<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 7, 1998: 25,568,622
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
PAGE NO.
--------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997........................................ 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997......................... 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 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 6. Exhibits and Reports on Form 8-K............................. 13
Signatures................................................... 14
Index to Exhibits............................................ 15
2
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CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................................. $ 16,068 $ 20,417
Accounts receivable-
Trade-
Billed, net of allowance of $1,435 and $1,394................................... 51,620 45,122
Unbilled........................................................................ 1,854 2,080
Other............................................................................... 1,742 1,400
Deferred income taxes.................................................................. 706 443
Other current assets................................................................... 2,736 2,664
------------- ------------
Total current assets................................................................ 74,726 72,126
------------- ------------
Property and equipment, net of depreciation of $18,059 and $16,343....................... 18,836 17,157
Software, net of amortization of $34,275 and $34,104..................................... 2,359 1,959
Noncompete agreements and goodwill, net of amortization of $20,847 and $19,490........... 11,652 13,938
Client contracts and related intangibles, net of amortization of $13,890 and $12,822..... 63,572 64,640
Deferred income taxes.................................................................... 11,244 6,909
Other assets............................................................................. 2,836 3,064
------------- ------------
Total assets....................................................................... $ 185,225 $ 179,793
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................................................... $ 9,000 $ 6,750
Customer deposits...................................................................... 7,132 7,002
Trade accounts payable................................................................. 10,369 11,795
Accrued liabilities.................................................................... 9,938 11,023
Deferred revenue....................................................................... 7,351 11,063
Conversion incentive payments.......................................................... 19,527 17,768
Accrued income taxes................................................................... 6,522 3,207
------------- ------------
Total current liabilities........................................................... 69,839 68,608
------------- ------------
Non-current liabilities:
Long-term debt, net of current maturities.............................................. 126,000 128,250
Deferred revenue....................................................................... 7,677 7,789
Conversion incentive payments.......................................................... 6,460 8,232
------------- ------------
Total non-current liabilities....................................................... 140,137 144,271
------------- ------------
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;
25,524,114 shares and 25,479,968 shares outstanding................................. 255 255
Common stock warrants; 1,500,000 warrants issued and outstanding...................... 26,145 26,145
Additional paid-in capital............................................................. 114,516 112,870
Deferred employee compensation......................................................... (562) (636)
Notes receivable from employee stockholders............................................ (544) (685)
Cumulative translation adjustments..................................................... 79 (1)
Treasury stock, at cost, 24,000 shares and zero shares................................. (90) -
Accumulated deficit.................................................................... (164,550) (171,034)
------------- ------------
Total stockholders' deficit......................................................... (24,751) (33,086)
------------- ------------
Total liabilities and stockholders' deficit......................................... $ 185,225 $ 179,793
============= ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended
-------------------------------
March 31, March 31,
1998 1997
--------------- --------------
<S> <C> <C>
Total revenues................................................... $ 49,308 $ 38,582
Expenses:
Cost of revenues:
Direct costs.............................................. 22,082 18,581
Amortization of acquired software......................... - 2,884
Amortization of client contracts and related intangibles.. 1,068 1,023
--------------- --------------
Total cost of revenues.............................. 23,150 22,488
--------------- --------------
Gross margin................................................. 26,158 16,094
--------------- --------------
Operating expenses:
Research and development.................................. 6,525 4,855
Selling and marketing..................................... 2,397 2,341
General and administrative:
General and administrative............................. 5,602 4,129
Amortization of noncompete agreements and goodwill..... 1,341 1,731
Stock-based employee compensation...................... 74 202
Depreciation.............................................. 1,842 1,509
--------------- --------------
Total operating expenses............................ 17,781 14,767
--------------- --------------
Operating income................................................. 8,377 1,327
--------------- --------------
Other income (expense):
Interest expense.......................................... (2,546) (641)
Interest income........................................... 660 211
Other..................................................... (7) 267
--------------- --------------
Total other......................................... (1,893) (163)
--------------- --------------
Income before income taxes....................................... 6,484 1,164
Income tax (provision) benefit............................... - -
--------------- --------------
Net income....................................................... $ 6,484 $ 1,164
=============== ==============
Basic net income per common share:
Net income available to common stockholders.................. $ 0.25 $ 0.05
=============== ==============
Weighted average common shares................................ 25,512,342 25,489,258
=============== ==============
Diluted net income per common share:
Net income available to common stockholders.................. $ 0.25 $ 0.05
=============== ==============
Weighted average common shares................................ 26,368,285 25,750,510
=============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
Three months ended
-------------------------------
March 31, March 31,
1998 1997
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................................. $ 6,484 $ 1,164
Adjustments to reconcile net income to net cash provided by (used in) operating activities-
Depreciation............................................................................. 1,842 1,509
Amortization............................................................................. 2,846 5,758
Deferred income taxes.................................................................... (3,313) (895)
Stock-based employee compensation........................................................ 74 202
Changes in operating assets and liabilities:
Trade accounts and other receivables, net.............................................. (6,540) 3,279
Other current and noncurrent assets.................................................... (94) (653)
Accounts payable and other liabilities................................................. (2,947) (2,314)
-------------- ---------------
Net cash provided by (used in) operating activities.................................. (1,648) 8,050
-------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment, net.................................................... (3,494) (2,540)
Additions to software....................................................................... (571) (3,196)
-------------- ---------------
Net cash used in investing activities................................................ (4,065) (5,736)
-------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock...................................................... 1,260 87
Purchase and cancellation of common stock................................................... - (6)
Payments on long-term debt.................................................................. - (2,500)
-------------- ---------------
Net cash provided by (used in) financing activities.................................. 1,260 (2,419)
-------------- ---------------
Effect of exchange rate fluctuations on cash.................................................. 104 (237)
-------------- ---------------
Net decrease in cash and cash equivalents..................................................... (4,349) (342)
Cash and cash equivalents, beginning of period................................................ 20,417 6,134
-------------- ---------------
Cash and cash equivalents, end of period...................................................... $ 16,068 $ 5,792
============== ===============
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for-
Interest.................................................................................. $ 2,311 $ 532
Income taxes.............................................................................. $ (70) $ 1,272
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements at March 31, 1998, and for the
three months then ended are unaudited and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim period. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, filed with the Securities and
Exchange Commission. The results of operations for the three months ended March
31, 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 both periods
presented, dilutive potential common shares consisted entirely of stock
options.
For the quarter ended March 31, 1998, the weighted average dilutive potential
common shares from Common Stock Warrants of 612,693 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 March 31, 1998.
3. COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), 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. Total
comprehensive income, consisting of net income and foreign currency translation
adjustments, for the quarters ended March 31, 1998 and 1997 was $6.6 million and
$0.6 million, respectively.
4. SECONDARY STOCK OFFERING
In April 1998, the Company completed a secondary public stock offering of
approximately 3.5 million shares of Common Stock. The primary shareholders in
the offering included Morgan Stanley affiliated entities and General Motors
employee benefit plan trusts. The Company received none of the proceeds from
the offering, nor incurred any expense.
5. 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
6
<PAGE>
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.
7
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------------
1998 1997
------------------------- -------------------------
% of % of
Amount Revenue Amount Revenue
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Total revenues................................................... $ 49,308 100.0% $ 38,582 100.0%
Expenses:
Cost of revenues:
Direct costs................................................. 22,082 44.8 18,581 48.2
Amortization of acquired software............................ - - 2,884 7.5
Amortization of client contracts and related intangibles..... 1,068 2.1 1,023 2.7
------------ ------------ ------------- -----------
Total cost of revenues................................ 23,150 46.9 22,488 58.4
------------ ------------ ------------- -----------
Gross margin................................................... 26,158 53.1 16,094 41.7
------------ ------------ ------------- -----------
Operating expenses:
Research and development..................................... 6,525 13.2 4,855 12.6
Selling and marketing........................................ 2,397 4.9 2,341 6.1
General and administrative:
General and administrative ................................ 5,602 11.4 4,129 10.7
Amortization of noncompete agreements and goodwill......... 1,341 2.7 1,731 4.5
Stock-based employee compensation.......................... 74 0.2 202 0.5
Depreciation................................................. 1,842 3.7 1,509 3.9
------------ ------------ ------------- -----------
Total operating expenses................................... 17,781 36.1 14,767 38.3
------------ ------------ ------------- -----------
Operating income (loss).......................................... 8,377 17.0 1,327 3.4
------------ ------------ ------------- -----------
Other income (expense):
Interest expense............................................. (2,546) (5.2) (641) (1.7)
Interest income.............................................. 660 1.3 211 0.5
Other........................................................ (7) - 267 0.7
------------ ------------ ------------- -----------
Total other................................................ (1,893) (3.9) (163) (0.5)
------------ ------------ ------------- -----------
Income before income taxes....................................... 6,484 13.1 1,164 2.9
Income tax (provision) benefit................................. - - - -
------------ ------------ ------------- -----------
Net income....................................................... $ 6,484 13.1% $ 1,164 2.9%
============ ============ ============= ===========
</TABLE>
8
<PAGE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues. Total revenues for the three months ended March 31, 1998, increased
27.8% to $49.3 million, from $38.6 million for the three months ended March 31,
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 March
31, 1998, increased 29.6% to $39.8 million, from $30.7 million for the three
months ended March 31, 1997. This increase is due primarily to an increase in
the number of customers of the Company's clients which were serviced by the
Company and increased revenue per customer. Customers serviced as of March 31,
1998, and 1997, respectively, were 23.6 million and 19.6 million, an increase of
20.2%. 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 March 31, 1998, the Company converted and processed
approximately 2.3 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 March 31, 1998, increased 20.6% to $9.5
million, from $7.9 million for the three months ended March 31, 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 three months ended March 31, 1998, from $2.9 million for the
three months ended March 31, 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 March 31,
1998, increased 4.4% to $1.1 million, from $1.0 million for the three months
ended March 31, 1997. The increase in expense is due to $0.3 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 March 31, 1998, increased
62.5% to $26.2 million, from $16.1 million for the three months ended March 31,
1997, due primarily to revenue growth. The gross margin percentage increased to
53.1% for the three months ended March 31, 1998, compared to 41.7% for the three
months ended March 31, 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 March 31, 1998, increased 34.4% to $6.5 million, from
$4.9 million for the three months ended March 31, 1997. As a percentage of
total revenues, R&D expense increased to 13.2% for the three months ended March
31, 1998, from 12.6% for the three months ended March 31, 1997.
During the three months ended March 31, 1997, the Company capitalized software
development costs of approximately $3.1 million, which consisted of $2.8 million
of internal development costs and $0.3 million of purchased software. The
Company capitalized third party, contracted costs of approximately $0.6 million
during the three months ended March 31, 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 three
months ended March 31, 1998 and 1997, were $7.1 million, or 14.4% of total
revenues, and $7.7 million, or 19.8% of total revenues, respectively. The
overall decrease in the R&D
9
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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 March 31, 1998, increased 2.4% to $2.4 million, from $2.3
million for the three months ended March 31, 1997. As a percentage of total
revenues, S&M expense decreased to 4.9% for the three months ended March 31,
1998, from 6.1% for the three months ended March 31, 1997. The 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 March 31, 1998, increased 35.7% to $5.6 million, from
$4.1 million for the three months ended March 31, 1997. As a percentage of
total revenues, G&A expense increased to 11.4% for the three months ended March
31, 1998, from 10.7% for the three months ended March 31, 1997. The increase in
G&A expense relates primarily to the continued expansion of the Company's
administrative staff and other administrative costs to support the Company's
overall growth.
Amortization of Noncompete Agreements and Goodwill. Amortization of noncompete
agreements and goodwill for the three months ended March 31, 1998, decreased
22.5%, to $1.3 million, from $1.7 million for the three months ended March 31,
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 March 31,
1998, increased 22.1% to $1.8 million, from $1.5 million for the three months
ended March 31, 1997. The increase in expense relates to capital expenditures
made throughout 1997 and the first three months of 1998 in support of the
overall growth of the Company.
Operating Income. Operating income for the three months ended March 31, 1998,
was $8.4 million or 17.0% of total revenues, compared to $1.3 million or 3.4% of
total revenues for the three months ended March 31, 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 March 31, 1998 and
1997, excluding Acquisition Charges of $2.1 million and $5.5 million, was $10.4
million or 21.1% of total revenues, and $6.9 million or 17.8% 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 March 31, 1998,
increased 297.2% to $2.5 million, from $0.6 million for the three months ended
March 31, 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 March 31, 1998,
increased 212.8% to $0.7 million, from $0.2 million for the three months ended
March 31, 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.
Income Taxes
- ------------
At March 31, 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 $12.0
million. The Company has recorded a valuation allowance of approximately $55.7
million against the remaining net deferred tax assets since realization of these
future benefits is not sufficiently assured as of March 31, 1998.
10
<PAGE>
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 March 31, 1998, the Company's principal sources of liquidity included cash
and cash equivalents of $16.1 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 March 31, 1998, $35.2 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.
During the three months ended March 31, 1998, the Company used $1.6 million of
net cash flow for operating activities, primarily due to an increase in accounts
receivable during the period. Current cash and cash equivalents and proceeds of
$1.3 million from the issuance of common stock through the Company's stock
incentive plans were used to fund capital expenditures of $3.5 million and
additions to software of $0.6 million.
Earnings from operations before interest, taxes, depreciation and amortization
(EBITDA) for the three months ended March 31, 1998 was $12.9 million or 26.1% of
total revenues, compared to $9.1 million or 23.5% of total revenues for the
three months ended March 31, 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 September 1997. In December 1997, the Company made an
optional principal payment on the term credit facility of $15.0 million. The
first scheduled principal payment on the term credit facility is June 30, 1998
in the amount of $2.3 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 March 31, 1998, the leverage ratio was 2.50.
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. Such payments to date have not been
significant. Based on the conversions performed to date and the future
conversions scheduled as of March 31, 1998, the Company expects to pay $19.5
million to TCI within the next 12 months, with the remaining amount payable by
the end of the third quarter of 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.
11
<PAGE>
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.
12
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1-5. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.19A* Second Amendment to Restated and Amended CSG Master
Subscriber Management System Agreement Between CSG
Systems, Inc. and TCI Cable Management Corporation,
dated January 9, 1998.
10.04A Second Amendment of Employee Performance Stock Purchase
Agreement, dated March 18, 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.
13
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SIGNATURES
- ----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 15, 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)
14
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.19A* Second Amendment to Restated and Amended CSG Master Subscriber
Management System Agreement between CSG Systems, Inc. and TCI Cable
Management Corporation, dated January 9, 1998.
10.04A Second Amendment of Employee Performance Stock Purchase Agreement,
dated March 18, 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.
15
<PAGE>
EXHIBIT 2.19A
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 (***).
SECOND AMENDMENT
TO
RESTATED AND AMENDED CSG MASTER
SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT
BETWEEN
CSG SYSTEMS, INC.
AND
TCI CABLE MANAGEMENT CORPORATION
This Second Amendment (the "Amendment") is executed this 9th day of January,
1998, and is made by and between CSG Systems, Inc., a Delaware corporation
("CSG") and TCI Cable Management Corporation ("Customer"). CSG and Customer
entered into a certain Restated and Amended CSG Master Subscriber Management
System Agreement dated August 10, 1997 (the "Agreement"), as subsequently
amended, 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. THE FOLLOWING SENTENCE IS HEREBY ADDED TO SECTION 6(a) OF SCHEDULE E:
----------
CSG AGREES TO MINIMIZE THE IMPACT OF NEW CSG VANTAGEPOINT UPDATES PROVIDED TO
CUSTOMER BY: 1) PROVIDING CUSTOMER WITH COMMERCIALLY REASONABLE NOTICE OF FUTURE
UPDATES; 2) WORKING WITH CUSTOMER TO MINIMIZE THE OPERATIONAL IMPACT AND EXPENSE
REQUIRED TO UPGRADE TO THE NEW UPDATES ON A TIME AND MATERIALS BASIS.
2. IF CSG PROVIDES CUSTOMER WITH ANY CUSTOMIZATIONS FOR CSG VANTAGEPOINT, CSG
WILL PROVIDE SUCH CUSTOMIZATIONS TO ALL CUSTOMER SITES THAT LICENSE CSG
VANTAGEPOINT PURSUANT TO THE TERMS, CONDITIONS AND FEES SET FORTH IN THE
STATEMENT OF WORK.
3. EXHIBIT E-1 IS HEREBY DELETED AND REPLACED WITH EXHIBIT E-1 ATTACHED HERETO.
4. WITH RESPECT TO THREE OF THE CUSTOMER SITES, CSG WILL PROVIDE CUSTOMER WITH
THE INSTALLATION AND TRAINING SERVICES FOR CSG VANTAGEPOINT AS SET FORTH IN
EXHIBIT E-2 ATTACHED HERETO.
5. THE FEES FOR CSG VANTAGEPOINT ARE SET FORTH BELOW:
NOTE: THE FEES SET FORTH BELOW APPLY ONLY WITH RESPECT TO THREE OF THE CUSTOMER
SITES. THE FEES FOR THE OTHER TWO PREVIOUS CUSTOMER SITES ARE SET FORTH IN
SECTION 10 OF SCHEDULE D.
----------
1
<PAGE>
"Confidential Treatment Requested
and the Redacted Material has been
separately filed with the Commission."
FEES:
-----
3 CUSTOMER SITE LICENSES- $(***)
($(***) per customer site license)
ANNUAL MAINTENANCE FEE
- 1998 maintenance - 3@ $(***) per customer site $(***)
SUBSEQUENT YEARS ANNUAL MAINTENANCE FEE (due on Jan. 1, 1999 and each
subsequent Jan. 1ST)- 3@ $(***) per customer site $(***)*
INSTALLATION/TRAINING - 3@ $(***) per customer site $(***)
DAILY DATA FEED (after 12/31/98) $(***)/sub/month*
* These prices are not subject to Section 4 of the Master Agreement prior
to January 1, 1999; there will be no price increase for any of the fees listed
in this Amendment prior to January 1, 1999. Thereafter, these prices shall be
subject to Section 4.
PAYMENT TERMS: (PER CUSTOMER SITE)
--------------
LICENSE FEE-
- 1st payment ((***)% of license fee) due thirty days from execution
date of this Amendment
- 2nd payment ((***)% of license fee) due on installation completion or
6/15/98, whichever comes first
- final payment ((***)% of license fee) due on installation completion
or 9/30/98, whichever comes first.
ANNUAL MAINTENANCE FEE-
- (***)% of the 1998 Annual Maintenance Fee due thirty days after
installation completion or 9/30/98, whichever comes first.
- (***)% of the Annual Maintenance Fee invoiced Jan. 1, 1999 and each
subsequent Jan. 1 and due sixty days from date of invoice.
INSTALLATION / TRAINING FEE -
- (***)% due thirty days from installation completion or 9/30/98,
whichever comes first.
NOTE: For a period of 36 months from the execution date of this
Amendment, Customer shall have the right to license additional
workstations of the CSG VantagePoint User Application Modules set forth
on page 3 of Exhibit E-1 for $(***) per workstation per User Application
Module and an annual maintenance fee of $(***) per workstation per User
Application Module. Thereafter, Customer may license additional
workstations for a mutually agreeable fee.
* License fee includes third party software set forth in page 2 of
Exhibit E-1.
* License fee includes daily data feeds through 12/31/98.
* If Customer cancels its marketing download (included in BSC) then
the VantagePoint data feed will be provided free of charge.
* Customer is responsible for reimbursing CSG for all of CSG's travel
and travel related expenses.
* 12 copies of VantagePoint documentation will be provided free of
charge for each customer site.
THIS AMENDMENT IS EXECUTED ON THE DAY AND YEAR FIRST SHOWN ABOVE.
CSG SYSTEMS, INC. ("CSG") TCI CABLE MANAGEMENT CORP.
("CUSTOMER")
BY: /s/ Joseph T. Ruble BY: /s/ Ann Montgomery
---------------------------- ----------------------------
2
<PAGE>
TITLE: V.P & General Counsel TITLE: Vice President Customer Operations
----------------------- ------------------------------------
and Billing
- -----------
NAME: Joseph T. Ruble NAME: Ann Montgomery
------------------------ -------------------------------------
3
<PAGE>
EXHIBIT E-1 (PAGE 1 OF 3)
PRODUCT SCHEDULE
----------------
CSG VANTAGEPOINT SOFTWARE (MODULE DEFINITIONS):_______________________________
1. CSG VANTAGEPOINT(TM) MODEL: The Data Warehouse is a logical collection of
strategic information. It combines critical information from CCS, and
enhances that operational data with selected demographics (Claritas Cluster
Codes and Geocodes loaded into the CCS environment). In a future standard and
supported CSG VantagePoint Update, CSG will provide Customer with the ability
to load, store, and access third party data in CSG-defined data elements
consistent with the current CSG VantagePoint data structure. If TCI desires
for CSG to create a data feed that does not exist within CSG VantagePoint, CSG
will create such Customization pursuant to the mutually agreeable terms,
conditions and fees set forth in a Schedule B Statement of Work. The CSG
----------
VantagePoint(TM) model provides a basic marketing data warehouse data model.
The physical database is optimized for performance in an Oracle database
environment. This data is then used in decision support applications,
marketing, and other business data reporting and analysis.
2. CSG VANTAGEPOINT(TM) CONVERSION ENGINE: The conversion engine consists of
the load routines that have been defined to allow the CCS source system to
load data into the CSG VantagePoint(TM) warehouse. Formatted data is extracted
from the source system and loaded into the warehouse. The load programs also
implement the necessary summarization procedures for the applications.
Subsequently, an incremental update will load data into the warehouse on a
nightly basis.
3. CSG VANTAGEPOINT(TM) MARKETING ANALYSIS SYSTEM (MAS): The Marketing
Analysis System (MAS) provides an ad-hoc query, reporting and multi-
dimensional business intelligence environment. This environment provides you
the ability to capture information and to perform complex business analyses on
data available in the CSG VantagePoint (TM) Data Warehouse. MAS provides you
a quick start to gaining valuable insight into your corporate data through the
use of predefined analysis models. The models address the following topics:
. Delinquency
. Lifetime Value
. Product Utilization
. Scoring and Segmentation
. Service and Customer Performance
. Campaign Performance - Original
. Campaign Performance - Current
MAS also gives you the ability to create your own reports and ad-hoc queries
to address your specific analysis requirements.
4. CSG VANTAGEPOINT(TM) CAMPAIGN MANAGEMENT SYSTEM (CMS): CMS is a tool that
enables you to create, manage, and track marketing campaigns. It allows you to
select a target marketing segment based on demographic and performance data
found in the CSG VantagePoint(TM) Data Warehouse. Defining a marketing campaign
includes identifying the goal, budget, time frame, offering, desired response,
sponsor information, and campaign intelligence for the overall campaign. In
addition, CMS allows you to specify one or more campaign events for a campaign.
A campaign event may include any one of the following activities: telemarketing,
direct mail, direct sales force, literature, flyers, door hangers, ESP
MessageLink, and ACSR MessageLink. Once a campaign and a campaign event have
been created, CMS allows you to select the participants to be included in each
campaign event based on data contained in the CSG VantagePoint Data Warehouse.
CMS allows you to monitor and to manage the financial aspects of marketing
campaigns, by recording actual revenue and expenses for each campaign event at
the campaign level. CMS provides several reporting views of the campaign
information to assist in monitoring marketing
4
<PAGE>
segments, managing active campaigns and campaign events, and tracking campaign
histories. The reports provide campaign and event summary, detail, expenses, and
participant selection information.
5
<PAGE>
EXHIBIT E-1 (PAGE 2 OF 3)
5. CSG VANTAGEPOINT(TM) ENHANCED STATEMENT PRESENTATION MESSAGELINK (EML): The
ESP MessageLink (EML) provides a data link from the Campaign Management System
(CMS) to the Enhanced Statement Presentation (ESP) service. It extracts
marketing messages from the data warehouse that are targeted to selected
campaign participants and creates a file that is accessed by ESP. This
information is extracted nightly from the CSG VantagePoint (TM) server and
transferred to the ESP server, where it is stored for use by the ESP process.
Campaign messages that are printed on the ESP bill will contain the marketing
message with any substitution fields, such as subscriber name and statement
balance, that will personalize the message for a subscriber. You may also add
special icons to attract attention to your messages. A customer site must have
successfully implemented the ESP service and have that system in production for
at least 30 days prior the EML implementation. It is standard practice to roll-
out EML by targeting test participants during the first 30 days of the EML
implementation.
6. CSG VANTAGEPOINT(TM) ACSR MESSAGELINK (AML): The ACSR MessageLink (AML)
provides a data link from the Campaign Management System (CMS) to the Advanced
Customer Service Representative (ACSR) module. AML extracts marketing messages
from the data warehouse that are targeted to selected campaign participants and
transfers the file to the ACSR server, where it is stored for use by the ACSR
application. Each time a customer support representative (CSR) accesses
information for a subscriber, the ACSR message files are searched for a match
with the account number. When the CSR accesses information for one of the
accounts contained in these files, a window is created on the ACSR screen. Using
the right mouse button, the CSR can display the marketing message(s) targeted
for the subscriber. This information will quickly tell a CSR which offers to
present to this subscriber.
7. CSG VANTAGEPOINT(TM) EXECUTIVE INFORMATION SYSTEM (EIS): The Executive
Information System (EIS) is a 3-D graphical visualization system that supports
the presentation of Key Performance Indicators (KPIs) to executive and senior
management. These KPIs focus on measures of your core business. The data for
the creation of these measures is made available through the CSG
VantagePoint(TM) Data Warehouse. EIS allows executives to select a KPI and
display the information in different modes. It also enables them to "drill
down" into the information by different categories. This provides them the
ability to quickly understand the key elements required to successfully run the
business. The Key Performance Indicators included in the EIS library will
provide measurements for marketing, Pay-Per-View (PPV) and operations
departments.
Actual to budget comparisons are provided for the following KPI's:
. Ending Subscriber Counts
. Net Subscriber Gain
. Subscriber Churn
. Service Call Rate
. % of Trouble Calls Completed Within 24 Hrs.
. PPV Viewings
The KPIs can be viewed in various graphical display modes in EIS to include
summary, maps, and graph (bar chart). EIS supports several target comparison
value for each of the KPI's. These target values are used to compare the
actual values against target values. The target values supported are budget,
re-estimate, forecast and goal.
INCORPORATED THIRD PARTY SOFTWARE (TO BE DELIVERED WITH VANTAGEPOINT FOR NO
ADDITIONAL FEE): Oracle
6
<PAGE>
RDMBS, Oracle 7.3.2.2, AVS Express from Advanced Visual Systems and Group 1
Address Merge. OTHER THIRD PARTY SOFTWARE (TO BE DELIVERED WITH VANTAGEPOINT FOR
NO ADDITIONAL FEE): Cognos Powerplay and Impromptu.
7
<PAGE>
EXHIBIT E-1 (PAGE 3 OF 3)
CUSTOMIZATION:
- --------------------------------------------------------------------------------
Customization means the Technical Services' Deliverables as defined under
Schedule B of the Master Agreement including but not limited to any and all
- ----------
interface programs and data conversion software developed by CSG on behalf of
Customer.
SYSTEM SITES AND NUMBER OF WORKSTATIONS:
- --------------------------------------------------------------------------------
Customer Site(s) where VantagePoint software will be located: 5 customer sites
to be determined by Customer. A customer site is any location where the
VantagePoint server resides.
Number of Workstations: At each customer site there will be twelve (12)
workstation seats for each of the User Application Modules which include:
Marketing Analysis, Campaign Management, and EIS. There is no restriction as to
where such workstations reside. Note: If each of the three (3)modules are
loaded on different workstations/seats, then Customer would have a total of
thirty-six (36) workstations/seats with a VantagePoint software User Application
Module loaded onto each one.
DESIGNATED ENVIRONMENT:
- --------------------------------------------------------------------------------
Customer is responsible for providing the necessary third party hardware and
network. CSG will provide Customer with the third party software listed on page
2 of Exhibit E-1 for no additional fee. Customer is responsible for obtaining
all other third party software set forth below that is not listed on page 2 of
Exhibit E-1. The hardware requirements listed below are to be used as rough
guidelines for Customer's planning purposes. These estimates are subject to
revision as CSG develops additional requirements and initiates work for
performance tuning. CSG will work with Customer to identify the necessary
computing environment for VantagePoint. The disk estimates for the database
server do not assume disk mirroring or any other fault tolerant disk
configuration.
Hardware:
Client configuration:
MS-DOS 6.2 with Windows for Workgroups 3.11 (32 bit extension)
Pentium 133 32MB RAM, 2 GB HD, SQLNet TCP/IP connection to Oracle
server
MDD Server
MS-DOS 6.2 with Windows NT 3.51
Pentium 133 64MB RAM, 2GB HD, SQLNet TCP/IP connection to Oracle
server
Database Server (Oracle)
SUN Sparc 2000X, Solaris V2.5, 10 CPU, 2GB RAM, 120GB DASD, SQLNet
TCP/IP
Network
T1 circuit between Customer data center and CSG data center
Software:
Oracle RDMBS
Oracle 7.3.2.2
Microsoft Visual Basic
NOTE: The specific hardware configuration cannot be completely identified and
- ----
certified until after the business requirements of Customer are determined
during the pre-install visit. Based on current knowledge, CSG believes that the
hardware set forth on this Exhibit E-1 is sufficient to meet the activities
contemplated by this Agreement; however, the above is subject to change.
8
<PAGE>
EXHIBIT E-2
INSTALLATION AND TRAINING SERVICES FOR CSG VANTAGEPOINT
INSTALLATION SERVICES FOR EACH CUSTOMER SITE
1 Environment Assessment
. Deliver sizing survey form for customer completion
. Document sizing requirements and deliver to customer as input for hardware
purchase
. Order initial load extract from CCS
2 Preparation of System
. Coordinate system configuration requirements with hardware vendor
. Provide disk partitioning/array setup
3 Installation of System
. Install and configure Oracle
. Install CSG VantagePoint(TM) system server components
. Install VantagePoint server applications
. Build Database and individual schemas
. Perform Initial Data Load
. Install CSG VantagePoint(TM) system client components
. Assist with database administration, system administration and operating
system installation tasks (after completion of installation at each customer
site, Customer is responsible for these tasks).
TRAINING SERVICES FOR EACH CUSTOMER SITE (if phased training is required, CSG
and Customer will agree on mutually acceptable timeframes for completing the
training services)
1. Includes one on-site training session
. Consists of 1 instructor for up to 12 students)
. A VantagePoint datawarehouse training plan will be presented and accepted
prior to the initiation of the training sessions.
. Training will be provided as set forth below:
. 6.5 hours - Data Training
. 2.0 hours - Conversion Training
. 1/2 day - Introduction to Impromptu
. 1/2 day - Introduction to PowerPlay
. 1 day - MAS Mutli-Dimensional Model Training
. 1 day - Campaign Management System Training for Users
. 1/2 day - Executive Information System Training For Administrator
. 1/2 day - Executive Information System for Users
. All training materials and documentation will be provided by CSG
2. Excludes additional training sessions other than the one provided above
. All additional sessions will be held at a location provided by Customer
. Customer must provide the following items for each training session:
. Conference room
. Designated Customer training coordinator
. Overhead projector
. Projection screen
. Whiteboard or flip chart
. LCD display or some alternative method with which to display the
information from the CSG instructor's PC
. One PC per two users (minimum)
. One PC with PowerPoint v7.0 for CSG instructor
. Network connection to CSG VantagePoint for all PCs
. Connection to network server for all PCs
NOTE: WITH RESPECT TO THREE OF THE CUSTOMER SITES, AS PART OF THE INSTALLATION
AND TRAINING FEE SET
9
<PAGE>
FORTH IN THIS AMENDMENT, CSG WILL PROVIDE EACH CUSTOMER SITE WITH A PROJECT
MANAGER, BEGINNING ON THE COMMENCEMENT DATE OF THE INSTALLATION SERVICES AND
ENDING 2 WEEKS AFTER THE COMPLETION DATE OF THE INSTALLATION SERVICES FOR SUCH
CUSTOMER SITE. IF REQUIRED BY AN INDIVIDUAL CUSTOMER SITE, THIS PROJECT MANAGER
WILL BE DEDICATED FULL-TIME TO SUCH CUSTOMER SITE FOR NO ADDITIONAL CHARGE. ANY
RESOURCES PROVIDED FOR IN THIS AMENDMENT ARE IN ADDITION TO ANY RESOURCES THAT
ARE SET FORTH IN THE MASTER AGREEMENT.
NOTE: WITH RESPECT TO THREE OF THE CUSTOMER SITES CSG WILL USE BEST COMMERCIAL
EFFORTS (I) TO BEGIN THE INSTALLATION SERVICES NO LATER THAN 30 DAYS AFTER THE
EXECUTION OF THIS AMENDMENT, AND (II) TO COMPLETE THE INSTALLATION SERVICES NO
LATER THAN JUNE 30, 1998. IN ANY EVENT, CSG AGREES TO COMPLETE THE INSTALLATION
SERVICES BY SEPTEMBER 30, 1998; PROVIDED HOWEVER, THAT, THERE ARE NO UNEXCUSED
DEFAULTS BY CUSTOMER OF ITS OBLIGATIONS SET FORTH IN A MUTUALLY AGREEABLE
PROJECT PLAN FOR THE INSTALLATION OF CSG VANTAGEPOINT WHICH HAVE MATERIALLY AND
ADVERSELY IMPACTED CSG'S COMPLETION OF SUCH INSTALLATION SERVICES.
10
<PAGE>
EXHIBIT 10.04A
SECOND AMENDMENT OF EMPLOYEE PERFORMANCE STOCK PURCHASE AGREEMENT
-----------------------------------------------------------------
This Second Amendment of Employee Performance Stock Purchase Agreement
is made effective as of March 18, 1998, by and between CSG SYSTEMS
INTERNATIONAL, INC., a Delaware corporation formerly known as CSG Holdings, Inc.
(the "Company"), and GEORGE HADDIX (the "Employee").
* * *
WHEREAS, the Company and the Employee are parties to that certain
Employee Performance Stock Purchase Agreement dated August 17, 1995, as amended
by a First Amendment thereto dated as of October 19, 1995 (the "Performance
Agreement"); and
WHEREAS, the Company and the Employee desire to amend the Performance
Agreement as more particularly set forth below;
NOW, THEREFORE, the Company and the Employee agree as follows:
1. Notwithstanding the provisions of Section 6(g) of the Performance
Agreement, the Company agrees that, at any time after the date of this Second
Amendment, the Employee may transfer the Unreleased Shares (as defined in the
Performance Agreement) to a limited partnership of which the Employee is a
general partner upon the conditions (i) that any Unreleased Shares so
transferred shall remain subject to the Repurchase Option under Section 3 of the
Performance Agreement until such Shares are released from the Repurchase Option
pursuant to Section 4 of the Performance Agreement, (ii) that such partnership
shall make no disposition of all or any portion of the Unreleased Shares
transferred to it by the Employee except in compliance with Section 6(g) of the
Performance Agreement (except that the provisions of Section 5 of the
Performance Agreement shall not be applicable), (iii) that the certificates for
any of the Unreleased Shares transferred to such partnership by the Employee
(the "Certificates") shall contain the following legends:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
OFFERED, SOLD, OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER
THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO
THE ISSUER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE, SUCH OFFER,
SALE, OR TRANSFER IS IN COMPLIANCE WITH THE ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT
OF REPURCHASE AND RESTRICTIONS ON TRANSFER, AS SET FORTH IN THE EMPLOYEE
PERFORMANCE STOCK PURCHASE AGREEMENT DATED AUGUST 17, 1995, BETWEEN THE
ISSUER AND GEORGE HADDIX, AS AMENDED, A COPY OF WHICH MAY BE OBTAINED AT
THE PRINCIPAL OFFICE OF THE ISSUER. SUCH RIGHT OF REPURCHASE AND
RESTRICTIONS ON TRANSFER ARE BINDING ON TRANSFEREES OF THE SHARES
REPRESENTED BY
<PAGE>
THIS CERTIFICATE.;
(iv) that the Certificates shall remain subject to Joint Escrow Instructions
between the Company and such partnership substantially similar to those dated
August 17, 1995, between the Company and the Employee, (v) that the provisions
of Sections 6(f), 6(g), 10(b), 10(c), 11,12,13,14,15, and 16 of the Performance
Agreement shall continue to be applicable to the Company and such partnership,
and (vi) that such partnership shall execute and deliver to the Company such
document as the Company reasonably may request to evidence the agreement of such
partnership with the foregoing provisions of this Paragraph 1. No transfer of
the Unreleased Shares shall be permitted by the Company pursuant to this
Paragraph 1 until the condition set forth in the preceding clause (vi) has been
satisfied.
2. As hereby amended, the Performance Agreement shall remain in full force
and effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Second Amendment of
Employee Performance Stock Purchase Agreement as of the date first set forth
above.
CSG SYSTEMS INTERNATIONAL, INC., a Delaware
corporation formerly known as CSG Holdings, Inc.
By: /s/ Neal C. Hansen
----------------------------------------------
Neal C. Hansen, Chairman of the Board and
Chief Executive Officer
/s/ George F. Haddix
----------------------------------------------
George Haddix
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
OF MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,068
<SECURITIES> 0
<RECEIVABLES> 56,651
<ALLOWANCES> 1,435
<INVENTORY> 0
<CURRENT-ASSETS> 74,726
<PP&E> 36,895
<DEPRECIATION> 18,059
<TOTAL-ASSETS> 185,225
<CURRENT-LIABILITIES> 69,839
<BONDS> 126,000
255
0
<COMMON> 0
<OTHER-SE> (25,006)
<TOTAL-LIABILITY-AND-EQUITY> 185,225
<SALES> 0
<TOTAL-REVENUES> 49,308
<CGS> 0
<TOTAL-COSTS> 23,150
<OTHER-EXPENSES> 6,525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,546
<INCOME-PRETAX> 6,484
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,484
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</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 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.
<PAGE>
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.
DEPENDENCE ON MAJOR CLIENTS
During the years ended December 31, 1996 and 1997, revenues from TCI and
affiliates represented approximately 25.9% and 32.9% of total revenues,
respectively, and revenues from Time Warner and affiliates 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.
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 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.
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
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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 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.
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
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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.
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
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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.
