<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 June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number 0-27512
CSG SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 47-0783182
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7887 East Belleview, Suite 1000
Englewood, Colorado 80111
(Address of principal executive offices, including zip code)
(303) 796-2850
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Shares of common stock outstanding at August 11, 2000: 52,327,497
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q For the Quarter Ended June 30, 2000
INDEX
Page No.
--------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999.......................................... 3
Condensed Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2000 and 1999 ....................... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 ........................... 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.....16
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............17
Item 6. Exhibits and Reports on Form 8-K...............................17
Signatures.....................................................19
Index to Exhibits..............................................20
2
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
ASSETS (unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 69,754 $ 48,676
Accounts receivable-
Trade-
Billed, net of allowance of $3,351 and $2,975..................................... 84,663 67,477
Unbilled.......................................................................... 4,598 8,311
Other................................................................................. 857 909
Deferred income taxes.................................................................... 1,922 1,972
Other current assets..................................................................... 4,476 2,850
-------- --------
Total current assets.................................................................. 166,270 130,195
-------- --------
Property and equipment, net of depreciation of $36,868 and $31,864.......................... 32,270 26,507
Software, net of amortization of $38,181 and $37,251........................................ 5,215 6,145
Noncompete agreements and goodwill, net of amortization of $29,936 and $29,727.............. 2,233 2,652
Client contracts and related intangibles, net of amortization of $26,799 and $24,779 ....... 53,323 55,343
Deferred income taxes....................................................................... 50,220 52,845
Other assets................................................................................ 921 1,281
-------- --------
Total assets.......................................................................... $310,452 $274,968
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt..................................................... $ 23,882 $ 21,711
Customer deposits........................................................................ 11,128 10,549
Trade accounts payable................................................................... 11,102 9,450
Accrued employee compensation............................................................ 13,855 16,386
Deferred revenue......................................................................... 8,613 16,746
Accrued income taxes..................................................................... 13,651 11,710
Other current liabilities................................................................ 10,511 11,551
-------- --------
Total current liabilities............................................................. 92,742 98,103
-------- --------
Non-current liabilities:
Long-term debt, net of current maturities................................................. 46,118 59,289
Deferred revenue.......................................................................... 489 714
-------- --------
Total non-current liabilities......................................................... 46,607 60,003
-------- --------
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;
52,212,946 shares and 51,638,629 shares outstanding.................................... 530 523
Common stock warrants; 3,000,000 warrants outstanding..................................... 26,145 26,145
Additional paid-in capital................................................................ 151,632 136,373
Deferred employee compensation............................................................ (3) (48)
Notes receivable from employee stockholders............................................... (48) (115)
Accumulated other comprehensive income-cumulative translation adjustments................. (523) (120)
Treasury stock, at cost, 815,986 shares and 722,486 shares................................ (23,403) (20,374)
Accumulated earnings (deficit)............................................................ 16,773 (25,522)
-------- --------
Total stockholders' equity ........................................................... 171,103 116,862
-------- --------
Total liabilities and stockholders' equity............................................ $310,452 $274,968
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------- ---------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Processing and related services.................. $ 72,921 $ 62,629 $143,548 $122,580
Software and professional services............... 23,141 13,881 44,577 25,017
-------- -------- -------- --------
Total revenues.......................... 96,062 76,510 188,125 147,597
-------- -------- -------- --------
Cost of Revenues:
Cost of processing and related services.......... 26,315 22,822 52,085 46,858
Cost of software and professional services....... 9,903 8,888 20,419 14,737
-------- -------- -------- --------
Total cost of revenues.................. 36,218 31,710 72,504 61,595
-------- -------- -------- --------
Gross margin (exclusive of depreciation)............. 59,844 44,800 115,621 86,002
-------- -------- -------- --------
Operating expenses:
Research and development......................... 10,366 8,217 20,254 15,837
Selling, general and administrative.............. 11,084 11,372 21,172 22,318
Depreciation..................................... 2,962 2,495 5,774 4,904
-------- -------- -------- --------
Total operating expenses................ 24,412 22,084 47,200 43,059
-------- -------- -------- --------
Operating income..................................... 35,432 22,716 68,421 42,943
-------- -------- -------- --------
Other income (expense):
Interest expense.............................. (1,482) (1,809) (3,023) (4,033)
Interest income............................... 1,355 816 2,618 1,457
Other......................................... (24) 4 (17) (17)
-------- -------- -------- --------
Total other............................. (151) (989) (422) (2,593)
-------- -------- -------- --------
Income before income taxes........................... 35,281 21,727 67,999 40,350
Income tax provision............................. (13,295) (8,234) (25,704) (15,275)
-------- -------- -------- --------
Net income........................................... $ 21,986 $ 13,493 $ 42,295 $ 25,075
======== ======== ======== ========
Basic net income per common share:
Net income available to common stockholders...... $ 0.42 $ 0.26 $ 0.81 $ 0.49
======== ======== ======== ========
Weighted average common shares................... 52,158 51,710 52,007 51,637
======== ======== ======== ========
Diluted net income per common share:
Net income available to common stockholders...... $ 0.39 $ 0.25 $ 0.74 $ 0.46
======== ======== ======== ========
Weighted average common shares................... 56,910 54,031 56,870 54,123
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
Six months ended
---------------------
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 42,295 $ 25,075
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation............................................. 5,774 4,904
Amortization............................................. 3,663 7,764
Deferred income taxes.................................... 2,671 4,911
Stock-based employee compensation........................ 45 146
Changes in operating assets and liabilities:
Trade accounts and other receivables, net............... (13,432) (3,662)
Other current and noncurrent assets..................... (1,643) (231)
Accounts payable and accrued liabilities................ (1,477) 1,546
-------- --------
Net cash provided by operating activities............ 37,896 40,453
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net.................... (11,513) (4,346)
Conversion and other incentive payments..................... -- (8,205)
-------- --------
Net cash used in investing activities................ (11,513) (12,551)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock...................... 9,100 3,888
Repurchase of common stock.................................. (2,987) --
Payments on notes receivable from employee stockholders..... 44 325
Payments on long-term debt.................................. (11,000) (37,250)
-------- --------
Net cash used in financing activities................ (4,843) (33,037)
-------- --------
Effect of exchange rate fluctuations on cash................... (462) (392)
-------- --------
Net increase (decrease) in cash and cash equivalents........... 21,078 (5,527)
Cash and cash equivalents, beginning of period................. 48,676 39,593
-------- --------
Cash and cash equivalents, end of period....................... $ 69,754 $ 34,066
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest................................................... $ 3,140 $ 3,689
Income taxes............................................... $ 14,865 $ 6,029
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements at June 30, 2000, and for the
three and six months then ended are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim period. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and analysis
of financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, filed with the
Securities and Exchange Commission (the Company's 1999 10-K). The results of
operations for the three and six months ended June 30, 2000, are not necessarily
indicative of the results for the entire year ending December 31, 2000.
2. 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. The warrants
expire in September 2002. See additional discussion of the Common Stock
Warrants in the Company's 1999 10-K.
Stock Repurchase Plan. In August 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. During the three months
ended June 30, 2000, the Company did not repurchase any shares under the
program. During the three months ended March 31, 2000, the Company repurchased
75,000 shares of Common Stock for approximately $3.0 million ($39.92 per share).
The Company has purchased a total of 730,500 shares for approximately $23.2
million (a weighted-average price of $31.81 per share) since the program was
announced. The repurchased shares are held as treasury shares.
3. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted net income per common share is consistent with the
calculation of basic net income per common share while giving effect to dilutive
potential common shares outstanding during the period. Basic and diluted
earnings per share ("EPS") are presented on the face of the Company's Condensed
Consolidated Statements of Income. No reconciliation of the EPS numerator is
necessary as the basic and diluted net income available to common stockholders
is the same for all periods presented. The reconciliation of the EPS denominator
is as follows (in thousands):
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic common shares outstanding.............. 52,158 51,710 52,007 51,637
Dilutive effect of common stock options...... 2,471 2,321 2,582 2,486
Dilutive effect of common stock warrants..... 2,281 --- 2,281 ---
------ ------ ------ ------
Diluted common shares outstanding............ 56,910 54,031 56,870 54,123
====== ====== ====== ======
</TABLE>
Common Stock options of 92,000 shares and 568,450 shares for the three months
ended June 30, 2000 and 1999, and 92,000 shares and 542,150 shares for the six
months ended June 30, 2000 and 1999, respectively, have been excluded from the
computation of diluted EPS because the exercise prices of these options were
greater than the average market price of the common shares for the respective
periods.
The diluted potential common shares related to the Common Stock warrants were
excluded from the computation of diluted common shares outstanding for the three
and six months ended June 30, 1999, as the warrants were not considered
exercisable. During the three and six months ended June 30, 2000, all of the
3.0 million warrants were considered exercisable.
5. COMPREHENSIVE INCOME
The Company's components of comprehensive income were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income..................... $21,986 $13,493 $42,295 $25,075
Foreign currency translation
adjustments................. (300) (143) (403) (307)
------- ------- ------- -------
Comprehensive income........... $21,686 $13,350 $41,892 $24,768
======= ======= ======= =======
</TABLE>
6. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS
Certain June 30, 1999 amounts have been reclassified to conform with the June
30, 2000 presentation.
7. SERVICE AGREEMENTS
The Company has service agreements with First Data Corporation ("FDC") and its
subsidiaries for data processing services, communication charges and other
related services. FDC provides data processing and related services required
for the operation of the Company's CCS system. Effective April 1, 2000, the
Company extended its contract with FDC for data processing services through June
30, 2005. The contract was previously scheduled to expire on December 31, 2001.
7
<PAGE>
8. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition". This SAB provides additional
guidance on revenue recognition criteria and related disclosure requirements.
This SAB is effective for the Company in the fourth quarter of 2000. Adoption
of this SAB is not expected to have a significant effect on the Company's
consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25". The Interpretation
clarifies the application of APB Opinion 25 for certain issues involving
employee stock compensation. The Interpretation is generally effective July 1,
2000. Adoption of this Interpretation is not expected to have a significant
effect on the Company's consolidated financial statements.
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 June 30, Six months ended June 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
----------------- ----------------- ----------------- -----------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Processing and related services........... $ 72,921 75.9% $ 62,629 81.9% $143,548 76.3% $122,580 83.1%
Software and professional services........ 23,141 24.1 13,881 18.1 44,577 23.7 25,017 16.9
-------- ------- -------- ------- -------- ------- -------- -------
Total revenues................... 96,062 100.0 76,510 100.0 188,125 100.0 147,597 100.0
-------- ------- -------- ------- -------- ------- -------- -------
Cost of Revenues:
Cost of processing and related services... 26,315 27.4 22,822 29.8 52,085 27.7 46,858 31.7
Cost of software and professional services 9,903 10.3 8,888 11.6 20,419 10.8 14,737 10.0
-------- ------- -------- ------- -------- ------- -------- -------
Total cost of revenues........... 36,218 37.7 31,710 41.4 72,504 38.5 61,595 41.7
-------- ------- -------- ------- -------- ------- -------- -------
Gross margin (exclusive of depreciation)..... 59,844 62.3 44,800 58.6 115,621 61.5 86,002 58.3
-------- ------- -------- ------- -------- ------- -------- -------
Operating expenses:
Research and development.................. 10,366 10.8 8,217 10.7 20,254 10.8 15,837 10.7
Selling, general and administrative....... 11,084 11.5 11,372 14.9 21,172 11.2 22,318 15.2
Depreciation.............................. 2,962 3.1 2,495 3.3 5,774 3.1 4,904 3.3
-------- ------- -------- ------- -------- ------- -------- -------
Total operating expenses.............. 24,412 25.4 22,084 28.9 47,200 25.1 43,059 29.2
-------- ------- -------- ------- -------- ------- -------- -------
Operating income............................. 35,432 36.9 22,716 29.7 68,421 36.4 42,943 29.1
-------- ------- -------- ------- -------- ------- -------- -------
Other income (expense):
Interest expense........................ (1,482) (1.6) (1,809) (2.4) (3,023) (1.6) (4,033) (2.8)
Interest income......................... 1,355 1.4 816 1.1 2,618 1.4 1,457 1.0
Other................................... (24) -- 4 -- (17) -- (17) --
-------- ------- -------- ------- -------- ------- -------- -------
Total other........................... (151) (0.2) (989) (1.3) (422) (0.2) (2,593) (1.8)
-------- ------- -------- ------- -------- ------- -------- -------
Income before income taxes................... 35,281 36.7 21,727 28.4 67,999 36.2 40,350 27.3
Income tax provision...................... (13,295) (13.8) (8,234) (10.8) (25,704) (13.7) (15,275) (10.3)
-------- ------- -------- ------- -------- ------- -------- -------
Net income................................... $ 21,986 22.9% $ 13,493 17.6% $ 42,295 22.5% $ 25,075 17.0%
======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
9
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues. Total revenues for the three months ended June 30, 2000, increased
25.6% to $96.1 million, from $76.5 million for the three months ended June 30,
1999.
Revenues from processing and related services for the three months ended June
30, 2000, increased 16.4% to $72.9 million, from $62.6 million for the three
months ended June 30, 1999. Of the total increase in revenue, approximately 68%
resulted from an increase in the number of customers of the Company's clients
which were serviced by the Company and approximately 32% was due to increased
revenue per customer. Customers serviced as of June 30, 2000 and 1999,
respectively, were 34.5 million and 31.2 million, an increase of 10.8%. The
increase in the number of customers serviced was due to the conversion of
additional customers by new and existing clients to the Company's systems, and
internal customer growth experienced by existing clients. From April 1, 2000
through June 30, 2000, the Company converted and processed approximately 0.1
million new customers on its systems.
Revenues from software and professional services for the three months ended June
30, 2000, increased 66.7% to $23.2 million, from $13.9 million for the three
months ended June 30, 1999. The Company sells its software products and
professional services principally to its existing client base to (i) enhance the
core functionality of its service bureau processing application, (ii) increase
the efficiency and productivity of its clients' operations, and (iii) allow
clients to effectively rollout new products and services to new and existing
markets. The increase in revenue between years relates to the continued strong
demand for the Company's existing software products (principally, call center
applications) and the rollout of additional new products and services to meet
the changing needs of the Company's client base.
Total annualized domestic revenue per customer account for the second quarter of
2000 was $11.11, compared to $9.49 for the same period in 1999, an increase of
17.1%. Revenue per customer increased primarily due to increased software sales
to new and existing clients, and to a lesser degree, increased processing
revenue per customer, as follows:
Three Months
Ended June 30
--------------------
2000 1999
---- ----
Processing and related services.......... $ 8.46 $8.08
Software and professional services....... 2.65 1.41
------ -----
Total................................. $11.11 $9.49
====== =====
Cost of Processing and Related Services. Direct processing costs as a
percentage of related processing revenues were 36.1% (63.9% gross margin) for
the three months ended June 30, 2000, compared to 36.4% (63.6% gross margin) for
the three months ended June 30, 1999. The decrease in costs as a percentage of
related revenues between periods relates primarily to (i) the Company's
continued focus on cost controls and reductions within its core processing
business, and (ii) a decrease in amortization of client contracts from the CSG
Acquisition, which became fully amortized as of November 30, 1999. Such
amortization was $0.75 million for the second quarter of 1999.
Cost of Software and Professional Services. The cost of software and
professional services as a percentage of related revenues was 42.8% (57.2% gross
margin) for the three months ended June 30, 2000, compared to 64.0% (36.0% gross
margin) for the three months ended June 30, 1999. The improvement between
periods relates primarily to (i) better overall leveraging of costs as a result
of higher software and professional services revenues for the quarter, and (ii)
the timing of the sales cycle for new products and services.
Gross Margin. Overall gross margin for the three months ended June 30, 2000,
increased 33.6% to $59.8 million, from $44.8 million for the three months ended
June 30, 1999, due primarily to revenue growth. The gross margin percentage
increased to 62.3% for the three months ended June 30, 2000, compared to 58.6%
for
10
<PAGE>
the three months ended June 30, 1999. The overall increase in the gross margin
percentage is due primarily to the increase in gross margin for software and
professional services due to the factors discussed above.
Research and Development Expense. Research and development (R&D) expense for
the three months ended June 30, 2000, increased 26.2% to $10.4 million, from
$8.2 million for the three months ended June 30, 1999. As a percentage of total
revenues, R&D expense increased to 10.8% for the three months ended June 30,
2000, from 10.7% for the three months ended June 30, 1999. The Company did not
capitalize any software development costs during the three months ended June 30,
2000 and 1999.
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 Company's development efforts for the
second quarter of 2000 were focused primarily on the development of products to:
. increase the efficiencies and productivity of its clients' operations,
. address the systems needed to support the convergence of the
communications markets,
. support a web-enabled, customer self-care and electronic bill
presentment/payment application,
. allow clients to effectively rollout new products and services to new
and existing markets, such as residential telephony, High-Speed
Data/ISP and IP markets (including CSG.net, the Company's ASP offering
to the ISP market), and
. address the international customer care and billing system market.
The Company expects its development efforts to focus on similar tasks through
the remainder of 2000.
Selling, General and Administrative Expense. Selling, general and
administrative (SG&A) expense for the three months ended June 30, 2000,
decreased 2.5% to $11.1 million, from $11.4 million for the three months ended
June 30, 1999. As a percentage of total revenues, SG&A expense decreased to
11.5% for the three months ended June 30, 2000, from 14.9% for the three months
ended June 30, 1999. The decrease in SG&A expense relates primarily to the
noncompete agreement from the CSG Acquisition becoming fully amortized as of
November 30, 1999 (such amortization was $1.2 million for the second quarter of
1999), offset by an increase in certain SG&A expenses related primarily to the
continued expansion of the Company's management and administrative staff and
other administrative costs to support the Company's overall growth.
Depreciation Expense. Depreciation expense for the three months ended June 30,
2000, increased 18.7% to $3.0 million, from $2.5 million for the three months
ended June 30, 1999. The increase in expense relates to capital expenditures
made during the last six months of 1999 and the first six months of 2000 in
support of the overall growth of the Company, consisting principally of (i)
computer hardware and related equipment, (ii) statement processing equipment,
and (iii) facilities expansion. 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 June 30, 2000,
was $35.4 million or 36.9% of total revenues, compared to $22.7 million or 29.7%
of total revenues for the three months ended June 30, 1999. The increase
between years relates to the factors discussed above.
Interest Expense. Interest expense for the three months ended June 30, 2000,
decreased 18.1% to $1.5 million, from $1.8 million for the three months ended
June 30, 1999, with the decrease attributable primarily to (i) scheduled
principal payments on the Company's long-term debt, and (ii) optional
prepayments on long-term debt during 1999. The balance of the Company's long-
term debt as of June 30, 2000, was $70.0 million, compared to $91.0 million as
of June 30, 1999, a decrease of $21.0 million.
Interest Income. Interest income for the three months ended June 30, 2000,
increased 66.1% to $1.4 million, from $0.8 million for the three months ended
June 30, 1999, with the increase attributable primarily to an
11
<PAGE>
increase in operating funds available for investment.
Income Tax Provision. For the three months ended June 30, 2000, the Company
recorded an income tax provision of $13.3 million, or an effective income tax
rate of approximately 38%, which represents the Company's estimate of the
effective book income tax rate for 2000. The Company's effective income tax
rate for 1999 was also approximately 38%. As of June 30, 2000, management
continues to believe that sufficient taxable income will be generated to realize
the entire benefit of its deferred tax assets. The Company's assumptions of
future profitable operations are supported by its strong operating performances
over the last several years.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues. Total revenues for the six months ended June 30, 2000, increased
27.5% to $188.1 million, from $147.6 million for the six months ended June 30,
1999.
Revenues from processing and related services for the six months ended June 30,
2000, increased 17.1% to $143.5 million, from $122.6 million for the six months
ended June 30, 1999. Of the total increase in revenue, approximately 71%
resulted from an increase in the number of customers of the Company's clients
which were serviced by the Company and approximately 29% 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, 2000 through June 30, 2000, the Company converted and processed
approximately 0.3 million new customers on its systems.
Revenues from software and professional services for the six months ended June
30, 2000, increased 78.2% to $44.6 million, from $25.0 million for the six
months ended June 30, 1999. The Company sells its software products and
professional services principally to its existing client base to (i) enhance the
core functionality of its service bureau processing application, (ii) increase
the efficiency and productivity of its clients' operations, and (iii) allow
clients to effectively rollout new products and services to new and existing
markets. The increase in revenue between years relates to the continued strong
demand for the Company's existing software products (principally, call center
applications) and the rollout of additional new products and services to meet
the changing needs of the Company's client base.
Total annualized domestic revenue per customer account for the six months ended
June 30, 2000 was $10.95, compared to $9.30 for the same period in 1999, an
increase of 17.7%. Revenue per customer increased primarily due to increased
software sales to new and existing clients, and to a lesser degree, increased
processing revenue per customer, as follows:
Six Months
Ended June 30
--------------------
2000 1999
---- ----
Processing and related services.......... $ 8.38 $8.02
Software and professional services....... 2.57 1.28
------ -----
Total................................. $10.95 $9.30
====== =====
Cost of Processing and Related Services. Direct processing costs as a
percentage of related processing revenues were 36.3% (63.7% gross margin) for
the six months ended June 30, 2000, compared to 38.2% (61.8% gross margin) for
the six months ended June 30, 1999. The decrease in costs as a percentage of
related revenues between periods relates primarily to (i) the Company's
continued focus on cost controls and reductions within its core processing
business, and (ii) a decrease in amortization of client contracts from the CSG
Acquisition, which became fully amortized as of November 30, 1999. Such
amortization was $1.5 million for the six months ended June 30, 1999.
12
<PAGE>
Cost of Software and Professional Services. The cost of software and
professional services as a percentage of related revenues was 45.8% (54.2% gross
margin) for the six months ended June 30, 2000, compared to 58.9% (41.1% gross
margin) for the six months ended June 30, 1999. The improvement between periods
relates primarily to (i) better overall leveraging of costs as a result of
higher software and professional services revenues for the period, and (ii) the
timing of the sales cycle for new products and services.
Gross Margin. Overall gross margin for the six months ended June 30, 2000,
increased 34.4% to $115.6 million, from $86.0 million for the six months ended
June 30, 1999, due primarily to revenue growth. The gross margin percentage
increased to 61.5% for the six months ended June 30, 2000, compared to 58.3% for
the six months ended June 30, 1999. The overall increase in the gross margin
percentage is due primarily to the increase in gross margin for software and
professional services due to the factors discussed above.
Research and Development Expense. R&D expense for the six months ended June 30,
2000, increased 27.9% to $20.3 million, from $15.8 million for the six months
ended June 30, 1999. As a percentage of total revenues, R&D expense increased
to 10.8% for the six months ended June 30, 2000, from 10.7% for the six months
ended June 30, 1999. The Company did not capitalize any software development
costs during the six months ended June 30, 2000 and 1999.
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 Company's development efforts for the
six months ended June 30, 2000 were focused primarily on the development of
products to:
. increase the efficiencies and productivity of its clients' operations,
. address the systems needed to support the convergence of the
communications markets,
. support a web-enabled, customer self-care and electronic bill
presentment/payment application,
. allow clients to effectively rollout new products and services to new
and existing markets, such as residential telephony, High-Speed
Data/ISP and IP markets (including CSG.net, the Company's ASP offering
to the ISP market), and
. address the international customer care and billing system market.
Selling, General and Administrative Expense. SG&A expense for the six months
ended June 30, 2000, decreased 5.1% to $21.2 million, from $22.3 million for the
six months ended June 30, 1999. As a percentage of total revenues, SG&A expense
decreased to 11.2% for the six months ended June 30, 2000, from 15.2% for the
six months ended June 30, 1999. The decrease in SG&A expense relates primarily
to the noncompete agreement from the CSG Acquisition becoming fully amortized as
of November 30, 1999 (such amortization was $2.3 million for the six months
ended June 30, 1999), offset by an increase in certain SG&A expenses related
primarily to the continued expansion of the Company's management and
administrative staff and other administrative costs to support the Company's
overall growth.
Depreciation Expense. Depreciation expense for the six months ended June 30,
2000, increased 17.7% to $5.8 million, from $4.9 million for the six months
ended June 30, 1999. The increase in expense relates to capital expenditures
made during 1999 and the first six months of 2000 in support of the overall
growth of the Company, consisting principally of (i) computer hardware and
related equipment, (ii) statement processing equipment, and (iii) facilities
expansion. 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 six months ended June 30, 2000, was
$68.4 million or 36.4% of total revenues, compared to $42.9 million or 29.1% of
total revenues for the six months ended June 30, 1999. The increase between
years relates to the factors discussed above.
Interest Expense. Interest expense for the six months ended June 30, 2000,
decreased 25.0% to $3.0 million, from $4.0 million for the six months ended June
30, 1999, with the decrease attributable primarily to (i) scheduled principal
payments on the Company's long-term debt, and (ii) optional prepayments on long-
term
13
<PAGE>
debt during 1999.
Interest Income. Interest income for the six months ended June 30, 2000,
increased 79.7% to $2.6 million, from $1.5 million for the six months ended June
30, 1999, with the increase attributable primarily to an increase in operating
funds available for investment.
Income Tax Provision. For the six months ended June 30, 2000, the Company
recorded an income tax provision of $25.7 million, or an effective income tax
rate of approximately 38%, which represents the Company's estimate of the
effective book income tax rate for 2000. The Company's effective income tax
rate for 1999 was also approximately 38%.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
As of June 30, 2000, the Company's principal sources of liquidity included cash
and cash equivalents of $69.8 million. The Company also has a revolving credit
facility in the amount of $40.0 million, of which there were no borrowings
outstanding. The Company's ability to borrow under the revolving credit
facility is subject to maintenance of certain levels of eligible receivables.
At June 30, 2000, all of the $40.0 million revolving credit facility was
available to the Company. The revolving credit facility expires in September
2002.
As of June 30, 2000 and December 31, 1999, respectively, the Company had $84.7
million and $67.5 million in net billed trade accounts receivable. The increase
between periods relates primarily to continued revenue growth and the timing of
new billings and collections. The Company's billed 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 billed trade accounts receivable
balance for the period. The Company's DBO calculations for the quarters ended
June 30, 2000 and 1999 were 53 days and 55 days, respectively. Total deferred
revenues decreased by approximately $8.4 million from December 31, 1999 to June
30, 2000, due primarily to performance on several contracts during the first
quarter that had previously been signed and billed in the latter part of 1999.
The deferred revenue balance was relatively unchanged from March 31, 2000.
During the six months ended June 30, 2000, the Company generated $37.9 million
of net cash flow from operating activities. Cash generated from these sources
and the proceeds of $9.1 million from the issuance of common stock through the
Company's stock incentive plans were used to (i) fund capital expenditures of
$11.5 million, (ii) repurchase 75,000 shares of the Company's Common Stock for
$3.0 million under its stock repurchase plan, and (iii) repay long-term debt of
$11.0 million, which included $10.0 million of scheduled payments and optional
prepayments of $1.0 million.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the
six months ended June 30, 2000 was $77.5 million, or 41.2% of total revenues,
compared to $55.2 million, or 37.4% of total revenues for the six months ended
June 30, 1999. 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.
As of June 30, 2000, the spread on the LIBOR rate and the prime rate was 0.50%
and 0%, respectively. As of June 30, 2000, the entire amount of the debt was
under a one-month LIBOR contract with an interest rate of 7.18% (i.e., LIBOR at
6.68% plus spread of 0.50%), compared to a weighted average rate of 6.55% at
December 31, 1999.
In August 1999, the Company's Board of Directors approved a stock repurchase
plan which authorized the
14
<PAGE>
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. During
the six months ended June 30, 2000, the Company repurchased 75,000 shares of
Common Stock for approximately $3.0 million ($39.92 per share). The Company has
purchased a total of 730,500 shares for approximately $23.2 million (a weighted-
average price of $31.81 per share) since the program was announced. The
repurchased shares are held as treasury shares.
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 June 30, 2000. 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,
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.
Forward-Looking Statements
--------------------------
This report contains a number of forward-looking statements relative to future
plans of the Company and its expectations concerning the customer care and
billing industry, as well as the converging telecommunications industry it
serves, and similar matters. Such forward-looking statements are based on
assumptions about a number of important factors, and involve risks and
uncertainties that could cause actual results to differ materially from
estimates contained in the forward-looking statements. Some of the risks that
are foreseen by management are contained in Exhibit 99.01 of this report.
Exhibit 99.01 constitutes an integral part of this report, and readers are
strongly encouraged to read that section closely in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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. During the six months
ended June 30, 2000 and 1999, revenues from AT&T and affiliated companies
generated under the AT&T Contract represented approximately 45.3% and 43.0% of
total revenues, respectively. The AT&T Contract had an original term of 15
years 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 contains 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.
AT&T began its efforts to provide convergent communications services in several
United States cities during 1999 and is expected to continue these efforts in
2000. The Company 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 AT&T that
are in excess of the minimum financial commitments and exclusive rights included
in the contract.
15
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no material changes to the Company's market risks during the six
months ended June 30, 2000. See the Company's 1999 10-K for additional
discussion regarding the Company's market risks.
16
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1-3. None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The 2000 annual meeting (the "Annual Meeting") of stockholders
of CSG Systems International, Inc. was held on May 19, 2000.
(b) The following persons were elected as directors at the Annual
Meeting:
Class III (term expiring in 2003)
---------------------------------
George F. Haddix
Neal C. Hansen
Frank V. Sica
The following directors' term of office continued after the
Annual Meeting:
Janice I. Obuchowski
John P. Pogge
Rockwell A. Schnabel
Royce J. Holland
Bernard W. Reznicek
(c) Votes were cast or withheld at the Annual Meeting as follows:
(i) Election of directors:
Director For Withheld
------------------ --- --------
George F. Haddix 44,164,276 222,539
Neal C. Hansen 44,164,196 222,619
Frank V. Sica 44,161,437 225,378
(ii) Increase the Stock Option Plan for Non-Employee
Directors by 250,000 shares:
For Against Abstain
--- ------- -------
26,686,267 17,611,194 89,354
Item 5. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.40* Second Amended and Restated Services Agreement between
First Data Technologies, Inc. and CSG Systems, Inc.,
dated April 1, 2000
10.44 CSG Systems International, Inc. Stock Option Plan for
Non-Employee Directors
17
<PAGE>
27.01 Financial Data Schedule (EDGAR Version only)
99.01 Safe Harbor for Forward-Looking Statements Under the
Private Securities Litigation Reform Act of 1995-
Certain Cautionary Statements and Risk Factors
(b) Reports on Form 8-K
None
__________________
* Portions of the exhibit have been omitted pursuant to an application for
confidential treatment, and the omitted portions have been filed separately
with the Commission.
18
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2000
CSG SYSTEMS INTERNATIONAL, INC.
/s/ Neal C. Hansen
--------------------------------------------
Neal C. Hansen
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Greg A. Parker
--------------------------------------------
Greg A. Parker
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Randy R. Wiese
--------------------------------------------
Randy R. Wiese
Vice President and Controller
(Principal Accounting Officer)
19
<PAGE>
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
10.40* Second Amended and Restated Services Agreement between First Data
Technologies, Inc. and CSG Systems, Inc., dated April 1, 2000
10.44 CSG Systems International, Inc. Stock Option Plan for Non-Employee
Directors
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.
20
