1.0
percent and 0 percent, respectively. Based on the Company's leverage ratio as of
March 31, 1998, the spread on the LIBOR rate was reduced to 0.75 percent,
effective April 1, 1998.
The loan agreement restricts, among other things, the payment of dividends or
other types of distributions on any class of the Company's stock unless the
Company's leverage ratio, as defined in the loan agreement, is under 1.50. As
of June 30, 1998, the leverage ratio was 2.19.
The purchase price for the SUMMITrak assets acquired in September 1997 included
up to $26.0 million in conversion incentive payments. The timing of the
conversion incentive payments is based upon the achievement of certain milestone
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. Total payments as of June 30, 1998
have been approximately $0.6 million. Based on the conversions performed to
date and the future conversions scheduled as of June 30, 1998, the Company
expects to pay $22.5 million to TCI within the next 12 months, with the
remaining amount payable by the end of the third quarter of 1999.
In the ordinary course of business, the Company evaluates potential acquisitions
of assets and businesses that may 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. On July 30,
1998, the Company acquired substantially all of the assets of US Telecom
Advanced Technology Systems, Inc. (USTATS) for approximately $6.0 million in
cash and assumption of certain liabilities of approximately $1.2 million.
USTATS, a South Carolina-based company, specializes in open systems,
client/server customer care and billing systems serving the telecommunications
markets. The cash portion of the purchase price was paid out of corporate
funds. The Company expects a significant portion of the purchase price will be
allocated to in-process R&D, and accordingly, will be expensed in the third
quarter of 1998. In-process R&D represents research and development of software
technologies which have not reached technological feasibility as of the
acquisition date, and have no other alternative future use.
The Company continues to make significant investments in capital equipment,
facilities, and research and development. The Company had no significant
capital commitments as of June 30, 1998. 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, 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
continues to report to the Company's management the progress on year 2000
compliance. 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. The Company is
analyzing the disclosure requirements recently released by the Securities and
Exchange Commission in August 1998, and will adopt those disclosure requirements
in the third quarter of 1998.
14
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1. 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 claimed that
certain amendments to stock agreements between the plaintiff and the
Company were unenforceable, and that the plaintiff's rights were
otherwise violated in connection with those amendments. The plaintiff
was seeking damages of approximately $2.0 million, and in addition,
sought to have such damages trebled under certain Colorado statutes
that the plaintiff claimed were applicable. In June 1998, the Company
settled this matter, the effect of which was not material to the
Company.
Item 2-3. None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The 1998 annual meeting (the "Annual Meeting") of stockholders of
CSG Systems International, Inc. was held on May 21, 1998.
(b) The following persons were elected as directors at the Annual
Meeting:
Class I (term expiring in 2001)
-------------------------------
Janice I. Obuchowski
John P. Pogge
Rockwell A. Schnabel
The following directors term of office continued after the Annual
Meeting:
Royce J. Holland
Bernard W. Reznicek
George F. Haddix
Neal C. Hansen
Frank V. Sica
(c) Votes were cast or withheld in the election of directors at the
Annual Meeting as follows:
Director For Against
-------- --- -------
Janice I. Obuchowski 22,012,839 10,600
John P. Pogge 22,012,839 10,600
Rockwell A. Schnabel 22,012,839 10,600
Item 5. Other Information.
Proposals of stockholders intended to be presented at the 1999 annual
meeting of stockholders must be received by the Company at its principle
office in Englewood, Colorado, not later than December 11, 1998, for
inclusion in the proxy statement for that meeting.
Pursuant to Rule 14a-4(c) under the Securities Exchange Act of 1934, if
the Company does not receive advance notice of a stockholder proposal to
be raised at its 1999 annual meeting in accordance with the requirements
of the Company's bylaws, management may use its discretionary voting
authority to vote management proxies on the stockholder proposal without
any discussion of the matter in the proxy statement. Pursuant to the
Company's bylaws, a written notice of any such proposal must be received
by the secretary of the Company at the principal executive offices of
the Company not less than 120 calendar days in advance of the date of
the proxy statement of the Company released to stockholders in
connection with the previous year's annual meeting of stockholders (as
noted above, the deadline is December 11, 1998 for the 1999 annual
meeting); provided, however, that if the date of the 1999 annual meeting
is changed by more than 30 days from the date contemplated at the time
of the 1998 proxy statement, notice by the stockholder to be timely must
be received not later than the close of business on the tenth day
following the earlier of (a) the day on which notice of the date of the
1999 annual meeting was mailed or given to stockholders or (b) the date
on which public disclosure of the date of the 1999 annual meeting was
made. The notice must contain certain information required by the
bylaws. The Company's bylaws also provide that the chairman of the
annual meeting shall, if the facts warrant, determine and declare at the
meeting that business was not properly brought before the meeting in
compliance with the provisions of the bylaws; and, if such chairman
shall so determine, then he or she shall so declare at the meeting, and
any such business not properly brought before the meeting shall not be
transacted.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.19B* First Amendment to Restated and Amended CSG Master
Subscriber Management System Agreement Between CSG Systems,
Inc. and TCI Cable Management Corporation, dated June 29,
1998.
27.01 Financial Data Schedule (EDGAR Version only)
99.01 Safe Harbor for Forward-Looking Statements Under the Private
Securities Litigation Reform Act of 1995-Certain Cautionary
Statements and Risk Factors
(b) Reports on Form 8-K
None
__________________
* Portions of the exhibit have been omitted pursuant to an application for
confidential treatment, and the omitted portions have been filed separately
with the Commission.
16
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 1998
CSG SYSTEMS INTERNATIONAL, INC.
/s/ Neal C. Hansen
-------------------------------------------
Neal C. Hansen
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Greg A. Parker
-------------------------------------------
Greg A. Parker
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Randy R. Wiese
-------------------------------------------
Randy R. Wiese
Controller and Principal Accounting Officer
(Principal Accounting Officer)
17
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.19B* First Amendment to Restated and Amended CSG Master Subscriber Management
System Agreement between CSG Systems, Inc. and TCI Cable Management
Corporation, dated June 29, 1998.
27.01 Financial Data Schedule (EDGAR Version only)
99.01 Safe Harbor for Forward-Looking Statements Under the Private Securities
Litigation Reform Act of 1995-Certain Cautionary Statements and Risk
Factors
__________________
* Portions of the exhibit have been omitted pursuant to an application for
confidential treatment, and the omitted portions have been filed separately
with the Commission.
18
<PAGE>
EXHIBIT 2.19B
Pages where confidential treatment has
been requested are stamped "Confidential
Treatment Requested and the Redacted Material
has been separately filed with the Commission,"
and places where information has been redacted
have been marked with (***).
FIRST AMENDMENT
TO
RESTATED AND AMENDED CSG MASTER
SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT
BETWEEN
CSG SYSTEMS, INC.
AND
TCI CABLE MANAGEMENT CORPORATION
This First Amendment (the "Amendment") is executed this 29th day of June, 1998,
and is made by and between CSG Systems, Inc., a Delaware corporation ("CSG") and
TCI Cable Management Corporation ("CDstomer"). CSG and Customer entered into a
certain Restated and Amended CSG Master Subscriber Management System Agreement
dated August 10, 1997 (the "Agreement"), and now desire to amend the Agreement
in accordance with the terms and conditions set forth in this Amendment. If the
terms and conditions set forth in this Amendment shall be in conflict with the
Agreement, the terms and conditions of this Amendment shall control. Any terms
in initial capital letters or all capital letters used as a defined term but not
defined in this Amendment, shall have the meaning set forth in the Agreement.
Upon execution of this Amendment by the parties, any subsequent reference to the
Agreement between the parties shall mean the Agreement as amended by this
Amendment. Except as amended by this Amendment, the terms and conditions set
forth in the Agreement shall continue in full force and effect according to
their terms.
CSG AND CUSTOMER AGREE AS FOLLOWS:
1. ITEM 13 OF SCHEDULE D OF THE AGREEMENT SHALL BE DELETED IN ITS ENTIRETY
AND REPLACED WITH THE FEES SET FORTH BELOW FOR ISP DOMAIN XBOI:
ISP DOMAIN XBOI -
- ------------------
XBOI DEVELOPMENT FEE: $(***)
XBOI DEVELOPMENT FEE INCLUDES:
------------------------------
. XBOI development team through January 1, 1998
. Project Management through January 1, 1998
. XBOI Executable development
. XBOI Documentation
. Product/Services API Executable
. Product/Services API Documentation
. Four (4) XBOI "Chalk Talk" sessions in Omaha
. Statement Extract Development
. Test Environment/Integration Testing Support
. New Client Training
. System Set Up
. NT server installation
<PAGE>
"Confidential Treatment Requested
and the Redacted Material has been
separately filed with the Commission."
PAYMENT TERMS FOR DEVELOPMENT FEES:
-----------------------------------
Due at November 30, 1997 $(***)
Due at February 28, 1998 $(***)
XBOI (*****) LICENSE FEE: $(***)
. (License Fee is (***))
. XBOI Perpetual License includes XBOI Executable Version 1.0
Version 1.0 includes the following transactions:
SIU, SRQ, HSE, HIU, WOC, WCM, WIU, CII, CIU, SCU, WDO, WHS, WRQ,
WTC, WDS, WCS, WRS, MBH, MBC, SAG, SAX, SAR, SAI, SAP, SSS.
Version 1.1 to include the following additional transactions:
SFS, SSL, SMA, SMC, SMD, SMS, SAA, SRR, SAD.
Version 1.X to include the following additional transactions: SAT and
Extension to UHS.
. Functionality for the SAT transaction will be determined after the Usage
Handling (UH) and the Service Delivery (SD) components have been defined.
ANNUAL SOFTWARE MAINTENANCE FEE:
. First year maintenance- $(***) due at delivery
. Subsequent years maintenance- $(***) due on anniversary date of delivery
. Version 1.1 will be provided under maintenance
2. EXHIBIT Q-1 OF THE AGREEMENT SHALL BE DELETED IN ITS ENTIRETY AND REPLACED
WITH THE ATTACHED EXHIBIT Q-1.
THIS AMENDMENT is executed on the day and year first shown above.
CSG SYSTEMS, INC. ("CSG") TCI CABLE MANAGEMENT CORPORATION
("CUSTOMER")
BY: /S/ JOSEPH T. RUBLE BY: /S/ ANN MONTGOMERY
-------------------------- ----------------------------
NAME: JOSEPH T. RUBLE NAME: ANN MONTGOMERY
------------------------ --------------------------
TITLE: V.P. & GENERAL COUNSEL TITLE: V.P. CUSTOMER OPERATIONS
----------------------- -------------------------
AND BILLING
-----------
<PAGE>
EXHIBIT Q-1
DESIGNATED ENVIRONMENT FOR ISP DOMAIN
-------------------------------------
THE SUPPORT SERVICES DO NOT INCLUDE SUPPORT OF THE ISP DOMAIN IF THE APIS AND
ISP DOMAIN SERVER ARE USED OUTSIDE THE CERTIFIED DESIGNATED ENVIRONMENT (I.E.
OTHER HARDWARE, SOFTWARE, OR OTHER MODIFICATIONS HAVE BEEN INTRODUCED BY
CUSTOMER THAT ARE OUTSIDE THE CERTIFIED DESIGNATED ENVIRONMENT). IN SUCH A CASE,
CSG MAY AGREE TO PROVIDE CUSTOMIZED TECHNICAL SUPPORT FOR CSG'S THEN-CURRENT
FEES FOR SUCH SERVICES.
Server and software for ISP (XBOI/ACSR)
- ----------------------------------------
Server: CPQ Proliant 6000, 2 CPU, 512M RAM, 4X9.1G hard drive CD-ROM, Ethernet
Software: Windows NT Server 4.0 OS
Server and Software for ISP (XBOI/ACSR) Code Distribution, BRX PU2.1, BRX 3270
- -------------------------------------------------------------------------------
Client, and LU 6.2 Protocol Conversion
- ---------------------------------------
Server:
Test only: SUN SPARCStation 5, 170Mhz, 128M, 2 X 2.1G hard drive, CD-ROM,
17" Monitor
Production: SUN Ultra 2, 200MHZ, 256 M, 2X4.2G hard drive, CD-ROM, 17"
Monitor SUN Ultra 3000
(Server model, number of CPUs, memory, and disk storage are based on individual
site requirements.)
Software:
Solaris V2.5.1 CSG standard recommended patches
Brixton Server PU2.1 FOR Solaris (Version 4.0.5) Running in 2.3.2 mode (both
core and session components required)
Brixton 3270 Client for Solaris (Version 3.0.1.9) (1 copy required for
trouble shooting & 1 copy required for each mainframe printer if
printing through TCP/IP)
Brixton LU6.2 (for Fleet Management Interface)
Hewlett Packard Unix Jet Direct Interface software (to support network-based
printing)
(Distribution) Servers for ACSR at remote sites
- ------------------------------------------------
SUN SPARCStation 5
Workstations for ACSR at Remote Sites
- -------------------------------------
Compaq Deskpro 2000 Pentium (133MHZ minimum)
IBM PC350 Pentium (133MHZ minimum)
<PAGE>
"Confidential Treatment Requested
and the Redacted Material has been
separately filed with the Commission."
EXHIBIT Q-1 (PAGE 2 OF 2)
Workstation Minimum Memory (RAM) for ACSR at Remote Sites
- ----------------------------------------------------------
32MB
Workstation Minimum Hard Drive Space for ACSR at Remote Sites
- -------------------------------------------------------------
1.2GB
Workstation Minimum Video Requirements for acsr at Remote Sites
- ---------------------------------------------------------------
Minimum 17" SVGA monitor
Minimum video resolution supported 1024 x 768 x 256 colors, small font
Workstation Software for ACSR at Remote Sites
- ---------------------------------------------
Microsoft Windows NT v4.0 w/ Service Pack 3 applied
Netmanage Chameleon Hostlink V6.0.1
Samba V1.9.15 p8
Network Cards/Devices
- ---------------------
3Com Etherlink cards
SUN Quad Ethernet card
SUN Fast Ethernet 10/100M
SUN Token Ring 4/16M
SUN Single Ring FDDI Interface
SUN Dual Ring FDDI Interface
Hewlett Packard Jet Direct EX
Printers
- --------
Lexmark 4227 (533 cps) (requires Hewlett Packard Jet Direct EX)
IBM 6400 Series (requires Hewlett Packard Jet Direct EX)
Hewlett Packard LaserJet5 (requires Hewlett Packard Jet Direct)
Routers
- -------
Cisco 2501, 2509, 2511, 2514, 4500
NUMBER OF SUBSCRIBERS: up to (*******) subscribers. for each increment of
(*******) subscribers in excess of the (*******) subscribers currently licensed,
Customer may license ISP Domain for the license fee set forth in Schedule D
----------
(subject to Section 4 of the Master Agreement).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AS
OF JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 26,174
<SECURITIES> 0
<RECEIVABLES> 59,708
<ALLOWANCES> 1,783
<INVENTORY> 0
<CURRENT-ASSETS> 88,370
<PP&E> 39,917
<DEPRECIATION> 19,926
<TOTAL-ASSETS> 199,853
<CURRENT-LIABILITIES> 82,216
<BONDS> 120,375
256
0
<COMMON> 0
<OTHER-SE> (14,092)
<TOTAL-LIABILITY-AND-EQUITY> 199,853
<SALES> 0
<TOTAL-REVENUES> 103,552
<CGS> 0
<TOTAL-COSTS> 48,242
<OTHER-EXPENSES> 13,306
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,008
<INCOME-PRETAX> 15,135
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,135
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,135
<EPS-PRIMARY> 0.59<F1>
<EPS-DILUTED> 0.57<F1>
<FN>
<F1>* IN THOUSANDS, EXCEPT PER SHARE AMOUNTS.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.01
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
CERTAIN CAUTIONARY STATEMENTS AND
RISK FACTORS
CSG Systems International, Inc. and its subsidiaries (collectively, the Company)
or their representatives from time to time may make or may have made certain
forward-looking statements, whether orally or in writing, including without
limitation, any such statements made or to be made in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in its various SEC filings or orally in conferences or
teleconferences. The Company wishes to ensure that such statements are
accompanied by meaningful cautionary statements, so as to ensure to the fullest
extent possible the protections of the safe harbor established in the Private
Securities Litigation Reform Act of 1995.
ACCORDINGLY, THE FORWARD-LOOKING STATEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO AND ARE ACCOMPANIED BY THE FOLLOWING MEANINGFUL CAUTIONARY
STATEMENTS IDENTIFYING CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
This list of factors is likely not exhaustive. The company operates in a
rapidly changing and evolving business involving the converging communications
markets, and new risk factors will likely emerge. Management cannot predict all
of the important risk factors, nor can it assess the impact, if any, of such
risk factors on the Company's business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
in any forward-looking statements.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT FORWARD-LOOKING STATEMENTS WILL BE
ACCURATE INDICATORS OF FUTURE ACTUAL RESULTS, AND IT IS LIKELY THAT ACTUAL
RESULTS WILL DIFFER FROM RESULTS PROJECTED IN FORWARD-LOOKING STATEMENTS AND
THAT SUCH DIFFERENCES MAY BE MATERIAL.
NET LOSSES
Although the Company recorded net income for the three months ended June 30,
1998 and March 31, 1998, 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.
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RELIANCE ON CCS
The Company derived approximately 76.7% and 77.3% of its total revenues from its
primary product, Communications Control System (CCS), and related products and
services in the years ended December 31, 1997 and 1996, 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.
DEPENDENCE ON MAJOR CLIENTS
During the six months ended June 30, 1998 and 1997, revenues from TCI
represented approximately 38.5% and 25.4% of total revenues, and
revenues from Time Warner represented 17.8% and 19.5% of total revenues,
respectively. As a result of the TCI Contract, revenues derived from TCI are
expected to increase 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.
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. 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 could 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.
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
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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, 1997 and 1996, the Company derived 73% and 77%, 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 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.
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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 skilled in these areas is intense. 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, patents,
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.
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.
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INTEGRATION OF ACQUISITIONS
As part of its growth strategy, the Company seeks to acquire assets, technology,
and businesses that may 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 "Year 2000" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional discussion of the Company's efforts concerning year
2000 compliance.
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.
