<PAGE>
FORM 10-Q
UNITED STATES
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 September 30, 1999
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 November 12, 1999: 51,829,926
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q For the Quarter Ended September 30, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998.................................................... 3
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and 1998 ................................ 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998................................. 5
Notes to Condensed Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 19
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................... 20
Signatures............................................................... 21
Index to Exhibits........................................................ 22
</TABLE>
2
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1999 1998
------------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents...................................................................... $ 30,963 $ 39,593
Accounts receivable-
Trade-
Billed, net of allowance of $3,133 and $2,051.......................................... 70,518 60,529
Unbilled............................................................................... 8,068 2,828
Other...................................................................................... 784 1,179
Deferred income taxes......................................................................... 2,202 1,803
Other current assets.......................................................................... 3,814 2,275
----------- ------------
Total current assets...................................................................... 116,349 108,207
----------- ------------
Property and equipment, net of depreciation of $29,427 and $23,765............................... 23,502 24,711
Software, net of amortization of $36,786 and $35,391............................................. 8,016 9,422
Noncompete agreements and goodwill, net of amortization of $28,827 and $24,878................... 3,620 7,596
Client contracts and related intangibles, net of amortization of $23,147 and $17,671............. 55,765 59,791
Deferred income taxes............................................................................ 53,698 59,389
Other assets..................................................................................... 1,483 2,380
----------- ------------
Total assets.............................................................................. $ 262,433 $ 271,496
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.......................................................... $ 20,235 $ 19,125
Customer deposits............................................................................. 10,552 10,018
Trade accounts payable........................................................................ 9,778 10,471
Accrued employee compensation................................................................. 13,306 12,276
Deferred revenue.............................................................................. 10,953 13,470
Conversion incentive payments................................................................. - 22,032
Accrued income taxes.......................................................................... 11,675 6,756
Other current liabilities..................................................................... 12,488 7,009
----------- ------------
Total current liabilities.................................................................. 88,987 101,157
----------- ------------
Non-current liabilities:
Long-term debt, net of current maturities..................................................... 65,765 109,125
Deferred revenue.............................................................................. 701 216
----------- ------------
Total non-current liabilities.............................................................. 66,466 109,341
----------- ------------
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized;
zero shares issued and outstanding ........................................................ - -
Common stock, par value $.01 per share; 100,000,000 shares authorized;
51,761,231 shares and 51,465,646 shares outstanding........................................ 521 515
Common stock warrants; 3,000,000 warrants outstanding......................................... 26,145 26,145
Additional paid-in capital.................................................................... 131,502 120,599
Deferred employee compensation................................................................ (108) (328)
Notes receivable from employee stockholders................................................... (164) (478)
Accumulated other comprehensive income-cumulative translation adjustments..................... 21 38
Treasury stock, at cost, 366,986 shares and 66,000 shares..................................... (6,677) (97)
Accumulated deficit........................................................................... (44,260) (85,396)
----------- ------------
Total stockholders' equity ................................................................ 106,980 60,998
----------- ------------
Total liabilities and stockholders' equity................................................. $ 262,433 $ 271,496
=========== ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three months ended Nine months ended
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Total revenues.............................................. $ 84,034 $ 63,461 $ 231,631 $ 167,013
Expenses:
Cost of revenues:
Direct costs........................................ 32,632 27,302 90,567 73,300
Amortization of client contracts.................... 1,909 1,402 5,569 3,646
------------- ------------- ------------- -------------
Total cost of revenues........................ 34,541 28,704 96,136 76,946
------------- ------------- ------------- -------------
Gross margin (exclusive of depreciation)................... 49,493 34,757 135,495 90,067
------------- ------------- ------------- -------------
Operating expenses:
Research and development............................... 8,681 6,972 24,518 20,278
Selling and marketing.................................. 3,825 3,004 10,827 8,040
General and administrative:
General and administrative.......................... 6,406 5,841 18,940 17,059
Amortization of noncompete agreements and goodwill.. 1,317 1,346 3,953 4,034
Stock-based employee compensation................... 74 74 220 222
Depreciation........................................... 2,563 2,064 7,467 5,894
------------- ------------- ------------- -------------
Total operating expenses...................... 22,866 19,301 65,925 55,527
------------- ------------- ------------- -------------
Operating income........................................... 26,627 15,456 69,570 34,540
------------- ------------- ------------- -------------
Other income (expense):
Interest expense.................................... (1,657) (2,473) (5,690) (7,481)
Interest income..................................... 751 617 2,208 1,750
Other............................................... 31 (24) 14 (98)
------------- ------------- ------------- -------------
Total other................................... (875) (1,880) (3,468) (5,829)
------------- ------------- ------------- ------------
Income before income taxes.................................. 25,752 13,576 66,102 28,711
Income tax provision................................... (9,691) - (24,966) -
------------- ------------- ------------- ------------
Net income................................................. $ 16,061 $ 13,576 $ 41,136 $ 28,711
============= ============= ============= ============
Basic net income per common share:
Net income available to common stockholders............. $ 0.31 $ 0.26 $ 0.80 $ 0.56
============= ============= ============= ============
Weighted average common shares......................... 51,744 51,252 51,673 51,134
============= ============= ============= ============
Diluted net income per common share:
Net income available to common stockholders............ $.0.29 $ 0.26 $ 0.76 $ 0.54
============= ============= ============= ============
Weighted average common shares......................... 54,536 52,831 54,261 52,803
============= ============= ============= ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
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CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
-----------------------------------
September 30, September 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................................................. $ 41,136 $ 28,711
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation......................................................................... 7,467 5,894
Amortization......................................................................... 11,773 9,274
Deferred income taxes................................................................ 5,292 (6,388)
Stock-based employee compensation.................................................... 220 222
Changes in operating assets and liabilities:
Trade accounts and other receivables, net.......................................... (14,918) (13,351)
Other current and noncurrent assets................................................ (1,581) (857)
Accounts payable and accrued liabilities........................................... 12,311 14,342
---------------- ----------------
Net cash provided by operating activities........................................ 61,700 37,847
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment, net................................................ (6,264) (11,781)
Acquisition of assets................................................................... - (5,974)
Additions to software................................................................... - (1,410)
Conversion and other incentive payments................................................. (23,482) (2,019)
---------------- ----------------
Net cash used in investing activities............................................ (29,746) (21,184)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock.................................................. 7,847 3,499
Repurchase of common stock.............................................................. (6,545) (2)
Payments on notes receivable from employee stockholders................................. 391 50
Payments on long-term debt.............................................................. (42,250) (4,500)
---------------- ----------------
Net cash used in financing activities............................................ (40,557) (953)
---------------- ----------------
Effect of exchange rate fluctuations on cash............................................... (27) 77
---------------- ----------------
Net increase (decrease) in cash and cash equivalents....................................... (8,630) 15,787
Cash and cash equivalents, beginning of period............................................. 39,593 20,417
---------------- ----------------
Cash and cash equivalents, end of period................................................... $ 30,963 $ 36,204
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest............................................................................. $ 5,101 $ 6,756
Income taxes......................................................................... $ 11,743 $ 1,591
Supplemental disclosures of noncash investing activities:
During July 1998, the Company assumed liabilities of $1.3 million as part of the purchase price for the USTATS asset
acquisition.
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements at September 30, 1999, and for
the three and nine 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, 1998, filed with the
Securities and Exchange Commission (the Company's 1998 10-K). The results of
operations for the three and nine months ended September 30, 1999, are not
necessarily indicative of the results for the entire year ending December 31,
1999.
2. STOCK SPLIT
On March 5, 1999, the Company completed a two-for-one stock split, effected as a
stock dividend, for stockholders of record on February 8, 1999. Share and per
share data for all periods presented herein reflect the effect of the split.
3. STOCKHOLDERS' EQUITY
Common Stock Warrants. AT&T holds 3.0 million warrants to purchase the
Company's Common Stock at an exercise price of $12 per share. During the three
months ended September 30, 1999, 2.6 million Common Stock Warrants became
exercisable when (i) the Company processed a total of 13.0 million AT&T
customers on its system and (ii) converted additional qualifying AT&T customers
to the Company's system in excess of the 13.0 million customers. The remaining
0.4 million warrants are exercisable at various increments as additional
qualifying AT&T customers are converted to the Company's system. None of the
warrants were exercised as of September 30, 1999. The warrants expire in
September 2002. See additional discussion of the Common Stock Warrants in the
Company's 1998 10-K.
Stock Repurchase Plan. Effective August 4, 1999, the Company's Board of
Directors approved a stock repurchase plan which authorized the Company at its
discretion to purchase up to a total of 5.0 million shares of its Common Stock
from time to time as market and business conditions warrant. This program
represents approximately 10% of the Company's outstanding shares. As of
September 30, 1999, the Company had repurchased 300,000 shares of Common Stock
for approximately $6.5 million (a weighted average price of $21.82 per share).
The stock repurchase plan will be in effect until terminated by the Board of
Directors of the Company. The stock may be used in connection with stock option
and warrant exercises, employee stock purchases, acquisitions, and other
corporate purposes.
4. 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
6
<PAGE>
to dilutive potential common shares outstanding during the period. The
reconciliation of the weighted average common shares outstanding for the
earnings per share calculation is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Basic common shares outstanding..................... 51,744 51,252 51,673 51,134
Dilutive effect of stock options.................... 1,443 1,579 2,138 1,669
Dilutive effect of stock warrants................... 1,349 --- 450 ---
------ ------ ------ ------
Diluted common shares outstanding................... 54,536 52,831 54,261 52,803
====== ====== ====== ======
</TABLE>
For the three and nine months ended September 30, 1999 and 1998, the weighted
average dilutive potential common shares (calculated using the treasury stock
method) from Common Stock Warrants 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 September 30, 1999 and 1998. For the three
and nine month periods ended September 30, 1999 and 1998, the weighted average
diluted potential common shares from Common Stock Warrants excluded from diluted
net income per common share are as follows:
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
-------------- ------------
<S> <C> <C>
September 30, 1999............................... 184,045 1,377,113
September 30, 1998............................... 1,334,986 1,301,304
</TABLE>
For the quarters ended September 30, 1999 and 1998, weighted average outstanding
stock options of 2,091,351 and 90,756 have been excluded from the computation of
diluted net income per common share because the exercise prices of these options
were greater than the average market price of the common shares for the
respective quarters.
5. COMPREHENSIVE INCOME
The Company's components of comprehensive income were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income............................... $16,061 $13,576 $41,136 $28,711
Foreign currency translation
Adjustments........................... 290 97 (17) 166
--------------- --------------- --------------- ---------------
Comprehensive income..................... $16,351 $13,673 $41,119 $28,877
=============== =============== =============== ===============
</TABLE>
7
<PAGE>
6. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS
Certain September 30, 1998 amounts have been reclassified to conform with the
September 30, 1999 presentation.
8
<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 September 30, Nine months ended September 30,
-------------------------------------------- --------------------------------------------
1999 1998 1999 1998
-------------------- -------------------- -------------------- --------------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.................... $ 84,034 100.0% $ 63,461 100.0% $231,631 100.0% $167,013 100.0%
Expenses:
Cost of revenues:
Direct costs................. 32,632 38.8 27,302 43.0 90,567 39.1 73,300 43.9
Amortization of client
contracts................ 1,909 2.3 1,402 2.2 5,569 2.4 3,646 2.2
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues 34,541 41.1 28,704 45.2 96,136 41.5 76,946 46.1
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin (exclusive of
depreciation)................ 49,493 58.9 34,757 54.8 135,495 58.5 90,067 53.9
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development..... 8,681 10.3 6,972 11.0 24,518 10.6 20,278 12.2
Selling and marketing........ 3,825 4.6 3,004 4.7 10,827 4.7 8,040 4.8
General and administrative:
General and administrative 6,406 7.6 5,841 9.2 18,940 8.2 17,059 10.2
Amortization of noncompete
agreements and goodwill. 1,317 1.6 1,346 2.1 3,953 1.7 4,034 2.4
Stock-based employee
compensation............ 74 0.1 74 0.1 220 0.1 222 0.1
Depreciation................. 2,563 3.0 2,064 3.3 7,467 3.2 5,894 3.5
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses... 22,866 27.2 19,301 30.4 65,925 28.5 55,527 33.2
-------- -------- -------- -------- -------- -------- -------- --------
Operating income.................. 26,627 31.7 15,456 24.4 69,570 30.0 34,540 20.7
-------- -------- -------- -------- -------- -------- -------- --------
Other income (expense):
Interest expense............. (1,657) (2.0) (2,473) (3.9) (5,690) (2.5) (7,481) (4.5)
Interest income.............. 751 0.9 617 0.9 2,208 1.0 1,750 1.0
Other........................ 31 - (24) - 14 - (98) -
-------- -------- -------- -------- -------- -------- -------- --------
Total other................ (875) (1.1) (1,880) (3.0) (3,468) (1.5) (5,829) (3.5)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes........ 25,752 30.6 13,576 21.4 66,102 28.5 28,711 17.2
Income tax provision........... (9,691) (11.5) - - (24,966) (10.8) - -
-------- -------- -------- -------- -------- -------- -------- --------
Net income........................ $ 16,061 19.1% $ 13,576 21.4% $ 41,136 17.7% $28,711 17.2%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
9
<PAGE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Revenues. Total revenues for the three months ended September 30, 1999,
increased 32.4% to $84.0 million, from $63.5 million for the three months ended
September 30, 1998.
Revenues from processing and related services for the three months ended
September 30, 1999, increased 30.2% to $64.6 million, from $49.6 million for the
three months ended September 30, 1998. Of the total increase in revenue,
approximately 69% resulted from an increase in the number of customers of the
Company's clients which were serviced by the Company and approximately 31% was
due to increased revenue per customer. Customers serviced as of September 30,
1999 and 1998, respectively, were 32.7 million and 27.2 million, an increase of
20.0%. 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
July 1, 1999 through September 30, 1999, the Company converted and processed
approximately 1.5 million new customers on its systems.
Revenues from software and related product sales and professional consulting
services for the three months ended September 30, 1999, increased 40.2% to $19.4
million, from $13.9 million for the three months ended September 30, 1998. This
increase relates primarily to the continued penetration of sales of the
Company's software products and services to the Company's existing client base,
as well as sales to new clients.
Total annualized domestic revenue per customer account for the third quarter of
1999 was $10.16, compared to $9.14 for the same period in 1998, an increase of
11.1%. Revenue per customer increased primarily due to (i) a greater percentage
of processing revenues in 1999 being generated under the AT&T Broadband and
Internet Services (BIS) processing contract (the AT&T Contract), (ii) increased
usage of ancillary processing services, (iii) price increases included in client
contracts, and (iv) increased software sales to new and existing clients.
Cost of Revenues. Direct costs as a percentage of related revenues were 38.8%
for the three months ended September 30, 1999, compared to 43.0% for the three
months ended September 30, 1998. The improvement between periods relates
primarily to better overall leveraging of processing costs as a result of the
continued growth of the customer base processed on the Company's system.
Amortization of client contracts for the three months ended September 30, 1999,
increased 36.2% to $1.9 million, from $1.4 million for the three months ended
September 30, 1998. The increase in expense is due primarily to an increase in
amortization of the value assigned to the AT&T Contract. The value assigned to
the AT&T Contract is being amortized over the life of the contract in proportion
to the financial minimums included in the contract.
Gross Margin. Gross margin for the three months ended September 30, 1999,
increased 42.4% to $49.5 million, from $34.8 million for the three months ended
September 30, 1998, due primarily to revenue growth. The gross margin
percentage increased to 58.9% for the three months ended September 30, 1999,
compared to 54.8% for the three months ended September 30, 1998. The overall
increase in the gross margin percentage is due primarily to the increase in
processing and related services revenue per customer while controlling the cost
of delivering such services.
Research and Development Expense. Research and development (R&D) expense for
the three months ended September 30, 1999, increased 24.5% to $8.7 million, from
$7.0 million for the three months ended September 30, 1998. As a percentage of
total revenues, R&D expense decreased to 10.3% for the three months ended
September 30, 1999, from 11.0% for the three months ended September 30, 1998.
The Company did not capitalize any software development costs during the three
months ended September 30, 1999 or 1998.
The overall increase in the R&D expenditures between periods is due primarily to
increased efforts on several products which are in development and enhancements
of the Company's existing products. The increased R&D expenditures consist
primarily of increases in salaries, benefits, and other programming-related
expenses.
10
<PAGE>
Selling and Marketing Expense. Selling and marketing (S&M) expense for the
three months ended September 30, 1999, increased 27.3% to $3.8 million, from
$3.0 million for the three months ended September 30, 1998. As a percentage of
total revenues, S&M expense decreased to 4.6% for the three months ended
September 30, 1999, from 4.7% for the three months ended September 30, 1998.
The overall increase in S&M expenses is due primarily to an increase in (i) the
sales staff, (ii) marketing and promotional activities, and (iii) sales
commissions resulting from increased sales activities.
General and Administrative Expense. General and administrative (G&A) expense
for the three months ended September 30, 1999, increased 9.7% to $6.4 million,
from $5.8 million for the three months ended September 30, 1998. As a
percentage of total revenues, G&A expense decreased to 7.6% for the three months
ended September 30, 1999, from 9.2% for the three months ended September 30,
1998. The increase in G&A expenses relates primarily to the continued expansion
of the Company's management and 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.
Depreciation Expense. Depreciation expense for the three months ended September
30, 1999, increased 24.2% to $2.6 million, from $2.1 million for the three
months ended September 30, 1998. The increase in expense relates to capital
expenditures made during the last six months of 1998 and the first nine months
of 1999 in support of the overall growth of the Company, consisting principally
of computer hardware and related equipment and statement processing equipment
and related facilities. Depreciation expense for all property and equipment is
reflected separately in the aggregate and is not included in the other
components of operating expenses.
Operating Income. Operating income for the three months ended September 30,
1999, was $26.6 million or 31.7% of total revenues, compared to $15.5 million or
24.4% of total revenues for the three months ended September 30, 1998. The
increase between years relates to the factors discussed above.
Interest Expense. Interest expense for the three months ended September 30,
1999, decreased 33.0% to $1.7 million, from $2.5 million for the three months
ended September 30, 1998, with the decrease attributable primarily to (i)
scheduled principal payments on the Company's long-term debt (ii) optional
prepayments on long-term debt of $15 million each made on March 31, 1999 and
June 30, 1999, and (iii) a decrease in interest rates between periods.
Income Tax Provision. As of December 31, 1997, the Company had recorded a
valuation allowance against certain deferred tax assets since realization of
future tax benefits was not sufficiently assured as of that date. During 1998,
the Company realized a portion of the deferred tax assets such that the overall
income tax provision for the quarter was zero. During the fourth quarter of
1998, the Company concluded that it was more likely than not that it would
realize the entire tax benefit from its deferred tax assets and eliminated the
entire valuation allowance as of December 31, 1998.
For the three months ended September 30, 1999, the Company recorded an income
tax provision of $9.7 million, or an effective income tax rate of approximately
38%, which represents the Company's estimate of the effective book income tax
rate for 1999.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenues. Total revenues for the nine months ended September 30, 1999,
increased 38.7% to $231.6 million, from $167.0 million for the nine months ended
September 30, 1998.
Revenues from processing and related services for the nine months ended
September 30, 1999, increased 40.2% to $187.2 million, from $133.5 million for
the nine months ended September 30, 1998. Of the total increase in revenue,
approximately 63% resulted from an increase in the number of customers of the
11
<PAGE>
Company's clients which were serviced by the Company and approximately 37% 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, 1999 through September 30, 1999, the Company
converted and processed approximately 3.3 million new customers on its systems.
Revenues from software and related product sales and professional consulting
services for the nine months ended September 30, 1999, increased 32.7% to $44.4
million, from $33.5 million for the nine months ended September 30, 1998. This
increase relates primarily to the continued penetration of sales of the
Company's software products and services to the Company's existing client base,
as well as sales to new clients.
Total annualized domestic revenue per customer account for the nine months ended
September 30, 1999 was $9.59, compared to $8.53 for the same period in 1998, an
increase of 12.4%. Revenue per customer increased primarily due to (i) a
greater percentage of processing revenues in 1999 being generated under the AT&T
Contract, (ii) increased usage of ancillary processing services, (iii) price
increases included in client contracts, and (iv) increased software sales to new
and existing clients.
Cost of Revenues. Direct costs as a percentage of related revenues were 39.1%
for the nine months ended September 30, 1999, compared to 43.9% for the nine
months ended September 30, 1998. The improvement between periods relates
primarily to better overall leveraging of processing costs as a result of the
continued growth of the customer base processed on the Company's system.
Amortization of client contracts for the nine months ended September 30, 1999,
increased 52.7% to $5.6 million, from $3.6 million for the nine months ended
September 30, 1998. The increase in expense is due primarily to an increase in
amortization of the value assigned to the AT&T Contract. The value assigned to
the AT&T Contract is being amortized over the life of the contract in proportion
to the financial minimums included in the contract.
Gross Margin. Gross margin for the nine months ended September 30, 1999,
increased 50.4% to $135.5 million, from $90.1 million for the nine months ended
September 30, 1998, due primarily to revenue growth. The gross margin
percentage increased to 58.5% for the nine months ended September 30, 1999,
compared to 53.9% for the nine months ended September 30, 1998. The overall
increase in the gross margin percentage is due primarily to the increase in
processing and related services revenue per customer while controlling the cost
of delivering such services.
Research and Development Expense. R&D expense for the nine months ended
September 30, 1999, increased 20.9% to $24.5 million, from $20.3 million for the
nine months ended September 30, 1998. As a percentage of total revenues, R&D
expense decreased to 10.6% for the nine months ended September 30, 1999, from
12.2% for the nine months ended September 30, 1998.
The Company did not capitalize any software development costs during the nine
months ended September 30, 1999. During the nine months ended September 30,
1998, the Company capitalized third party, contracted programming costs of
approximately $1.4 million, 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 nine months
ended September 30, 1999 and 1998, were $24.5 million, or 10.6% of total
revenues, and $21.7 million, or 13.0% of total revenues, respectively. The
overall increase in the R&D expenditures between periods is due primarily to
increased efforts on several products which are in development and enhancements
of the Company's existing products. The increased R&D expenditures consist
primarily of increases in salaries, benefits, and other programming-related
expenses.
Selling and Marketing Expense. S&M expense for the nine months ended September
30, 1999, increased 34.7% to $10.8 million, from $8.0 million for the nine
months ended September 30, 1998. As a percentage of total revenues, S&M expense
decreased to 4.7% for the nine months ended September 30, 1999, from 4.8% for
the nine months ended September 30, 1998. The overall increase in S&M expenses
is due primarily to an increase in (i) the sales staff, (ii) marketing and
promotional activities, and (iii) sales commission resulting from increased
sales activities.
12
<PAGE>
General and Administrative Expense. G&A expense for the nine months ended
September 30, 1999, increased 11.0% to $18.9 million, from $17.1 million for the
nine months ended September 30, 1998. As a percentage of total revenues, G&A
expense decreased to 8.2% for the nine months ended September 30, 1999, from
10.2% for the nine months ended September 30, 1998. The increase in G&A
expenses relates primarily to the continued expansion of the Company's
management and 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.
Depreciation Expense. Depreciation expense for the nine months ended September
30, 1999, increased 26.7% to $7.5 million, from $5.9 million for the nine months
ended September 30, 1998. The increase in expense relates to capital
expenditures made during 1998 and the first nine months of 1999 in support of
the overall growth of the Company, consisting principally of computer hardware
and related equipment and statement processing equipment and related facilities.
Depreciation expense for all property and equipment is reflected separately in
the aggregate and is not included in the other components of operating expenses.
Operating Income. Operating income for the nine months ended September 30,
1999, was $69.6 million or 30.0% of total revenues, compared to $34.5 million or
20.7% of total revenues for the nine months ended September 30, 1998. The
increase between years relates to the factors discussed above.
Interest Expense. Interest expense for the nine months ended September 30,
1999, decreased 23.9% to $5.7 million, from $7.5 million for the nine months
ended September 30, 1998, with the decrease attributable primarily to (i)
scheduled principal payments on the Company's long-term debt (ii) optional
prepayments on long-term debt of $15 million each made on March 31, 1999 and
June 30, 1999 and (iii) a decrease in interest rates between periods.
Income Tax Provision. Due to the factors discussed above, the Company's income
tax expense for the first nine months of 1998 was zero. For the nine months
ended September 30, 1999, the Company recorded an income tax provision of $25.0
million, or an effective income tax rate of approximately 38%, which represents
the Company's estimate of the effective book income tax rate for 1999.
Adjusted Results of Operations
- ------------------------------
The Company incurred certain one-time or acquisition-related charges
(Acquisition Charges) in connection with the CSG Acquisition in November 1994.
The Acquisition Charges include amortization of acquired software, client
contracts and related intangibles, noncompete agreement, goodwill, and stock-
based compensation. These charges totaled $2.0 million and $2.1 for the three
months ended September 30, 1999 and 1998, and $6.1 million and $6.2 million for
the nine months ended September 30, 1999 and 1998, respectively. The Company's
adjusted results of operations excluding the impact of these items are shown in
the following table. In addition to the exclusion of these expenses from the
calculation, the adjusted results of operations were computed using an effective
income tax rate of 38% for all periods, and outstanding shares on a diluted
basis. See the Company's "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Company's 1998 10-K for
additional discussion regarding the Acquisition Charges and the impact of such
charges on operations.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts)
Adjusted Results of Operations:
Operating income.................... $28,655 $17,508 $75,648 $40,696
Operating income margin............. 34.1% 27.6% 32.7% 24.4%
Income before income taxes.......... 27,780 15,628 72,180 34,867
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net income.......................... 17,224 9,689 44,752 21,618
Earnings per diluted common share... 0.32 0.18 0.83 0.41
Weighted average diluted common
shares............................ 54,536 52,831 54,261 52,803
</TABLE>
AT&T Contract and Merger
- ------------------------
AT&T completed its merger with Tele-Communications, Inc. (TCI) in March 1999 and
has consolidated the TCI operations into AT&T Broadband and Internet Services.
During the nine months ended September 30, 1999 and 1998, revenues from AT&T and
affiliated companies generated under the AT&T Contract represented approximately
47.5% and 36.3% of total revenues, respectively. The AT&T Contract has a 15-
year term and expires in 2012. The AT&T Contract has minimum financial
commitments over the term of the contract and includes exclusive rights to
provide customer care and billing products and services for AT&T's offerings of
wireline video, all Internet/high-speed data services, residential wireline
telephony services, and print and mail services. The AT&T Contract provides
certain performance criteria and other obligations to be met by the Company. The
Company is required to perform certain remedial efforts and is subject to
certain 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 wireline video industry.
To date, the Company believes it has complied with the terms of the contract.
Since execution of the AT&T Contract in September 1997 through September 30,
1999, the Company has successfully converted approximately 10.4 million AT&T
cable television customers onto its system.
AT&T has announced its planned efforts to provide convergent communications
services in several United States cities during 1999. The Company is
participating in those convergent trials and is working closely with AT&T to
provide customer care and billing services to customers in those cities. The
Company expects to continue performing successfully under the AT&T Contract, and
is hopeful that it can continue to sell products and services to the combined
entity that are in excess of the minimum financial commitments and exclusive
rights included in the contract.
See Note 3 to the Condensed Consolidated Financial Statements for discussion
regarding the Company's Common Stock Warrants held by AT&T.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1999, the Company's principal sources of liquidity included
cash and cash equivalents of $31.0 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 September 30, 1999, all of the $40.0 million revolving credit
facility was available to the Company. The revolving credit facility expires in
September 2002.
As of September 30, 1999 and December 31, 1998, respectively, the Company had
$70.5 million and $60.5 million in net trade accounts receivable, with the
increase due primarily to 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 billings for the period (including
non-revenue items) divided by the average net trade accounts receivable balance
for the period. The Company's DBO calculations for the quarters ended September
30, 1999 and 1998 were 50 days and 53 days, respectively.
During the nine months ended September 30, 1999, the Company generated $61.7
million of net cash flow from operating activities. Cash generated from these
sources and the proceeds of $7.8 million from the issuance of common stock
through the Company's stock incentive plans were used to (i) fund capital
expenditures of $6.3 million, (ii) pay conversion and other incentive payments
of $23.5 million, (iii)
14
<PAGE>
repurchase 300,000 shares of the Company's Common Stock for $6.5 million, and
(iv) repay long-term debt of $42.3 million, which includes $11.6 million of
scheduled payments and optional prepayments totaling $30.7 million.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the
nine months ended September 30, 1999 was $88.2 million or 38.1% of total
revenues, compared to $49.0 million or 29.3% of total revenues for the nine
months ended September 30, 1998. 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.
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 spread, with the spread dependent upon the Company's leverage ratio.
Effective April 1, 1999, the spread on the LIBOR rate and the prime rate was
0.50% and 0%, respectively. As of September 30, 1999, the entire amount of the
debt was under a six-month LIBOR contract with an interest rate of 5.68% (i.e.,
LIBOR at 5.18% plus spread of 0.50%), compared to 5.89% as of December 31, 1998.
In December 1997, the Company entered into a three-year interest rate collar
with a major bank to manage its risk from its variable rate long-term debt. The
underlying notional amount covered by the collar agreement is $63.8 million as
of September 30, 1999, and decreases over the three-year term in relation to the
originally scheduled principal payments on the long-term debt. Any payment on
the 4.9% (LIBOR) interest rate floor, or receipt on the 7.5% (LIBOR) interest
rate cap component of the collar, would be recognized as an adjustment to
interest expense in the period incurred. There are no amounts due or receivable
under this agreement as of September 30, 1999, and the agreement had no effect
on the Company's interest expense for 1999 or 1998.
The Company was required to make certain monetary conversion incentive payments
under the AT&T Contract. AT&T surpassed the milestone of 13 million customers
processed on the Company's systems during the quarter ended September 30, 1999.
Upon reaching this significant milestone, AT&T was paid its final monetary
conversion incentive by the Company. The total monetary conversion incentives
paid during 1999 to AT&T was $22.0 million, with 15.3 million of this amount
being paid in the current quarter. The amount paid was previously reflected in
the Company's consolidated balance sheet as "conversion incentive payments".
Additionally, upon reaching this milestone, AT&T earned the right to exercise a
certain number of the Company's Common Stock Warrants held by AT&T. See Note 3
to the Company's Condensed Consolidated Financial Statements and the Company's
1998 Form 1998 10-K for additional discussion.
Effective August 4, 1999, the Company's Board of Directors approved a stock
repurchase plan which authorized the Company at its discretion to purchase up to
a total of 5.0 million shares of its Common Stock from time to time as market
and business conditions warrant. As of September 30, 1999, the Company had
repurchased 300,000 shares of Common Stock for $6.5 million (a weighted average
price of $21.82 per share).
The Company continues to make significant investments in capital equipment,
facilities, research and development, and at its discretion, may continue to
make stock repurchases. The Company had no significant capital commitments as of
September 30, 1999. The Company believes that cash generated from operations,
together with the current cash and cash equivalents and the amount available
under its current revolving credit facility will be sufficient to meet its
anticipated cash requirements for operations, income taxes, debt service,
conversion incentive payments, capital expenditures, and stock repurchases for
both its short and long-term purposes. The Company also believes it has
significant unused borrowing capacity and could obtain additional cash resources
by amending its current credit facility and/or establishing a new credit
facility.
15
<PAGE>
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. The
Company's actions to address the risks associated with the year 2000 are as
follows:
The Company's State of Readiness. The Company has established a corporate
program to coordinate its year 2000 (Y2K) compliance efforts across all business
functions and geographic areas. The scope of the program includes addressing
the risks associated with the Company's (i) information technology (IT) systems
(including the Company's products and services), (ii) non-IT systems that
include embedded technology, and (iii) significant vendors and their Y2K
readiness. The Company is utilizing the following steps in executing its Y2K
compliance program: (1) awareness, (2) assessment, (3) renovation (including
upgrades and enhancements to the Company's products), (4) validation and
testing, and (5) implementation. The Company has completed all steps of its
program, except where noted in the following sections.
Products and Services.
----------------------
Processing and related services. The Company's most significant renovation
effort involved its core product, Communications Control System (R)
(CCS(R)). CCS utilizes one subroutine for calculating dates, with the
various computer programs within CCS with date dependent calculations
accessing this subroutine. As a result, all date calculations are performed
in one location. The renovation of this subroutine and the related
interfaces to the various date dependent programs has been completed. The
Company has completed the testing of the CCS application using its standard
testing methodologies, while adding date simulation to specifically address
the Y2K risk. Such date simulation considered pre-2000, crossover, and
post year 2000 time frames, including year 2000 leap year considerations.
The renovated and tested version of CCS has been implemented into the
production environment. As a final verification of Y2K readiness, during
November 1999, the Company successfully conducted an IPL (initial program
load) of CCS in a crossover and post year 2000 test environment, including
leap year considerations. A similar IPL was also successfully performed in
early 1999. The Company has also completed its testing of third party
interfaces (e.g., addressable devices) to CCS.
During October 1999, the Company successfully completed an "end-to-end" Y2K
test of the Omaha statement processing center, involving statements with a
cycle date of March 19, 2000 being routed from the Y2K test region on the
mainframe processor to the statement processing center for printing,
insertion and preparation for mailing.
Software products. For the Company's software products, no significant
renovation was necessary, as the products are relatively new. All mission-
critical software products have been tested and implemented into production.
Only one of the Company's clients needs to be upgraded from an older, non-
Y2K version of an application at this time, with the upgrade scheduled for
completion by December 16, 1999.
General. As part of its Y2K compliance program plan, the Company developed a
process to manage further updates, enhancements, or new releases to any
product related software code which had been previously tested and
internally verified as Y2K compliant. Only one new release to a previously
tested software product still requires final verification. This new release
was successfully tested in a post year 2000 test environment prior to
placing it into production, and is scheduled for year 2000 crossover and
leap year date verification on November 23, 1999 and December 10, 1999,
respectively. An older release of this product has already been through such
testing, and the Company believes the risk of not timely completing the
remaining testing or fixing any problems that may be detected in the final
testing is low.
The Company has implemented a code "freeze" for all changes to mission-
critical product related software effective November 13, 1999. The freeze
restricts the introduction of new code functionality into any production
environment, except in cases where (i) emergency code fixes are needed, or
(ii) a client requests a change and the code impacts only that client.
Several CSG clients have conducted tests of the Company's products in
conjunction with their own operating environments. Several test phases have
been completed (beginning in December 1998), with additional phases
continuing into December 1999, including participation by AT&T in such
testing.
16
<PAGE>
Internal Systems.
-----------------
Renovation, testing, and implementation of the Company's significant
internal use IT Systems (e.g., payroll systems, accounting systems, etc.)
has been completed. The Company has a substantial number of non-IT systems
that include embedded technology (e.g., buildings, plant, equipment and
other infrastructure) that are owned and managed by the lessors of the
buildings in which the Company is located. The Company has sent letters to
its lessors requesting certifications of the Y2K compliance of the embedded
systems. The Company has received substantially all of the certifications
from lessors and will continue to pursue the remaining certifications not
yet received. The Company considers these low risk because if any of the
systems for which a certification has not yet been received was to fail, it
would not impact any mission-critical functions, and/or the systems with the
embedded technology could be disengaged and/or overridden. Letters have also
been sent to third parties providing other internal non-IT systems with
embedded technology (e.g., statement insertion machines, copy machines,
etc.). All of these Y2K certifications and/or upgrades have been completed.
Significant Vendors.
--------------------
As part of the Company's Y2K compliance program, the Company has contacted
its significant vendors to assess their Y2K readiness. For all mission-
critical third party software embedded in or specified for use in
conjunction with the Company's IT systems and products, the Company's
communications with the vendors indicates that the vendors believe they are
fully Y2K compliant. Such third party software was tested in conjunction
with the testing of the IT systems and products discussed above. All other
significant vendors (including the Company's vendor who provides data
processing services for CCS) have indicated they are Y2K compliant. There
can be no assurance that (i) the Company's significant vendors will succeed
in their Y2K compliance efforts, or (ii) the failure of vendors to address
Y2K compliance will not have a material adverse effect on the Company's
business or results of operations.
The Costs to Address the Company's Year 2000 Issues. Since inception of its
program in 1995 through September 30, 1999, the Company has incurred and
expensed costs of approximately $3.8 million related to Y2K compliance efforts.
The total estimated costs to complete the Company's Y2K compliance effort are
approximately $0.4 million. The estimated costs to complete, which does not
include any costs which may be incurred by the Company if its significant
vendors fail to timely address Y2K compliance, is based on currently known
circumstances and various assumptions regarding future events. However, there
can be no assurance that these estimates will be achieved and actual results
could differ materially from those anticipated.
The Risks of the Company's Year 2000 Issues. The Company's failure to timely
resolve the Y2K risks could result in system failures, the generation of
erroneous information, and other significant disruptions of business activities,
including among others, access to CCS and the use of related software products,
and timely printing and delivery of clients' customers' statements. Although
the Company believes it will be successful in its Y2K compliance efforts, there
can be no assurance that the Company's systems and products contain all
necessary date code changes. In addition, the Company's operations may be at
risk if its vendors and other third parties (including public and private
infrastructure services, such as electricity, water, gas, transportation, and
communications) fail to adequately address the Y2K issue or if software
conversions result in system incompatibilities with these third parties. To the
extent that either the Company or a third party vendor or service provider on
which the Company relies does not achieve Y2K compliance, the Company's results
of operations could be materially adversely affected. Furthermore, it has been
widely reported that a significant amount of litigation surrounding business
interruption will arise out of Y2K issues. It is uncertain whether, or to what
extent, the Company may be affected by such litigation.
As is the case with many software companies and service providers, if the
Company's current or future clients experience significant business
interruptions due to their failure to achieve Y2K compliance, the
17
<PAGE>
Company's results of operations could be materially adversely affected. There
can be no assurance that the Company's current or future clients will adequately
and successfully address their Y2K risk and not experience any business
interruptions.
The Company's Contingency Plan. In formulating its Contingency Plan, the
Company conducted a comprehensive Y2K risk assessment of key business processes
and components. This risk assessment focused on;
. the progress made to date on the Company's overall Y2K compliance
program,
. the Company's existing Business Continuity Plans (BCP),
. the types of Y2K failures that could be expected, and
. the Company's processes and procedures of problem identification and
resolution in the event of a Y2K failure
As a result of this risk assessment and evaluation, the Company concluded that
for the most part, the types of Y2K failures that could happen are of a similar
nature as those items currently reported to its Product Support Center today,
and therefore, could be adequately identified and resolved using existing
problem reporting and recovery procedures, with additions or modifications to
these procedures for risks or failures modes specifically identified as unique
to Y2K. Over the years, the Company's problem identification and resolution
procedures have been formalized and proven effective as a means to provide its
clients 24x7 support. The advantages to this approach are as follows;
. it allows the Company to leverage the processes, procedures, tools and
expertise already in place and thereby maximize efficiency in problem
reporting, resolution and internal/external communication during the
critical Y2K transition period,
. for the Company's clients and vendors, it ensures continuity and
minimizes confusion. The Company's clients and vendors are already
familiar with these procedures, including the Company contact names and
numbers that can be relied upon for corrective action and follow-up.
Additions and/or modifications to the Company's existing problem reporting and
recovery procedures are included in the Company's Contingency Plan. Highlights
or key components of the Company's contingency plan and BCP specifically
addressing risks or failures modes specifically identified as unique to Y2K, are
as follows:
. disaster recovery plans for the CCS mainframe data processing function
and statement processing centers
. power generation backup at both of its statement processing centers and
at two other mission-critical sites (with one of these scheduled for
completion in December 1999)
. increased paper and envelope inventory at the statement processing
centers
. alternative telephone services at all mission-critical sites (e.g., cell
phones)
. a communication "command center", to coordinate status reporting, problem
resolution and internal/external communications will be established
. a dedicated staff on site for key business processes and support
functions, as well as additional staff "on call" to assist if needed. The
Company instituted a restricted vacation policy for December 1999 and
January 2000 to ensure appropriate and adequate resources are available
if needed
. a comprehensive list of expected locations and contact numbers at
crossover for all key management personnel
Although the Company believes it has performed a thorough assessment of its Y2K
related risks and believes its Contingency Plan and/or BCP adequately addresses
these risks, the (i) inability to timely identify and resolve any Y2K related
failure, (ii) inability to implement a contingency plan or BCP, if deemed
necessary, and (iii) cost to develop and implement such a plan, may have a
material adverse effect on the Company's results of operations.
18
<PAGE>
Certain Factors That May Affect Future Results of Operations. Except for
statements of existing or historical facts, the foregoing discussion of Y2K
consists of forward-looking statements and assumptions relating to forward-
looking statements, including without limitation the statements relating to
future costs, the timetable for completion of Y2K compliance efforts, potential
problems relating to Y2K, the Company's state of readiness, third party
representations, and the Company's plans and objectives for addressing Y2K
problems. Certain factors could cause actual results to differ materially from
the Company's expectations, including without limitation (i) the failure of
vendors and service providers to timely achieve Y2K compliance, (ii) system
incompatibilities with third parties resulting from software conversions, (iii)
the Company's systems and products not containing all necessary date code
changes, (iv) the failure of existing or future clients to achieve Y2K
compliance, (v) potential litigation arising out of Y2K issues, the risk of
which may be greater for information technology based service providers such as
the Company, (vi) the failure of the Company's validation and testing phase to
detect operational problems internal to the Company, in the Company's products
or services or in the Company's interface with service providers, vendors or
clients, whether such failure results from the technical inadequacy of the
Company's validation and testing efforts, the technological infeasibility of
testing certain non-IT systems, the perceived cost-benefit constraints against
conducting all available testing, or the unavailability of third parties to
participate in testing, or (vii) the failure to timely implement a contingency
plan to the extent Y2K compliance is not achieved.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
There have been no material changes to the Company's market risks during the
nine months ended September 30, 1999. See the Company's 1998 10-K for
additional discussion regarding the Company's market risks.
19
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1-5. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.19J* Thirty-Sixth and Thirty-Eighth Amendments to Restated
and Amended CSG Master Subscriber Management System
Agreement between CSG Systems, Inc. and TCI Cable
Management Corporation.
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
Form 8-K dated July 7, 1999, under Item 5, Other Events, was
filed with the Securities and Exchange Commission which included
a press release dated July 2, 1999. The press release
recommended that its shareholders reject an unsolicited, below-
market offer made by Peachtree Partners for up to 1% of CSG
Systems International, Inc.'s outstanding shares.
__________________
* 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.
20
<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: November 15, 1999
CSG SYSTEMS INTERNATIONAL, INC.
/s/ Neal C. Hansen
------------------------------------------
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Greg A. Parker
------------------------------------------
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Randy R. Wiese
------------------------------------------
Randy R. Wiese
Vice President and Controller
(Principal Accounting Officer)
21
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
2.19J* Thirty-Sixth and Thirty-Eighth Amendments to Restated and
Amended CSG Master Subscriber Management System Agreement
between CSG Systems, Inc. and TCI Cable Management
Corporation.
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.
22
<PAGE>
EXHIBIT 2.19J
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 (***).
THIRTY-SIXTH AMENDMENT
TO
RESTATED AND AMENDED CSG MASTER
SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT
BETWEEN
CSG SYSTEMS, INC.
AND
TCI Cable Management Corporation
This Thirty-Sixth Amendment (the "Amendment") is executed this 26th day of
August, 1999, 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, which has subsequently been
amended pursuant to separately executed amendments (collectively, 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. Customer desires to obtain from CSG, and CSG is willing to grant to
Customer, the right to use CSG Statement Express on an additional
(***********************) ((***)) workstations. Therefore, upon the
execution of this Amendment and subject to the terms of the Agreement,
including, but not limited to, the fees set forth in Schedule D, Customer
shall be entitled to use CSG Statement Express on a total of
(*****************************************) ((***)) workstations.
2. The following shall apply with respect to the (***********************)
((***)) workstations of Statement Express, as granted under this
Amendment:
a. The perpetual license fee (**********************).
b. (***************) the annual software maintenance fee
(*************************). Annual software maintenance
(**********************************************), at the rate
of $(***) per workstation.
c. The fees for implementation services and statement archival
are set forth in Schedule D (as amended by the Thirty-Fourth
Amendment).
3. As a point of clarification, the statement archival fee, as set forth in
the Thirty-Fourth Amendment:
a. shall also apply to Customer's Pilot System Site located at
Livermore, CA.
b. represents a fee that is incremental to the fee set forth in
Section 6, Item I.D. of Schedule D (as amended by the Twenty-
Seventh Amendment), in the event that Customer also desires to
receive CD-ROM Archival.
c. includes six (6) months of online statement image storage.
<PAGE>
THIS AMENDMENT is executed on the day and year first shown above.
CSG SYSTEMS, INC. ("CSG") TCI CABLE MANAGEMENT CORPORATION
("Customer")
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Joseph T. Ruble By: /s/ Ann Montgomery
---------------------- ------------------------------------------
Name: Joseph T. Ruble Name: Ann Montgomery
---------------------- ------------------------------------------
Title: V.P. & General Counsel Title: EVP of Fulfillment Services and Operations
---------------------- ------------------------------------------
2
</TABLE>
<PAGE>
EXHIBIT 2.19J
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 (***).
THIRTY-EIGHTH AMENDMENT
TO RESTATED AND AMENDED CSG MASTER
SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT
BETWEEN
CSG SYSTEMS, INC. AND
TCI Cable Management Corporation
This Thirty-Eighth Amendment (the "Amendment") is executed this 30th day of
September, 1999, 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, which has subsequently been
amended pursuant to separately executed amendments (collectively, 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. Customer is hereby licensed to use (*************************) ((***))
additional workstations of ACSR pursuant to the terms and conditions of the
Agreement (as amended), including, but not limited to, the fees set forth
below:
ACSR
-----
Perpetual license for (***) workstations $(***)
Price excludes third party software, hardware, implementation,
installation and customization.
Annual maintenance for (***) workstations:
. Initial maintenance period from the date of
execution of this Amendment through December 31, 2000 $(***)
. Annual maintenance for each subsequent calendar
year beginning January 1, 2001 $(***)
Implementation includes the implementation services set forth in
Exhibit C-3 of the Agreement. The fees for installation services
are set forth in Schedule D of the Agreement.
2. Customer is hereby licensed to use (*************************) ((***))
additional workstations of Customer Interaction Tracking (CIT) with CBT
pursuant to the terms and conditions of the Agreement (as amended),
including, but not limited to, the fees set forth below:
<PAGE>
CIT with CBT
-------------
Perpetual license for (***) workstations $(***)
Price includes third party software but excludes hardware,
implementation, installation and customization.
Annual maintenance for (***) workstations:
. Initial maintenance period from the date of
execution of this Amendment through December 31, 2000 $(***)
. Annual maintenance for each subsequent calendar
year beginning January 1, 2001 $(***)
Note: Includes third party software maintenance
Implementation services will be outlined in a Statement of Work
mutually agreed upon and executed by CSG and Customer.
Reimbursable Expenses are additional.
3. Customer is hereby licensed to use (**************************) ((***))
additional workstations of Screen Express pursuant to the terms and
conditions of the Agreement (as amended), including, but not limited to, the
fees set forth below:
Screen Express
---------------
Perpetual license for (***) workstations $(***)
Price excludes third party software, hardware, implementation,
installation and customization.
Annual maintenance for (***) workstations:
. Initial maintenance period from the date of
execution of this Amendment through December 31, 2000 $(***)
. Annual maintenance for each subsequent calendar
year beginning January 1, 2001 $(***)
Implementation - per Screen Express Server $(***)
Implementation includes the services outlined in paragraph 3
of the Twenty Fifth Amendment to the Agreement. Reimbursable
Expenses are additional.
4. Customer is hereby licensed to use the ACSR module of High Speed Data (HSD)
on (*************************) ((***)) workstations. Therefore, Schedule C
shall be amended to include the ACSR module of HSD which, through the
graphical user interface, allows Customer to access subscriber information
on CCS as it relates to Customer's offering of high speed data services. All
references to the "CCS Products" in the Agreement shall include the ACSR
module of HSD.
ACSR module of HSD
-------------------
Perpetual license for (***) workstations $(***)
Price excludes third party software, hardware, implementation,
installation and customization
2
<PAGE>
* If, between the date of execution of this Amendment and December 31,
2001, Customer desires to receive additional licenses of the ACSR
module of HSD, CSG and Customer shall execute separate amendments to
the Agreement, in which case such licenses shall be provided for fees
which shall not exceed $(***) per workstation.
Annual maintenance for (***) workstations:
. Initial maintenance period from the date of
execution of this Amendment through December 31, 2000 $(***)
. Annual maintenance for each subsequent calendar
year beginning January 1, 2001 $(***)
The implementation of the ACSR module of HSD is included
in the ACSR implementation.
5. Along with its license to use the ACSR module for HSD, CSG will provide
Customer with its @Home provisioning interface, version 2.2. This interface
provides for the sending and receiving of subscriber provisioning and
customer care data between @Home and CSG in a near real-time fashion.
Enhancements, upgrades, or changes to version 2.2 of the @Home provisioning
interface will be outlined in a Statement of Work mutually agreed upon and
executed by CSG and Customer. In addition, Schedule D shall be amended to
include the following fee for CSG's operation and management of the @Home
provisioning interface:
. Monthly Operations Fee (per HSD subscriber) $(***)
Note 1: The Monthly Operations Fee (******************
***) from the date of execution of this Amendment (*******
*****************). In addition, the total operations fee for
CSG's operation and management of the @Home
provisioning interface shall not exceed $(***) per
calendar year, (************************).
Note 2: All costs and performance of the network connection
between CSG and @Home are specifically the responsibility
of Customer.
6. Upon execution of this Amendment, for the fees set forth below, Customer may
access (***) ((***)) additional Vantage database tables containing
information about Customer's equipment and internet access methods. Customer
may access such additional tables from System Sites at which Customer is
licensed to use Vantage. Therefore, Section 7 of Schedule D shall be amended
to include the following:
High Speed Data Database Tables:
-------------------------------
. Monthly Processing and Maintenance Fee (per HSD subscriber) $(***)
Note: The start-up fee for the Vantage database tables for all of
Customer's @Home System Sites currently utilizing Vantage as of the date
of execution of this Amendment shall be $(***). The start-up fee for the
Vantage database tables for all of Customer's @Home System Sites that are
not currently utilizing Vantage as of the date of execution of this
Amendment shall be included in the Vantage One-Time Start-up Fee as set
forth in Section 7 of Schedule D.
3
<PAGE>
7. Payment Terms
-------------
Except as noted in this paragraph 7, the terms and conditions set forth in
the Agreement shall apply with respect to products or services provided as
part of this Amendment. Payment of the license fees and maintenance fees for
the initial maintenance period shall be as follows:
. Billable September 30, 1999; Due no later than January 1, 2000 $(***)
. Billable November 30, 1999; Due no later than January 15, 2000 $(***)
Implementation services will be invoiced upon completion of work.
8. Any services to be provided by CSG in connection with the initial conversion
of the @Home subscriber information from Interplex to the CCS HSD data
fields shall be set forth in a separately executed Statement of Work. Such
conversion services shall be provided by CSG
(********************************************************).
9. With respect to Products and Services set forth in this Amendment, CSG and
Customer agree that, except as otherwise expressly agreed in writing between
the parties, their rights and obligations relating thereto are set forth in
the Master Agreement, and the execution of this Amendment and its
performance shall not be deemed or construed to alter, impair, create or
evidence such rights or obligations.
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: EVP Fulfillment Svcs & Operations
---------------------- ---------------------------------
4
<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.
RELIANCE ON CCS
- ---------------
The Company derived approximately 78% and 77% of its total revenues from its
primary product, Communications Control System (CCS), and related products and
services in the years ended December 31, 1998 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.
REQUIREMENTS OF THE AT&T CONTRACT
- ---------------------------------
The AT&T Contract requires the conversion of additional AT&T customers onto the
Company's customer care and billing system. The AT&T 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
<PAGE>
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
wireline video industry. If an audit determines the Company is not providing
such an innovation and it fails to do so in the manner and time period dictated
by the contract, then AT&T would be released from its exclusivity obligation to
the extent necessary to obtain the innovation from a third party. To fulfill the
AT&T Contract and to remain competitive, the Company believes it will be
required to develop new and advanced features to existing products and services,
as well as new products and services, all of which will require substantial
research and development. AT&T also would have the right to terminate the AT&T
Contract in the event of certain defaults by the Company. The termination of the
AT&T Contract or of any of AT&T's commitments under the contract would have a
material adverse effect on the financial condition and results of operations of
the Company.
AT&T CONTRACT AND MERGER
- ------------------------
AT&T completed its merger with TCI in March 1999 and has consolidated the TCI
operations into AT&T Broadband and Internet Services (BIS). During the nine
months ended September 30, 1999 and 1998, revenues from AT&T and affiliated
companies represented approximately 47.5% and 36.3% of total revenues,
respectively. The AT&T Contract has minimum financial commitments over the 15-
year life of the contract and includes exclusive rights to provide customer care
and billing products and services for AT&T's offerings of wireline video, all
Internet/high speed data services, residential wireline telephony services, and
print and mail services. As discussed above, the AT&T Contract provides certain
performance criteria and other obligations to be met by the Company. To date,
the Company believes it has complied with the terms of the contract. Since
execution of the AT&T Contract in September 1997 through September 30, 1999, the
Company has successfully converted approximately 10.4 million AT&T cable
television customers onto its system.
AT&T has announced its planned efforts to provide convergent communications
services in several United States cities during 1999. The Company is
participating in those convergent trials and is working closely with AT&T to
provide customer care and billing services to customers in those cities. The
Company expects to continue performing successfully under the AT&T Contract, but
its failure to do so would have a material adverse effect on the financial
condition and results of operations of the Company.
CONVERSION TO THE COMPANY'S SYSTEMS
- -----------------------------------
The Company's ability to convert new client sites to its customer care and
billing systems on a timely and accurate basis is necessary to meet the
Company's contractual commitments and to achieve its business objectives.
Converting multiple sites under the schedules required by contracts or business
requirements is a difficult and complex process. One of the difficulties in the
conversion process is that competition for the necessary qualified personnel is
intense and the Company may not be successful in attracting and retaining the
personnel necessary to complete conversions on a timely and accurate basis. The
inability of the Company to perform the conversion process timely and accurately
would have a material adverse effect on the results of operations of the
Company.
DEPENDENCE ON CABLE TELEVISION AND DBS INDUSTRIES
- -------------------------------------------------
The Company's business is concentrated in the cable television and Direct
Broadcast Satellite (DBS) industries, making the Company susceptible to a
downturn in those industries. During the years ended December 31, 1998 and 1997,
the Company derived 78% and 73%, and 13% and 11% of its total revenues from
companies in the U.S. cable television and U.S. DBS industries, respectively. A
decrease in the number of customers served by the Company's clients, loss of
business due to non-renewal of client
<PAGE>
contracts, industry consolidation, and/or changing consumer demand for services
would adversely effect the results of operations of the Company.
There can be no assurance that new entrants into the cable television market
will become clients of the Company. Also, there can be no assurance that cable
television providers will be successful in expanding into other segments of the
converging communications markets. Even if major forays into new markets are
successful, the Company may be unable to meet the special billing and customer
care needs of that market. The cable television industry is undergoing
significant ownership changes at an accelerated pace. In addition, cable
television providers are consolidating, decreasing the potential number of
buyers for the Company's products and services. Consolidation in the industry
may put at risk the Company's ability to leverage its existing relationships.
Should this consolidation result in a concentration of cable television customer
accounts being owned by companies with whom the Company does not have a
relationship, or with whom competitors are entrenched, it could negatively
effect the Company's ability to maintain or expand its market share, thereby
adversely effecting the results of operations.
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 in sustaining and growing the annual revenue per
customer account 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. 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. Also, the introduction and
consumer acceptance of billing statements that are presented and paid
electronically over the Internet may happen more rapidly than the Company
anticipates. If electronic bill presentation and payment proliferates and the
Company is unable to respond with a solution quickly, such failure could have a
material adverse effect on the Company's results of operations.
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 solution for presenting multiple communications services on a single
bill, 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.
<PAGE>
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. The Company
believes that its future success also depends on its ability to attract and
retain highly skilled technical, managerial, and marketing personnel, including,
in particular, additional personnel in the areas of research and development and
technical support. Competition for qualified personnel is intense, particularly
in the areas of research and development and technical support. The Company may
not be successful in attracting and retaining the personnel it requires, which
would adversely effect the Company's ability to meet its commitments and new
product delivery objectives.
VARIABILITY OF QUARTERLY RESULTS
- --------------------------------
The Company's quarterly revenues and results, particularly relating to software
and professional services, may fluctuate depending on various factors, including
the timing of executed contracts and the delivery of contracted services or
products, the cancellation of the Company's services and products by existing or
new clients, the hiring of additional staff, new product development and other
expenses, and changes in sales commission policies. No assurance can be given
that results will not vary due to these factors. Fluctuations in quarterly
results may result in volatility in the market price of the Company's Common
Stock.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
- ------------------------------------
The Company relies on a combination of trade secret and copyright laws,
nondisclosure agreements, and other contractual and technical measures to
protect its proprietary rights in its products. The Company also holds a limited
number of patents on some of its newer products, and does not rely upon patents
as a primary means of protecting its rights in its intellectual property. 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 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
<PAGE>
and business areas, the requirement to understand local business practices, the
diversion of management's attention to the assimilation of acquired operations
and personnel, potential adverse short-term effects on the Company's operating
results, and the amortization of acquired intangible assets.
YEAR 2000
- ---------
The Company's business is dependent upon various computer software programs and
operating systems that utilize dates and process data beyond the year 2000. If
the actions taken by the Company to mitigate its risks associated with the year
2000 are inadequate, there could be a material adverse effect on the financial
condition and results of operations of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
additional discussion of the Company's efforts to address the year 2000 risks.
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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AS
OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000<F1>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,963
<SECURITIES> 0
<RECEIVABLES> 82,503
<ALLOWANCES> 3,133
<INVENTORY> 0
<CURRENT-ASSETS> 116,349
<PP&E> 52,929
<DEPRECIATION> 29,427
<TOTAL-ASSETS> 262,433
<CURRENT-LIABILITIES> 88,987
<BONDS> 65,765
0
0
<COMMON> 521
<OTHER-SE> 106,459
<TOTAL-LIABILITY-AND-EQUITY> 262,433
<SALES> 231,631
<TOTAL-REVENUES> 231,631
<CGS> 96,136
<TOTAL-COSTS> 96,136
<OTHER-EXPENSES> 24,518
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,690
<INCOME-PRETAX> 66,102
<INCOME-TAX> 24,966
<INCOME-CONTINUING> 41,136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,136
<EPS-BASIC> 0.80
<EPS-DILUTED> 0.76
<FN>
<F1>* In thousands except per share amounts.
</FN>
</TABLE>
