<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1996
REGISTRATION NO. 333-3842
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
USCS INTERNATIONAL, INC.
(Name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7371 94-1727009
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
No.)
</TABLE>
2969 PROSPECT PARK DRIVE
RANCHO CORDOVA, CA 95670-6148
(916) 636-4500
(Address and telephone number of principal executive offices)
JAMES C. CASTLE, PH.D.
CHIEF EXECUTIVE OFFICER
USCS INTERNATIONAL, INC.
2969 PROSPECT PARK DRIVE
RANCHO CORDOVA, CA 95670-6184
(916) 636-4500
(Name, address and telephone number, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
GILLES S. ATTIA, ESQ. MARK A. BERTELSEN, ESQ.
KEVIN A. COYLE, ESQ. ANN YVONNE WALKER, ESQ.
Graham & James, LLP Wilson Sonsini Goodrich & Rosati
400 Capitol Mall Professional Corporation
Suite 2400 650 Page Mill Road
Sacramento, CA 95814-4411 Palo Alto, CA 94304-1050
(916) 558-6700 (415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE ON OR AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
TITLE OF OFFERING MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT BEING PRICE PER AGGREGATE REGISTRATION
REGISTERED REGISTERED SHARE (1) OFFERING PRICE FEE (2)
<S> <C> <C> <C> <C>
Common Stock, Par Value
$.05 per share.......... 5,520,000 Shares $17.00 $93,840,000 $32,359
Rights to Purchase Series
A Preferred Stock, par
value $.05 per share.... 5,520,000 Rights $0.00 $0.00 $0.00
<FN>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee.
(2) Previously paid.
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
USCS INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501 OF REGULATION S-K
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
- ----------------------------------------------------------------- ------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus....................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges............................ Prospectus Summary; Risk Factors
4. Use of Proceeds....................................... Use of Proceeds
5. Determination of Offering Price....................... Underwriting
6. Dilution.............................................. Dilution
7. Selling Security Holders.............................. Principal and Selling Stockholders
8. Plan of Distribution.................................. Underwriting
9. Description of Securities to be Registered............ Description of Capital Stock
10. Interests of Named Experts and Counsel................ Not Applicable
11. Information with Respect to the Registrant............ Outside Front Cover Page; Prospectus Summary; Risk
Factors; Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling Stockholders;
Underwriting; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 20, 1996
PROSPECTUS
4,800,000 SHARES
[LOGO]
COMMON STOCK
--------------
Of the 4,800,000 shares of Common Stock, par value $.05 per share (the
"Common Stock"), being offered hereby, 2,763,855 shares are being offered by
USCS International, Inc. ("USCS" or the "Company") and 2,036,145 shares are
being offered by the Selling Stockholders (as defined herein). The Company will
not receive any of the proceeds from the sale of the shares by the Selling
Stockholders. See "Principal and Selling Stockholders." Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$15.00 and $17.00 per share. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "USCS," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total (3)............... $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,500,000.
(3) The Company has granted the several Underwriters an option, exercisable
within 30 days after the date of this Prospectus, to purchase up to an
additional 720,000 shares of Common Stock solely to cover over-allotments,
if any. If all of such additional shares are purchased, the total Price to
Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling
Stockholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
-------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that the delivery of shares of Common Stock will be made in New York, New York,
on or about , 1996.
-------------------
MERRILL LYNCH & CO. MONTGOMERY SECURITIES
------------
The date of this Prospectus is , 1996.
<PAGE>
[INSIDE FRONT COVER PAGE OF PROSPECTUS]
[ARTWORK]
[PHOTOGRAPH SHOWS COLLAGE OF IMAGES INCLUDING CELLULAR PHONE, COMPUTER MONITOR,
COMPUTER CABLES, A SATELLITE DISH, NUMBERS IN BINARY CODE, SITTING HUMAN FIGURE
AT A COMPUTER AND THE COMPANY'S LOGO; TEXT IN PHOTO IS AS FOLLOWS:
SERVING THE GLOBAL
COMMUNICATIONS MARKET INCLUDING:
* CABLE TELEVISION
* TELEPHONY
* MULTI-SERVICE PROVIDERS
CUSTOMER MANAGEMENT
SOFTWARE
* multi-service integration
* order processing
* customer service
* management reporting
CUSTOMER MANAGEMENT
SERVICES
* bill presentment
* statement production
* statement-based marketing
PROFESSIONAL SERVICES
* training and consulting
* custom programming
* statement design]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-------------------
CableData-Registered Trademark- is a registered trademark of the Company.
CableData's Intelecable-TM- ("Intelecable"), DDP/SQL-TM-, VantagePLUS-TM-,
International Billing Services-TM- ("IBS"), Dynamic Due Date-TM- and
ClassROM-TM- are trademarks or tradenames of the Company. The IBS servicemark is
a registered servicemark of the Company.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
USCS is a leading provider of customer management software and services to
the global communications industry. The Company's clients include providers of
cable television, wireless and land-line telephony, direct-broadcast satellite
("DBS") and multiple communications services in the U.S. and 13 other countries.
The Company's software-based solutions enable its clients to manage critical
customer relationship functions, including new account set-up, order processing,
customer support, management reporting and marketing analysis. The Company also
provides bill presentment services, which include generation of high quality,
customized billing statements that are produced in automated facilities designed
to minimize turnaround time and mailing costs. USCS also offers a variety of
complementary professional services, including consulting, application
development and client training, as well as statement design services that allow
clients to use the billing statement as a communication and marketing tool.
The Company's clients typically enter into contracts with terms ranging from
three to seven years. Clients are billed monthly, generally based on the number
of end-users they serve. As a result, a significant portion of the Company's
revenue is recurring and increases as the service provider's customer base
grows. In 1995, the Company's revenue totaled $229.3 million, of which 73% was
generated from companies that have been clients of USCS for three or more years.
USCS has been providing comprehensive customer management software and services
to the cable television industry for more than 25 years and has been profitable
in every year since 1973.
The Company's software currently supports 53% of U.S. cable television
subscribers and is used by 15 of the 20 largest cable television service
providers in the U.S., including Adelphia Communications Corporation
("Adelphia"), Cablevision Systems Corporation ("Cablevision Systems"), Comcast
Cable Communications, Inc. ("Comcast"), Tele-Communications, Inc. ("TCI") and
Time Warner, Inc. ("Time Warner"). The Company provides bill presentment
services to clients serving 53% of U.S. cable television subscribers, 33% of
U.S. cellular users and 9% of U.S. land-line telephony customers and to a
variety of other service providers. The Company's bill presentment clients
include substantially all of its domestic customer management software clients
and other service providers such as AirTouch Paging ("AirTouch"), Ameritech
Corporation ("Ameritech") and Frontier Corporation ("Frontier"). The Company
currently processes over 60 million bills per month and is the largest
centralized first class mailer in the U.S., responsible for generating more than
1.5% of the total volume of all U.S. first class mail, including customer
remittance volume. Bill presentment services are generally provided to software
clients in bundled contracts and are also sold separately.
The Company has extended its leadership position by introducing products and
services that address the rapidly changing global communications market.
Technological advances, regulatory changes and international growth are
transforming the structure and competitive dynamics of the industry. Markets
that were once segmented by service and geographic location are converging into
a single global communications market, which includes traditional service
providers and new entrants offering a combination of services. The rapidly
shifting and increasingly complex nature of the converging communications market
has increased the need among service providers for sophisticated and flexible
customer management software and services.
3
<PAGE>
In 1993, the Company deployed Intelecable, which the Company believes is the
first customer management software product designed for providers of multiple
communications services ("multi-service providers"). The Company also believes
that Intelecable is the only integrated multi-service customer management
software system currently operational and commercially available. Intelecable is
presently installed for 17 clients worldwide, including combined cable/telephony
service providers in the U.K., a combined cable/wireless cable/DBS provider in
Australia and two interactive video providers in the U.S., including BellSouth
Interactive Media Services, Inc. ("BellSouth Interactive"). The Company has also
expanded its bill presentment services to support multi-service providers by
offering consolidated billing statements that combine data from multiple
services, such as wireless and land-line telephony, into a single integrated
billing statement.
Since its founding, the Company has been a leader in providing customer
management software and services. The Company's record of achievement includes
what USCS believes is:
- The first customer management software system for multi-service
providers, including support of combined cable/telephony sites;
- The first contract with a regional bell operating company
("RBOC") to outsource all bill presentment functions for
telephony services; and
- The first installation and operation of customer management
software for interactive video trials in the U.S.
The Company's strategy to maintain and enhance its industry position
includes the following key elements: (i) focus on recurring revenue, (ii) focus
on the needs of multi-service providers, (iii) increase international revenue,
(iv) expand bill presentment market opportunities, (v) increase professional and
strategic services revenue, and (vi) continue to develop leading-edge software
and services.
The Company conducts its business primarily through two wholly-owned
subsidiaries: CableData, Inc. and International Billing Services, Inc. The
Company's principal executive offices are located at 2969 Prospect Park Drive,
Rancho Cordova, California 95670, and its telephone number is (916) 636-4500.
The Company's international headquarters are located at Spectrum Point, 279
Farnborough Road, Farnborough, Hampshire GU14 7LS England, U.K. U.S. Computer
Services, the predecessor to USCS International, Inc., was incorporated under
California law on November 18, 1969. USCS International, Inc., which was
incorporated under Delaware law on April 10, 1996, succeeded to the business of
the California corporation pursuant to a reincorporation effective May 31, 1996.
Unless the context otherwise requires, all references in this Prospectus to
"USCS" or the "Company" refer to USCS International, Inc., a Delaware
corporation, its predecessor, U.S. Computer Services, a California corporation,
and their consolidated subsidiaries.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company................................... 2,763,855 Shares
The Selling Stockholders...................... 2,036,145 Shares
Common Stock to be outstanding after this 22,235,574 Shares (1)
offering........................................
Use of proceeds................................. Repayment of certain indebtedness
(approximately $38.0 million as of March
31, 1996) and working capital and other
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.......... USCS
</TABLE>
- ------------------------------
(1) Based on shares outstanding as of May 20, 1996. Excludes an aggregate of
5,178,119 shares reserved as of May 20, 1996 for future issuance under the
Company's 1988 Incentive Stock Option Plan, 1990 Nonstatutory Stock Option
Plan, 1993 Incentive Stock Option Plan, 1996 Incentive Stock Option Plan,
1996 Directors' Stock Option Plan and Employee Stock Purchase Plan. See
"Management -- Employee and Director Plans."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- --------- ---------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue.................................... $ 143,513 $ 146,087 $ 166,064 $ 188,805 $ 229,263 $ 53,012 $ 60,255
Gross profit............................... 51,754 53,086 61,745 66,283 82,023 19,498 22,094
Operating income (1)....................... 12,905 16,299 13,494 15,787 22,106 4,937 5,443
Income before income taxes and cumulative
effect of accounting change (2)........... 8,160 11,250 8,885 11,503 17,140 3,769 4,237
Income before cumulative effect of
accounting change (2)..................... 5,053 6,895 4,555 6,169 10,370 2,281 2,563
Net income................................. 5,053 6,895 6,963 6,169 10,370 2,281 2,563
Income before cumulative effect of
accounting change per share (3)........... $ 0.20 $ 0.30 $ 0.20 $ 0.28 $ 0.49 $ 0.11 $ 0.12
Net income per share (3)................... $ 0.20 $ 0.30 $ 0.31 $ 0.28 $ 0.49 $ 0.11 $ 0.12
Shares used in per share computation (3)... 25,149 22,675 22,129 21,882 21,138 21,494 20,659
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(4)
---------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash.................................................................................. $ 5,930 $ 7,556
Working capital....................................................................... 28,343 29,969
Total assets.......................................................................... 182,824 184,450
Long-term debt less current portion (5)............................................... 53,090 15,090
Stockholders' equity.................................................................. 49,087 88,713
</TABLE>
- ------------------------------
(1) In 1993, the Company charged to expense $4.1 million for the consolidation
of customer support activities and relocation expenses.
(2) In 1993, the Company adopted SFAS 109 resulting in an accumulated credit to
income for an adjustment in the calculation of income tax expense.
(3) Per share data is based on the weighted average number of shares of Common
Stock and dilutive common equivalent shares from stock options outstanding
during the period using the treasury stock method. Pursuant to certain
Securities and Exchange Commission Staff Accounting Bulletins, common and
common equivalent shares issued during the 12-month period prior to the
date of the initial filing of the Registration Statement have been included
in the calculation as if they were outstanding for all periods prior to
their issuance. See Note 2 of Notes to Consolidated Financial Statements.
(4) Adjusted to give effect to the sale of 2,763,855 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price
of $16.00 per share and the anticipated application of the estimated net
proceeds therefrom. See "Use of Proceeds."
(5) See Note 5 of Notes to Consolidated Financial Statements.
------------------------------
THE STATEMENTS THAT ARE NOT HISTORICAL FACTS OR STATEMENTS OF CURRENT STATUS
CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS (AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THE RISKS SET FORTH IN "RISK
FACTORS." ACTUAL RESULTS MAY DIFFER MATERIALLY. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE MATTERS SET FORTH IN "RISK FACTORS." EXCEPT AS OTHERWISE
INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS: (I) ASSUMES NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) HAS BEEN ADJUSTED TO GIVE
EFFECT TO (A) THE REINCORPORATION OF THE COMPANY UNDER DELAWARE LAW, (B) A
2.1-FOR-1 STOCK SPLIT OF THE COMPANY'S VOTING COMMON STOCK, (C) A 2-FOR-1 STOCK
SPLIT OF THE COMPANY'S NON-VOTING COMMON STOCK, AND (D) THE CONVERSION OF ALL
OUTSTANDING SHARES OF NON-VOTING COMMON STOCK INTO COMMON STOCK ON A 1-FOR-1
BASIS. SEE "CAPITALIZATION," "DESCRIPTION OF CAPITAL STOCK" AND "UNDERWRITING."
5
<PAGE>
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED BY THIS PROSPECTUS.
THE STATEMENTS THAT ARE NOT HISTORICAL FACTS OR STATEMENTS OF CURRENT STATUS
CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES INCLUDING, BUT NOT LIMITED TO, THE FACTORS SET FORTH BELOW.
ACTUAL RESULTS MAY DIFFER MATERIALLY.
DEPENDENCE ON THE CABLE TELEVISION MARKET
The Company is highly dependent on the cable television market. During 1995,
approximately two-thirds of the Company's revenue was derived from sales to
cable television service providers. Revenue from cable television providers is
based primarily on the number of subscribers served by such providers, typically
calculated monthly. Due primarily to recent consolidation, the number of
providers of cable television service in the U.S. is declining, resulting in a
reduction of the number of potential cable television clients in the U.S. As the
number of companies serving the available subscriber base decreases, the loss of
a single client could have a greater adverse impact on the Company than in the
past. Even if the number of clients remains the same, a decrease in the number
of subscribers served by the Company's cable television clients would result in
lower revenue for the Company. Furthermore, any adverse development in the cable
television market could have a material adverse effect on the financial
condition and results of operations of the Company.
CHANGING COMMUNICATIONS MARKET
The communications market is characterized by rapid technological
developments, changes in client requirements, evolving industry standards and
frequent new product introductions. The Company's future success will depend, in
part, upon its ability to enhance its existing applications, develop and
introduce new products that take advantage of technological advances and respond
promptly to new client requirements and evolving industry standards. The Company
has expended considerable funds to develop products to serve the changing
communications market. If the communications market fails to converge or grows
more slowly than anticipated or the Company's products and services fail to
achieve market acceptance, there could be a material adverse effect on the
financial condition and results of operations of the Company. Furthermore, there
can be no assurance that the Company's clients will be successful in expanding
into other segments of the converging communication markets, or that the Company
will be successful in selling its products to new entrants in the cable
television market.
NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGES
The market for the Company's products and services is characterized by rapid
technological changes. The Company believes that its future success depends in
part upon its ability to enhance its current products and services and develop
new products and services that address the increasingly complex needs of its
clients. The Company's development projects are subject to all of the risks
associated with the development of new software and other products based on
innovative technologies, including (i) unanticipated technical or other problems
that could result in a change in the design, delay in the development or
abandonment of such products, (ii) unanticipated integration, compatibility or
similar problems, such as difficulties in porting to additional hardware
platforms, (iii) problems that arise during implementation, and (iv) possible
insufficiency of development funds. Certain of the Company's development
contracts provide for reimbursement of a portion of the research and development
expenditures by third parties, subject to meeting performance milestones.
Failure to meet such milestones may result in a loss of the third party funds
and the need for the Company to reallocate Company resources to complete the
project. Products, if any, resulting from research and development activities
may not produce revenue for a substantial time, if at all. In addition, the
introduction by third parties of new products or services could render the
Company's existing products and services obsolete or unmarketable. The Company's
ability to anticipate changes in technology and successfully develop and
introduce new or enhanced products incorporating such technology on a timely
basis will be significant factors in the Company's ability to remain
competitive. There can be no assurance that the Company will timely or
successfully complete the development of new or enhanced products or services or
successfully manage transitions from one product release to the next, that the
6
<PAGE>
Company will not encounter difficulties that could delay introduction of new or
enhanced products in the future or that errors will not be found in new or
enhanced products after installation, resulting in a loss of or a delay in
market acceptance. If the Company is unable to develop new or enhanced products
on a timely basis or to meet development contract milestones, the Company's
business, operating results and financial condition could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations" and "Business --
Research and Development."
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly operating results may fluctuate from quarter to
quarter depending on various factors, including the impact of significant
start-up costs associated with initiating the delivery of contracted services to
new clients, the hiring of additional staff, new product development and other
expenses, introduction of new products by competitors, pricing pressures, the
evolving and unpredictable nature of the markets in which the Company's products
and services are sold and general economic conditions. The Company may invest
significant time and financial resources towards securing and implementing
contracts or developing new products and services. Revenue from such activities
may be received, if at all, only in future quarters. Thus, the Company may incur
significant expenses in a particular quarter that are not offset by
corresponding revenue and conversely may receive additional revenue in future
quarters for which related expenses were incurred in prior quarters. For
example, in the first quarter of 1994, the Company added Ameritech as a bill
presentment client, resulting in a significant increase in expenses in late 1993
and the first quarter of 1994 and a significant increase in revenue in the
second quarter of 1994. Revenue from Ameritech represented approximately 16% and
13% of the Company's revenue for the years ended December 31, 1995 and 1994,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
COMPETITION; DEVELOPMENT OF IN-HOUSE SYSTEM BY SIGNIFICANT CLIENT
The market for the Company's products and services is highly competitive,
and competition is increasing as additional market opportunities arise. The
Company competes with independent providers of customer management software and
services and with in-house systems. The Company believes its most significant
competitors for customer management software are Information Systems Development
(owned by Cincinnati Bell Information Systems ("CBIS")), CSG Systems
International, Inc., and the Company's own clients to the extent such clients
develop in-house systems. In addition, certain of the Company's competitors,
including CBIS, have contracted with the Company to provide bill presentment
services to their own software customers. The most significant competitors for
bill presentment services are in-house services and, to a lesser extent, other
third-party providers. It is also possible that new competitors may emerge and
acquire market share as the communications market expands. TCI, which
represented approximately 17% and 18% of the Company's revenue for 1995 and
1994, respectively, has announced that it is developing and testing an in-house
customer management software system and plans to begin deploying it nationwide
by 1997. In June 1996, the Company entered into a new 3- 1/2 year agreement to
continue to provide customer management software and bill presentment services
for TCI. TCI may remove subscribers from the agreement during its term, subject
to price increases based on the number of subscribers remaining under contract.
The Company expects revenue from TCI will be reduced or eliminated in the future
if TCI is successful in developing its in-house system and such in-house system
replaces the Company's system. Another client, which accounted for 4% of total
revenue in 1995 and recently extended its contract with the Company to early
1997, has orally advised the Company that it may select an alternative solution
for its customer management software requirements. In addition, competitive
factors could influence or alter the Company's overall revenue mix between
customer management software, services, including bill presentment services, and
equipment sales and leasing. Any of these events could have a material adverse
effect on the financial condition and results of operations, including gross
profit margins, of the Company. See "-- Reliance on Significant Clients,"
"Business -- Clients," "Business -- Competition" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
7
<PAGE>
CONCENTRATION OF CLIENT BASE
Aggregate revenue from the Company's ten largest clients accounted for
approximately 63% of total revenue in both 1995 and 1994. TCI accounted for 17%
and 18% and Ameritech accounted for 16% and 13% of the Company's revenue for
1995 and 1994, respectively. Loss of all or a significant part of the business
of any of these clients or a decrease in their respective customer bases could
have a material adverse effect on the financial condition and results of
operations of the Company. See "-- Variability of Quarterly Operating Results"
and "-- Competition; Development of In-House System by Significant Client."
MANAGEMENT OF GROWTH
The Company's strategy is to grow through maximizing recurring revenue,
focusing on the needs of multi-service providers in the converging
communications market, increasing international revenue, expanding the market
for its bill presentment services, increasing professional and strategic
services revenue and continuing to develop leading-edge technologies. Management
of the Company's growth may place a considerable strain on the Company's
management, operations and systems. The Company's ability to execute its
business strategy will depend in part upon its ability to manage the demands of
a growing business. Any failure of the Company's management team to effectively
manage growth could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business -- USCS Strategy."
CLIENT FAILURE TO RENEW OR UTILIZE CONTRACTS
Substantially all of the Company's revenue is derived from the sale of
services or products under long-term contracts with its clients. The Company
typically does not have the unilateral option to extend the terms of such
contracts upon their expiration. In addition, most of the Company's software and
services contracts have no minimum purchase requirements. Other contracts
require minimum purchases that are substantially below the current level of
business under such contracts and all contracts are cancelable by clients under
certain conditions. The failure of clients to renew contracts, a reduction in
usage by clients under any contracts or the cancellation of contracts could have
a material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
INTERNATIONAL BUSINESS ACTIVITIES
The Company markets its products in a variety of international markets. To
date, the Company's primary customer management software has been installed and
is generating revenue in 13 countries. While less than 5% of the Company's
customer management software and services revenue in 1995 came from
international sources, the Company is expanding its international presence,
primarily through third party marketing and distribution alliances. The
Company's practice is to bill international clients in U.S. dollars and revenue
not billed in U.S. dollars is not material to the Company as a whole. Risks
inherent in the Company's current and proposed international business activities
in general, and in its activities in the converging communications market, in
particular, include the possible failure to develop and maintain international
marketing and distribution alliances, unexpected changes in regulatory
requirements, difficulties in managing international operations, longer accounts
receivable payment cycles, potential adverse tax consequences, restrictions on
the conversion of currencies or the repatriation of earnings, the imposition of
tariffs or other trade barriers, the burdens of complying with a wide variety of
foreign laws and regulations and, in some countries, economic and political
instability. There can be no assurance that such factors will not have a
material adverse effect on the Company's future international sales and,
consequently, the Company's business, operating results and financial condition.
ATTRACTION AND RETENTION OF KEY 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 believes that its future success also depends on its ability to attract
and retain 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. The Company
has from time to time experienced difficulties
8
<PAGE>
in recruiting qualified skilled technical personnel. Failure by the Company to
attract and retain the personnel it requires could have a material adverse
effect on the financial condition and results of operations of the Company.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company relies on a combination of patent, trade secret and copyright
laws, nondisclosure agreements, and other contractual and technical measures to
protect its proprietary technology. There can be no assurance that these
provisions will be adequate to protect its proprietary rights. Although the
Company believes that its products and services 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. A significant cable television client has advised the Company that
Ronald A. Katz Technology Licensing, L.P. ("RAKTL") has asserted that patents
held by RAKTL may be infringed by the client's use of certain interfaces offered
by the Company. The patents relate to telephone call processing with audio
response unit and automatic number identification capabilities of certain
interfaces offered by the Company. The client recently informed the Company
that, should it become necessary, it would seek indemnification from the
Company. The Company believes that, if the patents are valid and if they apply
to the Company's business, they would also apply to many users and suppliers of
interactive computer telephony systems, including the Company's competitors. The
Company believes that it is adequately protected by its patent position and, as
of the date of this Prospectus, no legal proceedings have been instituted
against the Company, but, to the extent that the RAKTL patents are valid and
apply to the Company's business, the Company could be required to seek licenses
from RAKTL and provide indemnification to its clients. Such licenses may not be
available on commercially reasonable terms, if at all. Although the Company
believes that it has sufficient rights to conduct its current business and that
its clients have sufficient rights to use USCS products and services without
infringing upon the patent rights of such third party, there can be no
assurances that the Company or its clients will prevail in any patent
infringement dispute with such third party or that, if the Company does not
successfully resolve such dispute, the terms of any settlement with such third
party would not have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Intellectual
Property."
GOVERNMENT REGULATION
The Company's business is not subject to direct government regulation. The
Company's existing and potential clients, however, are subject to extensive
regulation, and certain of the Company's revenue opportunities may depend on
continued regulatory changes in the worldwide communications industry. In
addition, the Company's clients are subject to certain regulations governing the
privacy and use of the customer information that is collected and managed by the
Company's products and services. Regulatory changes that adversely affect the
Company's existing and potential clients could have a material adverse effect on
the financial condition and results of operations of the Company.
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; SUBSTANTIAL
DILUTION
There has been no prior public market for the Company's Common Stock, and
there can be no assurance that a viable public market for the Common Stock will
develop or be sustained after this offering. The Company believes that factors
such as announcements of developments related to the Company's business,
fluctuations in the Company's quarterly or annual operating results, failure to
meet securities analysts' expectations, general conditions in the international
communications marketplace or the worldwide economy, announcements of
technological innovations or new systems or enhancements by the Company or its
competitors, developments in patents or other intellectual property rights and
developments in the Company's relationships with clients and suppliers could
cause the price of the Company's Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market has experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. Such fluctuations could adversely affect the
market price of the Company's Common Stock. In addition, investors participating
in this offering will incur immediate and substantial dilution of book value.
See "Dilution."
9
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock in the public market
after this offering could adversely affect the market price of the Common Stock.
In addition to the 4,800,000 shares to be sold in this offering, approximately
741,000 additional shares issued and outstanding as of May 20, 1996 will be
eligible for immediate sale in the public market without restriction following
consummation of this offering pursuant to Rule 144(k) of the Securities Act of
1933, as amended (the "Securities Act"). Commencing 30 days and 60 days after
the date of this Prospectus, an additional 50,000 shares and 50,000 shares,
respectively, will be eligible for immediate sale in the public market without
restriction pursuant to Rule 144(k). Commencing 90 days after the date of the
Prospectus, approximately 168,000 shares outstanding and 18,000 shares subject
to options (if exercised) will be eligible for sale in the public market
pursuant to Rule 701 or Rule 144 of the Securities Act. Commencing 120 days
after the date of this Prospectus, an additional 50,000 shares will be eligible
for immediate sale in the public market without restriction pursuant to Rule
144. Commencing 180 days after the date of the Prospectus, upon the expiration
of lock-up agreements with the Underwriters, approximately 16,372,000 shares of
Common Stock issued and outstanding as of May 20, 1996 will be eligible for
immediate sale in the public market pursuant to Rule 144 or Rule 701, subject to
compliance with certain volume limitations and other restrictions under Rule
144. The Company intends to register a total of approximately 6,534,500 shares
of Common Stock that have been issued, that are reserved for issuance or that it
intends to reserve for issuance under its 1988 Incentive Stock Option Plan, 1990
Non-Qualified Stock Option Plan, 1993 Incentive Stock Option Plan, 1996
Directors' Stock Option Plan, 1996 Incentive Stock Option Plan and Employee
Stock Purchase Plan no earlier than 90 days after the date of this Prospectus.
Holders of an aggregate of approximately 9,907,062 shares of Common Stock issued
and outstanding as of May 20, 1996 have rights under certain circumstances to
require the Company to register their shares for future sale. See "Management --
Employee and Director Plans," "Description of Capital Stock -- Registration
Rights," "Shares Eligible for Future Sale" and "Underwriting."
CONTROL BY EXISTING STOCKHOLDERS
The Company's executive officers and directors will beneficially own
approximately 45.9% of the Company's outstanding shares of Common Stock
immediately following this offering (including 39.2% owned by Westar Capital
("Westar")), and the Company's Employee Stock Ownership Plan ("ESOP") will own
approximately 17.7% of the Company's outstanding shares of Common Stock
immediately following this offering. Purchasers of the shares offered hereby
will own approximately 22% of the Company's outstanding shares of Common Stock
immediately following this offering, and although entitled to vote on matters
submitted for a vote of the shareholders, will not control the outcome of such a
vote. Management, Westar and the ESOP will thus exert significant influence over
the affairs of the Company. See "Dilution," "Management -- Executive Officers
and Directors," "Certain Transactions" and "Principal and Selling Stockholders."
ANTI-TAKEOVER EFFECT OF CERTIFICATE OF INCORPORATION, BYLAWS, STOCKHOLDERS'
RIGHTS PLAN AND DELAWARE LAW
Under the Company's Certificate of Incorporation, the Board of Directors of
the Company has the authority, without action by the Company's stockholders, to
fix certain terms of, and to issue, shares of Preferred Stock. In addition, the
Company has adopted a Stockholders' Rights Plan, which, under certain
circumstances, would significantly dilute the interest in the Company of persons
seeking to acquire control of the Company without prior approval of the Board.
The Company has also recently reincorporated under Delaware law. The
Stockholders' Rights Plan, certain provisions of the Certificate of
Incorporation and certain provisions of Delaware law may have the effect of
delaying, deterring or preventing a change in control of the Company. Other
provisions in the Company's Certificate of Incorporation and Bylaws and Delaware
law impose procedural and other requirements that could make it more difficult
to effect certain corporate actions, including replacing incumbent directors.
Further, the Board is divided into three classes, each of which is to serve for
a staggered three-year term after the initial classification and election, which
may make it more difficult for a third party to gain control of the Board. By
virtue of these provisions, the Board of Directors of the Company may be able to
take or prevent actions affecting unaffiliated stockholders without such
stockholders' approval or consent. In addition, these provisions may adversely
affect the market price of the Company's Common Stock and reduce the possibility
that an investor may receive a premium for his or her shares in a tender offer.
See "Management -- Executive Officers and Directors," "Description of Capital
Stock -- Preferred Stock" and "Description of Capital Stock -- Anti-takeover
Effects of Provisions of the Certificate of Incorporation, Bylaws and the
Stockholders' Rights Plan."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,763,855 shares of
Common Stock offered by the Company hereby are estimated to be $39.6 million
(approximately $50.3 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $16.00 per
share, after deducting the underwriting discount and estimated offering expenses
payable by the Company. The Company intends to use the net proceeds from this
offering to repay certain outstanding indebtedness (including amounts incurred
after March 31, 1996) under its unsecured lines of credit, of which
approximately $38.0 million was outstanding as of March 31, 1996. Such
indebtedness bears interest at LIBOR (plus a margin ranging from .75% to 1.25%)
or the bank's reference rate. At March 31, 1996, the rates were 6.25% to 8.25%
per annum. The lines of credit mature on February 17, 1999 and 2001. The Company
expects to use the balance of the net proceeds, if any, for working capital and
other general corporate purposes, including acquisitions of complementary
businesses, products or technologies, although there are no current agreements,
arrangements or understandings with respect to any material acquisitions.
Pending use of the excess proceeds for the above purposes, the Company intends
to invest such funds in short-term, interest-bearing, investment grade
obligations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company will not receive any proceeds from the sale of shares of Common
Stock offered by the Selling Stockholders. See "Principal and Selling
Stockholders."
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock to date. The
Company currently intends to retain any future earnings for its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. In addition, the Company's bank credit agreements restrict
the Company's ability to pay dividends.
11
<PAGE>
CAPITALIZATION
The following table sets forth the current portion of long-term debt and the
capitalization of the Company (i) at March 31, 1996 and (ii) as adjusted to
reflect the sale of the 2,763,855 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $16.00 per share and the
application of the estimated net proceeds therefrom as set forth under "Use of
Proceeds" and to reflect the conversion of Non-Voting Common Stock into Common
Stock subsequent to March 31, 1996. This table should be read in conjunction
with the Consolidated Financial Statements of the Company, including the related
Notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
AS
ACTUAL ADJUSTED
---------- ----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Current portion of long-term debt (1)..................................................... $ 10,143 $ 10,143
---------- ----------
---------- ----------
Long-term debt (1)........................................................................ 53,090 15,090
Stockholders' equity (2):
Preferred Stock, $.05 par value, 10,000,000 shares authorized; no shares issued and
outstanding............................................................................ -- --
Common Stock, $.05 par value:
Voting: 40,000,000 shares authorized; 12,812,404 shares issued and outstanding
21,798,441 as adjusted............................................................... 641 1,090
Non-Voting: 12,000,000 shares authorized; 6,222,182 shares
issued and outstanding; none authorized, issued or
outstanding as adjusted.............................................................. 311 --
Additional paid-in capital.............................................................. -- 39,488
Retained earnings....................................................................... 48,487 48,487
Foreign currency translation adjustment................................................. (352) (352)
---------- ----------
Total stockholders' equity............................................................ 49,087 88,713
---------- ----------
Total capitalization................................................................ $ 102,177 $ 103,803
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) See Note 5 of Notes to Consolidated Financial Statements.
(2) Excludes (i) 2,312,898 shares reserved as of March 31, 1996 for future
issuance under the Company's 1988 Incentive Stock Option Plan, 1990
Nonstatutory Stock Option Plan and 1993 Incentive Stock Option Plan and (ii)
3,290,000 shares reserved for issuance under the 1996 Incentive Stock Option
Plan, the 1996 Directors' Stock Option Plan and the Employee Stock Purchase
Plan, which plans were adopted by the Board of Directors after March 31,
1996.
12
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1996, was
$46,125,000, or $2.42 per share of Common Stock. Net tangible book value per
share represents the amount of the Company's total tangible net worth (tangible
assets less total liabilities), divided by the number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of 2,763,855 shares
of Common Stock offered hereby at an assumed initial public offering price of
$16.00 per share (after deducting the underwriting discount and estimated
offering expenses) the net tangible book value, as adjusted, of the Company as
of March 31, 1996, would have been approximately $85,751,000 or $3.93 per share
of Common Stock. This represents an immediate increase from net tangible book
value per share to net tangible book value, as adjusted, of $1.51 per share to
existing stockholders and immediate dilution of $12.07 per share to new
investors purchasing shares in this offering. If the initial public offering
price is higher or lower, the dilution to new investors will be greater, or
less, respectively. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $ 16.00
Net tangible book value per share as of March 31, 1996............ $ 2.42
Increase per share attributable to new stockholders............... 1.51
---------
Adjusted net tangible book value after this offering................ 3.93
---------
Dilution per share to new stockholders (1).......................... $ 12.07
---------
---------
</TABLE>
- ------------------------
(1) Dilution is determined by subtracting adjusted net tangible book value per
share of Common Stock after the offering from the initial public offering
price paid by new investors for a share of Common Stock.
The following table sets forth, as of March 31, 1996, the number of shares
of Common Stock purchased from the Company, the total cash paid to the Company
and the average price paid per share by existing stockholders and by purchasers
of shares offered by the Company hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PER
------------------------- -------------------------- SHARE
NUMBER PERCENT AMOUNT PERCENT PRICE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders (1)................ 19,034,586 87.3% $ 1,611,000 3.5% $ 0.08
New Investors............................ 2,763,855 12.7 44,222,000 96.5 16.00
------------ ----- ------------- ----- -----------
Total................................ 21,798,441 100.0% $ 45,833,000 100.0% $ 2.10
------------ ----- ------------- ----- -----------
------------ ----- ------------- ----- -----------
</TABLE>
- ------------------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 16,998,441, or approximately 78.0%
of the total number of shares to be outstanding after this offering, and
will increase the number of shares held by new investors to 4,800,000, or
approximately 22.0% of the total number of shares to be outstanding after
this offering. If the Underwriters' over-allotment option is exercised in
full, the number of shares held by the new investors will increase to
5,520,000 shares, or approximately 24.5% of the total number of shares to be
outstanding after this offering.
The foregoing tables assume no exercise of the Underwriters' over-allotment
option or options to purchase shares of Common Stock outstanding and exercisable
under the Company's 1988 Incentive Stock Option Plan, 1990 Nonstatutory Stock
Option Plan, 1993 Incentive Stock Option Plan, 1996 Incentive Stock Option Plan
and 1996 Directors' Stock Option Plan. As of March 31, 1996, there were
outstanding under the Company's 1988 Incentive Stock Option Plan, 1990
Nonstatutory Stock Option Plan and 1993 Incentive Stock Option Plan, options to
purchase an aggregate of 1,745,136 shares of Common Stock at exercise prices
ranging from $0.20 to $7.38 per share, or a weighted average exercise price of
$3.31 per share. To the extent that such options are exercised, there will be
further dilution to new investors. See "Management -- Employee and Director
Plans" and Note 7 of Notes to Consolidated Financial Statements.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The consolidated statements of operations data presented below for the years
ended December 31, 1993, 1994 and 1995 and the consolidated balance sheet data
as of December 31, 1994 and 1995 are derived from the consolidated financial
statements of the Company, included elsewhere in this Prospectus, that have been
audited by Price Waterhouse LLP, independent accountants. The consolidated
financial data presented below for the years ended December 31, 1991 and 1992
and the consolidated balance sheet data as of December 31, 1991, 1992 and 1993
are derived from audited consolidated financial statements not included in this
Prospectus. The consolidated financial data as of March 31, 1996 and for the
three months ended March 31, 1995 and 1996 were derived from unaudited
consolidated financial statements prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the Company's financial position and results of operations. The results of
operations for any interim period are not necessarily indicative of results to
be expected for a full year. The data set forth below should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and the Notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Software and services............................ $ 90,532 $ 106,348 $ 116,563 $ 155,247 $ 197,282 $ 46,484 $ 55,421
Equipment sales and services..................... 52,981 39,739 49,501 33,558 31,981 6,528 4,834
--------- --------- --------- --------- --------- --------- ---------
Total........................................ 143,513 146,087 166,064 188,805 229,263 53,012 60,255
Cost of revenue:
Software and services............................ 58,360 65,904 72,758 103,046 127,702 29,813 35,228
Equipment sales and services..................... 33,399 27,097 31,561 19,476 19,538 3,701 2,933
--------- --------- --------- --------- --------- --------- ---------
Total........................................ 91,759 93,001 104,319 122,522 147,240 33,514 38,161
--------- --------- --------- --------- --------- --------- ---------
Gross profit....................................... 51,754 53,086 61,745 66,283 82,023 19,498 22,094
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development......................... 11,121 12,170 16,007 16,700 17,815 4,504 5,642
Selling, general and administrative.............. 27,728 24,617 28,148 34,160 42,102 10,057 11,009
Consolidation and relocation..................... -- -- 4,096 (364) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total........................................ 38,849 36,787 48,251 50,496 59,917 14,561 16,651
--------- --------- --------- --------- --------- --------- ---------
Operating income................................... 12,905 16,299 13,494 15,787 22,106 4,937 5,443
Interest expense................................... 4,745 5,049 4,609 4,284 4,966 1,168 1,206
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative effect of
accounting change................................. 8,160 11,250 8,885 11,503 17,140 3,769 4,237
Income tax provision............................... 3,107 4,355 4,330 5,334 6,770 1,488 1,674
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of accounting
change (1)........................................ 5,053 6,895 4,555 6,169 10,370 2,281 2,563
Cumulative effect of accounting change (1)......... -- -- 2,408 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income......................................... $ 5,053 $ 6,895 $ 6,963 $ 6,169 $ 10,370 $ 2,281 $ 2,563
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of accounting
change
per share (2)..................................... $ 0.20 $ 0.30 $ 0.20 $ 0.28 $ 0.49 $ 0.11 $ 0.12
--------- --------- --------- --------- --------- --------- ---------
Net income per share (2)........................... $ 0.20 $ 0.30 $ 0.31 $ 0.28 $ 0.49 $ 0.11 $ 0.12
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in per share computation............... 25,149 22,675 22,129 21,882 21,138 21,494 20,659
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- -----------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash................................................. $ 2,334 $ 9,053 $ 8,158 $ 1,966 $ 6,627 $ 5,930
Working capital...................................... 23,801 23,757 20,029 11,454 23,440 28,343
Total assets......................................... 117,485 125,997 140,922 157,331 180,450 182,824
Long-term debt less current portion (3).............. 43,070 42,734 40,167 37,647 51,155 53,090
Stockholders' equity................................. 27,099 29,445 35,633 39,861 46,590 49,087
</TABLE>
- ------------------------------
(1) In 1993, the Company adopted SFAS 109, resulting in an accumulated credit
to income for an adjustment in the calculation of income tax expense.
(2) Net income per share is based on the weighted average number of shares of
Common Stock and dilutive common equivalent shares from stock options and
warrants outstanding during the period using the treasury stock method.
Pursuant to certain Securities and Exchange Commission Staff Accounting
Bulletins, common and common equivalent shares issued during the 12-month
period prior to the date of the initial filing of the Registration
Statement have been included in the calculation as if they were outstanding
for all periods prior to their issuance. See Note 2 of Notes to
Consolidated Financial Statements.
(3) See Note 5 of Notes to Consolidated Financial Statements.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Founded in 1969, USCS is a leading provider of customer management software
and services to the global communications industry. Revenue is derived primarily
from providing software and bill presentment services to cable television and
multi-service providers in the U.S. and 13 other countries and bill presentment
services to telecommunication companies in the U.S. Software and bill
presentment services to cable television and multi-service providers are
generally provided under bundled service arrangements. Most of the Company's
revenue is derived based on the number of subscribers or end-users of the
Company's clients, the number of billing statements mailed and/or the number of
images, generally one page side, produced. Most of the Company's revenue is
derived under long-term contracts with terms ranging from three to seven years.
Over the three years ended December 31, 1995, the Company's revenue from
software and services has increased at an average rate of 23% per year and has
grown from approximately 70% of the Company's total revenue in 1993 to over 86%
in 1995. The increase in revenue was attributable primarily to the addition of
Ameritech as a significant client in 1994 and increased bill presentment
services volume from cellular clients. Also contributing to the growth in
revenue was an increase in sales of the Company's software and services in the
international marketplace following the introduction of Intelecable in 1993. Two
significant clients represented an aggregate of 33% and 31% of the Company's
revenue in 1995 and 1994, respectively. Revenue from the ten largest accounts
aggregated 63% of the Company's total revenue in 1995 and 1994. See Note 11 of
Notes to Consolidated Financial Statements.
The Company provides software and services to North American cable
television and multi-service providers primarily through a direct sales force.
Outside of North America, the Company markets its software services primarily
through strategic partners, such as system integrators and computer hardware
manufacturers, which provide local sales and support. Building and maintaining
relationships with its clients is an important part of the Company's strategy
because selling cycles can extend a year or longer. The Company has committed
increased resources to the international, multi-service and telecommunications
markets because it believes these represent opportunities to grow at rates
greater than in the U.S. cable television marketplace alone. In 1993, the
Company increased its annual expenditures for research and development by over
30% in support of its Intelecable software product, which is being marketed to
cable television companies outside the U.S. and multi-service providers in the
U.S. and internationally.
Revenue from selling computer hardware and providing associated maintenance
and leasing services has been declining in absolute dollars and as a percentage
of total revenue. Revenue from these activities was 30% of total revenue in 1993
and had declined to less than 10% in the first quarter of 1996. The Company
expects that equipment sales and services revenue will continue to decline as a
percentage of revenue.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
consolidated statements of operations and the percentage of revenue represented
by each line item:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------- ---------------------
1993 1994 1995 1995
--------------------- --------------------- --------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services......... $ 116,563 70.2% $ 155,247 82.2% $ 197,282 86.1% $ 46,484 87.7%
Equipment sales and
services..................... 49,501 29.8 33,558 17.8 31,981 13.9 6,528 12.3
--------- ----- --------- ----- --------- ----- --------- -----
Total....................... 166,064 100.0 188,805 100.0 229,263 100.0 53,012 100.0
Cost of revenue:
Software and services......... 72,758 43.8 103,046 54.6 127,702 55.7 29,813 56.2
Equipment sales and
services..................... 31,561 19.0 19,476 10.3 19,538 8.5 3,701 7.0
--------- ----- --------- ----- --------- ----- --------- -----
Total....................... 104,319 62.8 122,522 64.9 147,240 64.2 33,514 63.2
--------- ----- --------- ----- --------- ----- --------- -----
Gross profit.................... 61,745 37.2 66,283 35.1 82,023 35.8 19,498 36.8
--------- ----- --------- ----- --------- ----- --------- -----
Operating expenses:
Research and development...... 16,007 9.6 16,700 8.8 17,815 7.8 4,504 8.5
Selling, general and
administrative............... 28,148 17.0 34,160 18.1 42,102 18.3 10,057 19.0
Consolidation and
relocation................... 4,096 2.4 (364) (0.2) -- -- -- --
--------- ----- --------- ----- --------- ----- --------- -----
Total....................... 48,251 29.0 50,496 26.7 59,917 26.1 14,561 27.5
--------- ----- --------- ----- --------- ----- --------- -----
Operating income................ 13,494 8.2 15,787 8.4 22,106 9.7 4,937 9.3
Interest expense................ 4,609 2.8 4,284 2.3 4,966 2.2 1,168 2.2
--------- ----- --------- ----- --------- ----- --------- -----
Income before income taxes and
cumulative effect of accounting
change......................... 8,885 5.4 11,503 6.1 17,140 7.5 3,769 7.1
Income tax provision............ 4,330 2.6 5,334 2.8 6,770 3.0 1,488 2.8
--------- ----- --------- ----- --------- ----- --------- -----
Income before cumulative effect
of accounting change........... 4,555 2.8 6,169 3.3 10,370 4.5 2,281 4.3
Cumulative effect of accounting
change (1)..................... 2,408 1.4 -- -- -- -- -- --
--------- ----- --------- ----- --------- ----- --------- -----
Net income...................... $ 6,963 4.2% $ 6,169 3.3% $ 10,370 4.5% $ 2,281 4.3%
--------- ----- --------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- ----- --------- -----
<CAPTION>
1996
---------------------
<S> <C> <C>
Revenue:
Software and services......... $ 55,421 92.0%
Equipment sales and
services..................... 4,834 8.0
--------- -----
Total....................... 60,255 100.0
Cost of revenue:
Software and services......... 35,228 58.5
Equipment sales and
services..................... 2,933 4.8
--------- -----
Total....................... 38,161 63.3
--------- -----
Gross profit.................... 22,094 36.7
--------- -----
Operating expenses:
Research and development...... 5,642 9.4
Selling, general and
administrative............... 11,009 18.3
Consolidation and
relocation................... -- --
--------- -----
Total....................... 16,651 27.7
--------- -----
Operating income................ 5,443 9.0
Interest expense................ 1,206 1.9
--------- -----
Income before income taxes and
cumulative effect of accounting
change......................... 4,237 7.1
Income tax provision............ 1,674 2.8
--------- -----
Income before cumulative effect
of accounting change........... 2,563 4.3
Cumulative effect of accounting
change (1)..................... -- --
--------- -----
Net income...................... $ 2,563 4.3%
--------- -----
--------- -----
</TABLE>
- ------------------------------
(1) In 1993, the Company adopted SFAS 109, resulting in an accumulated credit of
$2.4 million.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
REVENUE. Revenue is derived primarily from providing customer management
software and services to cable television and multi-service providers in the
U.S. and 13 other countries and from providing bill presentment services
primarily to telecommunications companies in the U.S. Software and bill
presentment services to cable television and multi-service providers are
generally provided under bundled service arrangements. In addition, the Company
sells computer hardware and associated maintenance and leasing services to cable
television service providers in connection with providing the Company's software
and provides design, printing and graphics services in connection with its bill
presentment services. Most of the software and services revenue is derived based
on the number of end-users of the services of the Company's clients, the number
of bills mailed and/or the number of images produced under long-term contracts,
which usually have terms ranging from three to seven years. The Company
generally recognizes software and bill presentment services revenue
(collectively referred to as "software and services revenue") as services are
performed. Certain of the Company's software licenses provide for fixed or
minimum fees. Fixed fees and the present value of minimum fees under software
licenses are recognized as revenue upon installation. Such amounts have not been
material. Most contracts include provisions for inflation-based adjustments,
including changes in paper costs.
Total revenue increased by 14% to $60.3 million in the first quarter of 1996
from $53.0 million in the comparable quarter in 1995. The increase was
attributable to growth in revenue from software and services partially offset by
a decline in equipment sales and services revenue. Software and services
revenue, which was 92% of total revenue in the first quarter of 1996 versus 88%
in the comparable 1995 quarter, increased in the first quarter of 1996 by 19%
over the comparable 1995 quarter. Customer management software and
16
<PAGE>
services revenue increased by 13% to $32.5 million in the first quarter of 1996
from $28.8 million in the comparable 1995 quarter. The increase is attributable
to growth in sales to U.S. domestic cable television and multi-service
providers, and to international clients. Bill presentment revenue provided
primarily to telecommunications companies as a stand-alone service increased by
30% to $22.9 million in the first quarter of 1996 from $17.7 million in the
comparable quarter of the prior year. Equipment sales and services declined in
the first quarter of 1996 by 26% from the comparable quarter in 1995.
TCI, which accounted for $9.8 million or 16% of total revenue in the first
quarter of 1996 and $10.2 million or 19% in the first quarter of 1995, has
announced a plan to begin the replacement of the Company's software with an
in-house system. In June 1996, the Company entered into a new 3- 1/2 year
agreement with TCI to continue to provide customer management software and bill
presentment services for TCI. TCI may remove subscribers from the agreement
during its term, subject to price increases based on the number of subscribers
remaining under contract. The Company cannot estimate when this alternative
system will become available to TCI and when they would be successful in
converting their subscriber base to the TCI system. Another client, which
accounted for 4% of total revenue in the first quarter of 1996 and recently
extended its contract with the Company to early 1997, has orally advised the
Company that it may select an alternative system for its customer management
software requirements.
The Company's largest bill presentment client, Ameritech, accounted for 16%
of total revenue in the first quarter of 1996 and 13% in the comparable quarter
of 1995. Ameritech became a client early in 1994 and has long-term contracts
with the Company expiring in 2000 and 2001.
COST OF REVENUE AND GROSS PROFIT. Cost of software and services revenue
consists primarily of direct labor, equipment-related expenses, cost of
materials such as paper and facilities expense. Cost of equipment sales and
services revenue consists primarily of computer hardware purchased for resale or
lease and third party maintenance.
The Company's gross profit margin of approximately 37% in the first quarter
of 1996 remained unchanged from the first quarter of 1995. Customer management
software and services gross profit margin declined to 44% in the first quarter
of 1996 from 45% in the comparable quarter of 1995. Bill presentment services
gross profit margin increased to 26% in the first quarter of 1996 from 22% in
the comparable 1995 quarter due to economies of scale resulting from increased
revenue. The gross profit margin on equipment related revenue declined to 39% in
1996 from 43% in 1995 because of lower prices realized on equipment sales.
RESEARCH AND DEVELOPMENT. Research and development costs relate primarily
to on-going product development and consist of personnel costs, consulting,
testing, supplies, facilities and depreciation expenses. Once the product under
development reaches technological feasibility, the development expenditures are
capitalized and amortized. See Note 2 of Notes to Consolidated Financial
Statements.
Under certain development agreements, a portion of software development
expense is shared by development partners. The Company retains the rights to any
development and third-party funds may be subject to certain performance
milestones, which, if not met, may require the Company to repay the partner or
to expend its own capital for the development without reimbursement from the
partner.
The Company is currently in discussions with a development partner to revise
the milestone schedule for the completion of the porting and the enhancement of
Intelecable on that partner's computer platform. In the event it is unable to
reach an understanding for a revised milestone schedule, the Company's
capitalized development cost would not be reduced by the remaining unreimbursed
portion under this agreement, of up to $3.2 million, and will be expensed over
the life of the product. The Company has evaluated the estimated net realizable
value of capitalized development costs related to the development agreement and
has determined that such costs are not in excess of estimated future net
revenues to be earned from the product under development.
The Company spent $5.9 million in the first quarter of 1996, inclusive of
amounts reimbursable by development partners on research and development versus
$4.6 million in the comparable quarter of 1995. This represents an increase of
27% primarily from increased spending on Intelecable.
17
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling expenses consist of
compensation for sales and marketing personnel including commissions and related
bonuses, travel, trade shows and promotional expenses. General and
administrative expenses consist of compensation for administration, finance and
general management personnel, as well as legal and accounting fees.
Total sales and marketing expenses increased by 28% in the first quarter of
1996 in comparison to the first quarter of 1995. The increase in sales and
marketing expenditures was primarily because of the addition of sales and
marketing personnel committed to the international, multi-service and
telecommunications market. General and administrative expenses remained
unchanged between the quarters.
INCOME TAXES. The Company's provision for income taxes represents estimated
federal, state and foreign income taxes. The effective income tax rate of 39.5%
in the first quarter of 1996 was unchanged from the comparable quarter in 1995
and was based on the Company's anticipated effective rate for the full year.
NET INCOME. Net income in the first quarter of 1996 increased by 12% to
$2.6 million from $2.3 million in the comparable 1995 quarter primarily because
of the factors cited above.
THE YEAR 1995 COMPARED TO 1994
REVENUE. Total revenue increased by 21% to $229.3 million in 1995 from
$188.8 million in 1994. The increase was attributable to growth in revenue from
software and services, partially offset by a decline in equipment sales and
services revenue. Software and services revenue, which was 86% of total revenue
in 1995 versus 82% in 1994, increased in 1995 by 27% over the prior year.
Customer management software and services revenue increased by 15% to $116.9
million in 1995 from $101.4 million in 1994. The increase was attributable to
growth in sales to international and multi-service clients and the migration of
U.S. clients to expanded services for which higher fees are charged.
Bill presentment services revenue increased by 49% to $80.4 million in 1995
from $53.8 million in 1994. Ameritech accounted for 16% and 13% of total revenue
in 1995 and 1994, respectively. Revenue from Ameritech, which became a client in
1994, increased in 1995 by $12.6 million reflecting a full year of service and
growth in its volume of bills presented. Revenue derived from wireless service
providers, exclusive of Ameritech, also increased in 1995 reflecting an increase
in the numbers of clients served by the Company and growth in the number of
wireless service users. Another significant client, TCI, accounted for $39.3
million or 17% of total revenue in 1995, and $34.8 million or 18% in 1994.
Equipment sales and services revenue declined in 1995 by 5% from the prior
year, primarily due to lower equipment sales.
COST OF REVENUE AND GROSS PROFIT. The Company's gross profit margin in 1995
increased to approximately 36% from approximately 35% in 1994. Customer
management software and services gross profit margin increased to 43% in 1995
from 40% in 1994. The improvement is primarily related to increased efficiencies
in operations and higher prices. When provided on a stand-alone basis, bill
presentment services gross profit margin increased to 24% in 1995 from 21% in
1994 because of efficiencies related to increased volume. Depreciation and
amortization expenses included in cost of revenue were $12.6 million in 1995 and
$11.0 million in 1994, an increase of 15%. Such expenses have increased because
of the Company's capital expenditures for equipment and facilities to support
primarily bill presentment services. The gross profit margin on
equipment-related revenue was 39% in 1995 versus 42% in 1994. The margins
decreased because of lower prices realized on equipment sales.
RESEARCH AND DEVELOPMENT. The Company spent $19.8 million in 1995 on
research and development versus $18.0 million in 1994, an increase of 10%.
Included in 1995 and 1994 were expenditures of $2.0 million and $1.3 million,
respectively, that were reimbursable by development partners. See Note 2 of
Notes to Consolidated Financial Statements.
SELLING, GENERAL AND ADMINISTRATIVE. Total sales and marketing expenses
increased by 30% in 1995 in comparison to 1994. The increase in personnel and
sales and marketing expenditures was due primarily to the Company's addition of
sales and marketing personnel, reflecting an increased commitment to the
international, multi-service and telecommunications market. General and
administrative expenses increased by 21% in 1995 compared to 1994 to support
higher levels of sales, but remained constant as a percentage of total revenue.
18
<PAGE>
INCOME TAXES. In 1995, the Company's effective tax rate was less than 40%
in comparison to 46% in
1994. In 1994, losses in a foreign subsidiary were incurred and not tax
effected. The Company anticipates the 1995 effective income tax rate to be
indicative of the rate in future periods.
NET INCOME. Net income in 1995 increased by 68% from $6.2 million in 1994
to $10.4 million. Net income per share in 1995 increased 75% from $0.28 in 1994
to $0.49 because of the higher earnings and the Company's redemption of
1,044,521 shares pursuant to its obligation under the ESOP. See "Management --
Employee and Director Plans."
THE YEAR 1994 COMPARED TO 1993
REVENUE. Total revenue increased by 14% to $188.8 million in 1994 from
$166.1 million in 1993. This increase was attributable to an increase in
software and services revenue, partially offset by a decrease in revenue from
equipment sales and services. Software and services revenue increased by 33%
over 1993 and represented 82% of total revenue in 1994 as compared to 70% in
1993.
Customer management software and services revenue increased by 6% to $101.4
million in 1994 from $95.9 million in 1993. Expansion into new countries and
sales to multi-service clients contributed to the increase. Bill presentment
services revenue increased by 160% to $53.8 million in 1994 from $20.7 million
in 1993. The addition of Ameritech, which accounted for 13% of total revenues in
1994, as a client and growth in services to the cellular market accounted for
the increase. In 1994, equipment sales and services decreased by 32% as compared
to 1993.
COST OF REVENUE AND GROSS PROFIT. The Company's gross profit margin
decreased to approximately 35% in 1994 from 37% in 1993. Software and services
gross profit margin was 34% in 1994 versus 38% in 1993 due to decreased gross
margins on customer management software and services and a revenue mix that
included a higher proportion of lower-margin bill presentment services. Customer
management software and services gross profit margin declined to 40% in 1994
from 41% in 1993. When provided on a stand-alone basis, bill presentment
services gross profit margin increased to 21% in 1994 from 20% in 1993. The
gross profit margin on equipment-related revenue increased to 42% in 1994 from
36% in 1993. The improved margin percentage resulted from higher margins on
equipment sold despite the decreased total revenue.
RESEARCH AND DEVELOPMENT. The Company spent $18.0 million in 1994 on
research and development versus $16.6 million in 1993, an increase of 8%.
Included in 1994 were expenditures of $1.3 million and $0.6 million,
respectively that were reimbursable by development partners. See Note 2 of Notes
to the Consolidated Financial Statements.
SELLING, GENERAL AND ADMINISTRATIVE. Selling and marketing expenses
increased by 22% in 1994 in comparison to the prior year. This increase was
attributable primarily to additional selling efforts to the international,
multi-service and telecommunications markets. General and administrative
expenses increased 18% in 1994 over 1993 because of the growth of the overall
business.
CONSOLIDATION AND RELOCATION. In 1993, the Company charged to expense
approximately $4.1 million pertaining to the consolidation and relocation of
customer support activities in the U.S. and relocation of the Company's offices
in the U.K.
INCOME TAXES. In 1993, the Company adopted SFAS 109, resulting in an
accumulated credit to income of $2.4 million. Income tax expense in 1993,
exclusive of the change in accounting, was 49% of pretax income, versus 46% in
1994. In both years, losses in a foreign subsidiary were incurred and not tax
effected.
NET INCOME. Net income in 1994 increased 35% from $4.6 million in 1993 to
$6.2 million, exclusive of the accounting change. Net income per share in 1994
increased 33% from $0.21 in 1993 to $0.28, exclusive of the accounting change
which was $2.4 million or $0.11 per share. During 1994, the number of shares
outstanding were reduced by 560,067 primarily from the Company's redemption of
shares pursuant to its obligation under the ESOP. See "Management -- Employee
and Director Plans."
19
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial data
for each quarter of 1994 and 1995 and the first quarter of 1996 and the
percentage of revenue represented by each line item. The Company believes that
all necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the selected
quarterly information when read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere herein. The operating
results for any quarter are not necessarily indicative of results for any
subsequent period or for the entire fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
1994 1995
-------------------------------------------- ---------------------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30
----------- --------- --------- --------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services................... $ 32,688 $ 38,777 $ 40,352 $ 43,430 $ 46,484 $ 46,129 $ 50,218
Equipment sales and services............ 8,004 11,140 5,234 9,180 6,528 10,022 6,459
----------- --------- --------- --------- ----------- --------- ---------
Total................................. 40,692 49,917 45,586 52,610 53,012 56,151 56,677
Cost of revenue:
Software and services................... 22,024 24,972 26,455 29,595 29,813 31,102 32,509
Equipment sales and services............ 5,031 6,560 2,830 5,055 3,701 5,996 4,124
----------- --------- --------- --------- ----------- --------- ---------
Total................................. 27,055 31,532 29,285 34,650 33,514 37,098 36,633
----------- --------- --------- --------- ----------- --------- ---------
Gross profit.............................. 13,637 18,385 16,301 17,960 19,498 19,053 20,044
----------- --------- --------- --------- ----------- --------- ---------
Operating expenses:
Research and development................ 4,072 4,052 4,570 4,006 4,504 3,917 4,295
Selling, general and administrative..... 7,537 8,427 7,530 10,302 10,057 10,120 9,784
----------- --------- --------- --------- ----------- --------- ---------
Total................................. 11,609 12,479 12,100 14,308 14,561 14,037 14,079
----------- --------- --------- --------- ----------- --------- ---------
Operating income.......................... 2,028 5,906 4,201 3,652 4,937 5,016 5,965
Interest expense.......................... 1,034 985 1,116 1,149 1,168 1,236 1,346
----------- --------- --------- --------- ----------- --------- ---------
Income before income taxes................ 994 4,921 3,085 2,503 3,769 3,780 4,619
Income tax provision...................... 463 2,283 1,431 1,157 1,488 1,493 1,825
----------- --------- --------- --------- ----------- --------- ---------
Net income................................ $ 531 $ 2,638 $ 1,654 $ 1,346 $ 2,281 $ 2,287 $ 2,794
----------- --------- --------- --------- ----------- --------- ---------
----------- --------- --------- --------- ----------- --------- ---------
Net income per share...................... $ 0.02 $ 0.12 $ 0.08 $ 0.06 $ 0.11 $ 0.11 $ 0.13
----------- --------- --------- --------- ----------- --------- ---------
----------- --------- --------- --------- ----------- --------- ---------
Shares used in per share calculation...... 21,995 21,963 21,864 21,707 21,494 21,186 21,078
----------- --------- --------- --------- ----------- --------- ---------
----------- --------- --------- --------- ----------- --------- ---------
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
1994 1995
-------------------------------------------- ---------------------------------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30
----------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services................... 80.3% 77.7% 88.5% 82.6% 87.7% 82.2% 88.6%
Equipment sales and services............ 19.7 22.3 11.5 17.4 12.3 17.8 11.4
----------- --------- --------- --------- ----------- --------- ---------
Total................................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Software and services................... 54.1 50.1 58.0 56.3 56.2 55.4 57.3
Equipment sales and services............ 12.4 13.1 6.2 9.6 7.0 10.7 7.3
----------- --------- --------- --------- ----------- --------- ---------
Total................................. 66.5 63.2 64.2 65.9 63.2 66.1 64.6
----------- --------- --------- --------- ----------- --------- ---------
Gross profit.............................. 33.5 36.8 35.8 34.1 36.8 33.9 35.4
----------- --------- --------- --------- ----------- --------- ---------
Operating expenses:
Research and development................ 10.0 8.1 10.1 7.6 8.5 7.0 7.6
Selling, general and administrative..... 18.5 16.9 16.5 19.6 19.0 18.0 17.3
----------- --------- --------- --------- ----------- --------- ---------
Total................................. 28.5 25.0 26.6 27.2 27.5 25.0 24.9
----------- --------- --------- --------- ----------- --------- ---------
Operating income.......................... 5.0 11.8 9.2 6.9 9.3 8.9 10.5
Interest expense.......................... 2.6 1.9 2.4 2.1 2.2 2.2 2.4
----------- --------- --------- --------- ----------- --------- ---------
Income before income taxes................ 2.4 9.9 6.8 4.8 7.1 6.7 8.1
Income tax provision...................... 1.1 4.6 3.2 2.2 2.8 2.6 3.2
----------- --------- --------- --------- ----------- --------- ---------
Net income................................ 1.3% 5.3% 3.6% 2.6% 4.3% 4.1% 4.9%
----------- --------- --------- --------- ----------- --------- ---------
----------- --------- --------- --------- ----------- --------- ---------
<CAPTION>
1996
-----------
DEC. 31 MAR. 31
--------- -----------
<S> <C> <C>
Revenue:
Software and services................... $ 54,451 $ 55,421
Equipment sales and services............ 8,972 4,834
--------- -----------
Total................................. 63,423 60,255
Cost of revenue:
Software and services................... 34,278 35,228
Equipment sales and services............ 5,717 2,933
--------- -----------
Total................................. 39,995 38,161
--------- -----------
Gross profit.............................. 23,428 22,094
--------- -----------
Operating expenses:
Research and development................ 5,099 5,642
Selling, general and administrative..... 12,141 11,009
--------- -----------
Total................................. 17,240 16,651
--------- -----------
Operating income.......................... 6,188 5,443
Interest expense.......................... 1,216 1,206
--------- -----------
Income before income taxes................ 4,972 4,237
Income tax provision...................... 1,964 1,674
--------- -----------
Net income................................ $ 3,008 $ 2,563
--------- -----------
--------- -----------
Net income per share...................... $ 0.14 $ 0.12
--------- -----------
--------- -----------
Shares used in per share calculation...... 20,796 20,659
--------- -----------
--------- -----------
1996
-----------
DEC. 31 MAR. 31
--------- -----------
<S> <C> <C>
Revenue:
Software and services................... 85.9% 92.0%
Equipment sales and services............ 14.1 8.0
--------- -----------
Total................................. 100.0 100.0
Cost of revenue:
Software and services................... 54.1 58.4
Equipment sales and services............ 9.0 4.9
--------- -----------
Total................................. 63.1 63.3
--------- -----------
Gross profit.............................. 36.9 36.7
--------- -----------
Operating expenses:
Research and development................ 8.0 9.4
Selling, general and administrative..... 19.1 18.3
--------- -----------
Total................................. 27.1 27.7
--------- -----------
Operating income.......................... 9.8 9.0
Interest expense.......................... 2.0 1.9
--------- -----------
Income before income taxes................ 7.8 7.1
Income tax provision...................... 3.1 2.8
--------- -----------
Net income................................ 4.7% 4.3%
--------- -----------
--------- -----------
</TABLE>
20
<PAGE>
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on various factors. These factors include
the number of subscribers or end-users serviced by the Company's clients, the
timing and size of new or expiring contracts, the effort involved in converting
new clients to the Company's systems, labor and material costs, the volume of
custom design, graphics and printing services contracted by the Company's
clients, and the success of current clients' migration to alternative software
and services. The Company may invest significant time and financial resources
towards securing and implementing contracts and potential contracts, such as the
addition of Ameritech in 1994 as a client, or developing new products and
services. Revenue from such activities may be received, if at all, only in
future quarters. Thus, the Company may incur significant expenses in a
particular quarter that are not offset by corresponding revenue and conversely
may receive additional revenue in future quarters for which related expenses
were incurred in prior quarters.
Over the nine quarters ended March 31, 1996, the most significant quarterly
variances in revenue have been the addition of Ameritech as a bill presentment
client in early 1994, which resulted in the increase in software and services
revenue in the second quarter of 1994, and the variation in computer hardware
sales from quarter to quarter. In general, the Company has experienced lower
revenue from equipment sales in the second half, and particularly the third
quarter, of each year. In the third quarters of 1994 and 1995, equipment sales
and services revenue declined by $5.9 million or 53% and $3.6 million or 36%,
respectively, over the immediate prior quarters.
The overall gross margin increased to 37% and 36% in the second and third
quarters of 1994 from 34% in the first quarter. The lower margin in the first
quarter resulted from labor and equipment costs incurred in adding Ameritech as
a client. In the fourth quarter of 1994, the gross margin was reduced to 34% as
the Company incurred additional costs and increased staffing in connection with
adding approximately 287,000 square feet of leased facilities to accommodate the
expansion of bill presentment services. Gross margin improved to 37% in the
first quarter of 1995 as the facilities became operational and software and
services revenue increased. In the second quarter of 1995, gross margin declined
to 34%. The Company was anticipating the addition of a large bill presentment
services client and, accordingly, added the necessary equipment and personnel.
When it became evident that the prospective client would not outsource its
business, the equipment and personnel were redeployed or eliminated, helping to
improve gross margin in the third and fourth quarters of 1995 and the first
quarter of 1996.
Research and development expenses can vary from quarter to quarter depending
on changing priorities and client needs. In the fourth quarter of 1995, the
Company increased its spending level primarily to upgrade its Intelecable
software product. Selling, general and administrative expenses can vary from
quarter to quarter based on revenue, contract signings and the initiation of
market and promotional programs. In the fourth quarter of 1994, the Company
increased its selling and marketing expenditures by 66% over the average of the
first three quarters of that year. This increase was directed at expanding the
Company's international presence, marketing Intelecable in the U.S. and
increasing its focus on selling bill presentment services.
LIQUIDITY AND CAPITAL RESOURCES
From 1993 through the first quarter of 1996, the primary sources of
financing of the Company's growth has been cash provided by operations and
borrowings from banks and financial institutions. During the 13-quarter period,
the Company generated $82.7 million in net cash from operations and increased
its net borrowings by $10.1 million. In the same period, net capital
expenditures were $86.8 million, and repurchases by the Company of its common
stock were $8.9 million.
The Company collects from its clients and remits to the U.S. Postal Service
a substantial amount of postage. All contracts allow the Company to pre-bill
and/or require deposits from its clients to mitigate the effect on cash flow. As
of March 31, 1996, 35% of the Company's accounts receivable represented amounts
due from clients for postage. Postage collections and remittances are not
included in the Company's statements of operations.
21
<PAGE>
At March 31, 1996, the Company had $5.9 million of cash, $62.8 million of
accounts receivable (including postage receivable of $22.2 million), $5.7
million of current net investment in leases, and $28.3 million of working
capital. At the end of the first quarter of 1996, the Company and a subsidiary
had combined borrowings of $38.0 million under unsecured bank credit
arrangements with a total borrowing availability of $65.0 million. Of the $63.2
million of total debt outstanding at March 31, 1996, $10.1 million is due over
the following 12-month period. The Company plans to use a portion of the
proceeds from this offering to repay borrowings under the bank credit
agreements. See "Use of Proceeds."
The Company plans to continue making significant investments in capital
equipment, facilities and research and development. The Company believes that
the proceeds of this offering, together with net cash flow from operations and
borrowing availability, will be sufficient to support operations through the
next twelve months. The above statements that are not historical facts or
statements of current status are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995 and as such are subject to the
risks and uncertainties set forth under "Risk Factors" herein. Actual results
may differ materially.
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BUSINESS
USCS is a leading provider of customer management software and services to
the global communications industry. The Company's clients include cable
television, wireless and land-line telephony, DBS and multi-service providers in
the U.S. and 13 other countries. The Company's software-based solutions enable
its clients to manage critical customer relationship functions, including new
account set-up, order processing, customer support, management reporting and
marketing analysis. The Company also provides bill presentment services, which
include generation of high quality customized billing statements that are
produced in automated facilities designed to minimize turnaround time and
mailing costs. USCS also offers a variety of complementary professional
services, including consulting, application development and client training, as
well as statement design services that allow clients to use the billing
statement as a communication and marketing tool. The Company's clients typically
enter into contracts with terms ranging from three to seven years. Clients are
billed monthly, generally based on the number of end-users they serve. As a
result, a significant portion of the Company's revenue is recurring and
increases as the service provider's customer base grows. In 1995, the Company's
revenue totaled $229.3 million, of which 73% was generated from companies which
have been clients of USCS for three or more years.
USCS has been providing comprehensive customer management software and
services to the cable television industry for more than 25 years. The Company's
software currently supports 53% of U.S. cable subscribers and is used by 15 of
the 20 largest cable television service providers in the U.S. The Company
provides bill presentment services to clients serving 53% of U.S. cable
television subscribers, 33% of U.S. cellular users and 9% of U.S. land-line
telephony customers and to a variety of other service providers. The Company's
bill presentment clients include substantially all of its domestic customer
management software clients and other service providers such as Ameritech,
AirTouch and Frontier. The Company currently processes over 60 million bills per
month and is the largest centralized first class mailer in the U.S., responsible
for generating more than 1.5% of the total volume of all U.S. first class mail,
including customer remittance volume. Bill presentment services are generally
provided to software clients in bundled contracts and are also sold separately.
The Company has extended its leadership position by introducing products and
services that address the rapidly changing global communications market.
Technological advances, regulatory changes and international growth are
transforming the structure and competitive dynamics of the industry. Markets
that were once segmented by service and geographic location are converging into
a single global communications market which includes traditional service
providers and new entrants offering a combination of services. The rapidly
shifting and increasingly complex nature of the converging communications market
has increased the need among service providers for sophisticated and flexible
customer management software and services.
In 1993, the Company deployed Intelecable, which the Company believes is the
first customer management software product designed for multi-service providers.
The Company also believes that Intelecable is the only integrated multi-service
customer management software system currently operational and commercially
available. Intelecable is presently installed for 17 clients worldwide,
including combined cable/telephony service providers in the U.K., a combined
cable/wireless cable/DBS provider in Australia and two interactive video
providers in the U.S., including BellSouth Interactive. The Company has also
expanded its bill presentment services to support multi-service providers by
offering consolidated billing statements that combine data from multiple
services, such as wireless and land-line telephony, into a single integrated
billing statement.
COMMUNICATIONS MARKET DYNAMICS
The communications industry includes cable television, wireless and
land-line telephony, paging, personal communications services ("PCS"), DBS,
wireless cable, interactive broadband and other services. Technological advances
and regulatory changes in the U.S. and internationally have transformed the
structure and competitive dynamics of the industry. Markets that were formerly
segmented by service and geographical location are converging into a single,
worldwide communications market, which includes both traditional service
providers and a variety of new entrants. Communications service providers can
now offer expanded combinations of services in numerous locations.
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In the U.S., cable television and telecommunications companies traditionally
operated in a highly regulated environment that often limited the number of
service providers for a particular service in a given geographical area and also
limited the types of services that could be provided by single companies.
Passage in February 1996 of the Telecommunications Act of 1996 and other recent
deregulatory measures, however, have removed some of the barriers that
previously prevented telephony companies from providing cable television service
and cable television companies from providing telephony service in the U.S.
RBOCs for example, which provided local telephony services to 78 million
households in the U.S. in 1995, now have the opportunity to offer video services
in the U.S.
The regulatory changes redefining the U.S. market have in many cases already
affected the foreign marketplace. In recent years, some countries have
authorized cable and telephony companies to compete. In the U.K., for example,
seven companies currently offer combined cable/telephony services to over one
million customers.
Improving price/performance characteristics of communications hardware have
also contributed to growth in the worldwide communications market. For example,
the retail price of cellular handsets has declined significantly in recent years
and in some instances handsets are now given away free of charge to encourage
new subscriber growth. Due in part to such developments, the number of cellular
customers increased by approximately 40% in the U.S. and 80% internationally in
1995. In addition, governments in the U.S. and other countries have recently
allocated additional bandwidth for new wireless communications services such as
PCS. In the U.S., nearly 100 PCS licenses were awarded in Federal Communications
Commission auctions in the first quarter of 1995 alone.
Historically limited availability of many traditional communications
services outside of the U.S. offers significant opportunities for local and
U.S.-based communications service providers. Many countries outside the U.S.
have recently passed legislation designed to increase availability and usage of
video-based services such as cable television and DBS. In other countries,
governments are privatizing their formerly state-owned telecommunications
monopolies to increase the quality and availability of services. Additionally,
cable television regulations have recently been approved in some countries
legalizing the construction of cable systems.
The rapidly shifting dynamics of the converging communications marketplace
have resulted in an increased emphasis on effective customer management software
and services. Companies competing in this deregulated and increasingly
competitive environment require customer management software and services that
are flexible, scaleable and capable of supporting multi-service providers.
CUSTOMER MANAGEMENT SOFTWARE AND SERVICES
Customer management software systems enable a communications service
provider to manage critical customer relationship functions, including new
account set-up, order processing, customer service and support, management
reporting, marketing analysis and accounts receivable management. Effective
customer management software systems are generally flexible, modular and
scaleable, allowing clients to manage increasing customer bases. In addition,
such systems are generally interoperable with the service provider's other
information systems such as decision support software. Customer management
services include bill presentment, the process by which electronic billing data
are analyzed, verified, formatted and presented to the end user for payment.
Billing statements are generally printed and mailed to customers, although in
recent years, service providers have begun to explore alternative presentment
methods, including electronic presentment via a PC or other communications
device. The bill presentment process must be cost-effective and produce easily
understandable bills quickly and accurately. As customer management software and
services often form the basis of the only regular communication between service
providers and their customers, the interaction enabled by these systems can be a
critical marketing tool.
Customer management software and services can either be developed and
managed by the communications service provider, outsourced to one or more third
parties or apportioned between internal and external systems. Software systems
can be operated on a stand-alone basis, using hardware located at the client's
facility, or provided on a service bureau basis using third party computer
systems located at the
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supplier's facility and linked to the client by a wide area network. Development
and implementation of a customer management software system is a costly and
time-consuming effort. The Company believes that third party customer management
software systems developed independently often provide a higher level of
price/performance, flexibility and scaleability than in-house systems. The
Company also believes that, as new communications service providers enter the
market and the amount of new services being provided by both new and established
companies increases, the demand for systems with expanded functionality,
flexibility and scaleability will also increase.
Land-line telephony service providers in the U.S. have traditionally used
customer management software systems developed internally or through cooperative
joint ventures. These so-called "legacy" systems, many of which were developed
over 10 years ago, are designed for a single-service market and do not provide
the scaleability, flexibility and service integration capability required in a
multi-service environment. Significant resources would be required to transition
most legacy systems to a multi-service environment. The Company believes that
the inherent limitations of legacy systems may encourage telephony service
providers to seek outsourcing alternatives to support new or expanded offerings
in a multi-service environment.
Unlike land-line telephony service providers, cable television, wireless and
DBS service providers in the U.S. have typically outsourced customer management
software and services, preferring to allocate resources to other aspects of
their business, including network build-out. New companies entering the market
will be required to decide between developing their own in-house systems or
outsourcing, and established companies that are expanding their service
offerings will be required to upgrade their in-house systems or seek outsourcing
alternatives. The Company believes that the enhanced functionality and features,
lower start-up cost and rapid implementation capability of outsourced solutions
will be an attractive alternative for such companies.
In non-U.S. markets, land-line telephony service providers have typically
developed in-house single-service customer management systems, while cable
television, wireless and DBS providers have typically outsourced. The Company
believes that the rapid growth of cable television, wireless and DBS providers
internationally will result in substantially increased outsourcing
opportunities. In addition, as U.S. cable companies continue to enter
international markets through acquisitions and alliances, the Company believes
that such companies will continue to outsource customer management software
systems. Non-U.S. communications companies have also historically used
internally developed bill presentment solutions. However, the Company believes
that increased activity in non-telephony services and the expansion of U.S.
companies into non-U.S. markets will increase outsourcing opportunities for bill
presentment services in non-U.S. markets.
THE USCS SOLUTION
USCS provides customer management software and services to single and
multi-service providers in the U.S. and 13 other countries. The Company's
software and related products are flexible, modular, interoperable with other
information systems and scaleable to an expanding customer base. The Company's
bill presentment services offer its clients a variety of options for generating
informative, easy-to-read and customized billing statements that maximize
marketing impact and minimize overall production cost. The Company offers its
customer management software to U.S. and international clients on a stand-alone
basis while offering U.S. clients both stand-alone and service-bureau
alternatives. USCS also offers a variety of complementary professional services,
including consulting, application development and client training, as well as
statement design services that allow clients to use the billing statement as a
communication and marketing tool.
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USCS is a leading provider of customer management software and services to
the global communications industry. In 1995, the Company was the largest
provider of customer management software systems to U.S. cable television
service providers, supporting 53% of U.S. cable subscribers. The Company's bill
presentment services generated statements for 53% of U.S. cable subscribers, 33%
of U.S. cellular customers and 9% of U.S. land-line telephony users. The
Company's record of achievement includes what USCS believes is:
-The first customer management software system for multi-service
providers, including support of combined cable television/telephony
sites;
-The first contract with an RBOC to outsource all bill presentment
functions for telephony services;
-The first installation and operation of customer management software
for interactive video trials in the U.S.;
-The first on-line processing system for the cable industry;
-The first pay-per-view module for on-line subscribers; and
-The first incorporation of a relational database into a customer
management software application which allows the user to query logical
relationships without the need to predefine or describe a specific
access path to the data.
USCS STRATEGY
The Company's strategy to maintain and enhance its industry position
includes the following key elements:
FOCUS ON RECURRING REVENUE. The Company's clients typically enter into
contracts with terms ranging from three to seven years. Clients are billed
monthly, generally based on the number of end-users they serve. As a result, a
significant portion of the Company's revenue is recurring and increases as the
service provider's customer base grows. In addition, the Company focuses on
client care and service to encourage long-term relationships and contract
renewals. In 1995, the Company's revenue totaled $229.3 million, of which 73%
was generated from companies that have been USCS clients for three or more
years. The Company will continue to focus on building recurring revenue through
long-term contracts and enhanced client care.
FOCUS ON NEEDS OF MULTI-SERVICE PROVIDERS. The Company is a pioneer in
providing integrated customer management software and services to both single
and multi-service communications providers. The Company intends to leverage its
technology, multi-service experience and installed base of clients to rapidly
expand its base of multi-service clients.
INCREASE INTERNATIONAL REVENUE. The Company currently provides customer
management software and services to clients in 13 foreign countries and is
seeking to expand its international presence, both in software and bill
presentment services, using direct and indirect sales channels. The Company has
entered into alliances with established international distributors such as Bull
Argentina S.A., Sema Group and IBM to market Intelecable. The Company intends to
target additional distribution alliances for Intelecable and to market its bill
presentment services in selected international markets, primarily through
licensing arrangements.
EXPAND BILL PRESENTMENT MARKET OPPORTUNITIES. The Company provides bill
presentment services to a variety of communications service providers,
generating billing statements for 53% of U.S. cable subscribers, 33% of U.S.
cellular users and 9% of U.S. land-line telephony customers. The Company also
services several non-communications clients, including financial service
providers and utility companies. The Company intends to target clients in both
communications and other industries to expand the market for its bill
presentment services.
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INCREASE PROFESSIONAL AND STRATEGIC SERVICES REVENUE. The Company provides
its customers with a variety of professional and strategic services, including
application development, consulting, support, training, software design,
statement design and marketing services. The Company intends to leverage its
installed client base and capitalize on the professional and strategic expertise
of its personnel to increase revenue from these activities.
CONTINUE TO DEVELOP LEADING-EDGE SOFTWARE AND SERVICES. The Company
regularly develops and incorporates new and diverse technologies into its
customer management software products and its bill presentment processes. The
Company's product development strategy is based on open systems architecture and
relational databases, which facilitate operation on multiple hardware platforms
and interoperability with other information systems. The Company has entered
into alliances with IBM and Tandem Computers Incorporated ("Tandem") in
connection with the development of customer management software. The Company is
also continually seeking to enhance its bill presentment services to increase
client interaction and reduce turnaround time and mailing costs. Additionally,
the Company is exploring electronic statement presentment alternatives. USCS
intends to use both its internal development team and strategic alliances to
maintain its technological leadership.
USCS PRODUCTS AND SERVICES
USCS offers customer management software systems, bill presentment services
and a variety of related professional and support services. The Company's
products and services enable communications service providers to manage critical
customer relationship functions, including new account set-up, order processing,
customer support, management reporting, marketing analysis and design and
generation of customized billing statements. The Company also offers a variety
of fee-based professional services, including worldwide consulting, application
development, client training and statement design services that allow clients to
use the billing statement as a communication and marketing tool.
CUSTOMER MANAGEMENT SOFTWARE
The Company's primary customer management software products are DDP/SQL and
Intelecable. The Company markets DDP/SQL to the traditional U.S. cable
television provider market while Intelecable is targeted to single and
multi-service providers in the U.S. and internationally. The Company also offers
CableWorks, a PC-based system for smaller operators. Additionally, certain
clients continue to use earlier generations of the Company's software that are
no longer marketed to new clients. Both DDP/SQL and Intelecable are scaleable
and are available in basic systems with optional modules, allowing the service
provider to design a customized system which can effectively manage a growing
customer base. Both systems were developed in compliance with ISO 9001
international quality process standards for design, production, installation and
servicing.
The Company licenses its software products to its clients under multi-year
license agreements. License fees are generally paid monthly based on the number
of subscribers or end-users served by the client. These agreements are typically
subject to periodic renewals and inflation-based license fee adjustments.
DDP/SQL. DDP/SQL is the Company's primary software system for cable
television companies in North America. Currently, 15 of the 20 largest cable
television service providers in the U.S. use the DDP/ SQL system. DDP/SQL offers
a basic system with optional modules for expanded functionality. DDP/SQL uses a
relational database which allows the user to query logical relationships without
the need to predefine or describe a specific access path to the data.
Information generated by DDP/SQL can be used with the client's internal
information systems and off-the-shelf software programs. This interoperability
allows users, for example, to easily create financial spreadsheets based on
information generated by DDP/SQL.
The Company offers DDP/SQL on either a stand-alone or a service bureau
basis. Stand-alone systems currently support approximately 75% of the Company's
client subscriber base while 25% are supported on a service bureau basis. For
stand-alone clients, the Company installs a complete DDP/SQL system at the
provider's facility, including necessary hardware and peripherals. Clients using
a service bureau arrangement access the Company's on-line processors via wide
area networks. The Company's Technical Response Center monitors traffic and
network availability to identify and respond to outages in the system. See "--
USCS Products and Services -- Hardware Leasing and Sales" and "-- Client Support
and Care."
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DDP/SQL runs on massively parallel processing hardware manufactured by
Tandem. The Company is a value-added reseller of Tandem equipment. The Company
also sells to its clients peripheral hardware made by manufacturers other than
Tandem, and generally enters into hardware maintenance agreements with its
clients. The Company also provides lease financing and maintenance services for
companies operating systems on a stand-alone basis. See "-- USCS Products and
Services -- Hardware Leasing and Sales."
INTELECABLE. The Company believes that Intelecable is the world's first
customer management software system designed for multi-service providers in the
converging communications marketplace. The Company also believes that
Intelecable is the only integrated multi-service software system currently
operational and commercially available. First installed in 1993, Intelecable
supports a diverse array of communications services, including cable television,
telephony, combined cable/telephony, interactive video and DBS. The Company has
installed Intelecable for 17 clients worldwide, including combined
cable/telephony service providers in the U.K., a combined cable/wireless
cable/DBS provider in Australia and two sites in the U.S. that support
interactive video operations.
The Company has installed Intelecable for Birmingham Cable Communications
Ltd. ("Birmingham Cable") in Birmingham, U.K. The Birmingham site became
operational in August 1993 and over 275,000 homes have been passed in its
region. At the Birmingham site, Intelecable supports 80,000 cable subscribers
and handles over 8.3 million telephone calls per month.
In addition to Birmingham Cable, Intelecable is being deployed to support
combined cable/telephony operations for Optus Vision in Australia, which is
expected to be the world's first nationwide integrated cable/telephony system.
Other sites include a nationwide cable/wireless cable/DBS operation in Australia
and cable-television-only sites in Australia, Chile, Japan, Portugal, the U.K.
and Venezuela. Intelecable is enabled with National Language Support double-byte
capability, which allows operation in a variety of foreign languages, including
Japanese, Chinese and Arabic. In the U.S., Intelecable has recently been
deployed to support an interactive video trial by BellSouth Interactive in
Chamblee, Georgia.
The Company believes that Intelecable is the only customer management
software system currently operational that has multi-platform capabilities.
Initially offered on IBM's AIX (UNIX) operating system, Intelecable is being
ported to Tandem's Integrity NR and is expected to be available on Tandem's OSS
platform. The Tandem OSS port is expected to provide a migration path to
Intelecable for DDP/ SQL users requiring multi-service customer management
software capabilities.
Intelecable is based on an open systems architecture, which facilitates
customization and interoperability with other information systems. The
Intelecable system has been developed using standard design methodologies and
transaction processing monitor architecture. Intelecable also uses an embedded
standard query language (SQL), which facilitates access to the database by
user-created applications. The design of Intelecable delivers a high-level
programming interface, which allows extensive customization without complex code
changes. Intelecable uses an Oracle relational database, which allows clients to
maintain an integrated database for each service offered by the client.
CABLEWORKS. The Company markets its CableWorks PC-based customer management
software product to domestic and international cable operators that have lower
transaction volume requirements than operators supported by DDP/SQL or
Intelecable. CableWorks is designed to introduce smaller cable operators to the
Company's products, with the expectation that such operators will migrate to
Intelecable or DDP/SQL as their business grows. CableWorks is installed in sites
in the U.S. and 26 other countries and has been translated into eight foreign
languages.
DOCUMENTATION AND TRAINING. The Company provides, at an additional charge,
complete product documentation and training services to users of its software
products. The Company has recently added CD-ROM-based product documentation. The
Company's "ClassROM" software provides interactive instruction and product
training on CD-ROM. The Company maintains training facilities in California and
the U.K. See "-- USCS Products and Services -- Professional Services and
Support."
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BILL PRESENTMENT SERVICES
The Company provides bill presentment services in a fully integrated and
automated production environment that rapidly and cost-effectively transforms
electronic data received from the client into informative, accurate and
customized billing statements. In addition, the Company's statement-based
marketing services allow clients to use the billing statement as a marketing
tool to reinforce a corporate image, advertise special offers and features and
otherwise market its services to its customers. To address the needs of
multi-service providers, the Company offers billing statements that combine data
from multiple services, such as wireless and land-line telephony, into a
consolidated billing statement.
The Company's automated bill presentment services offer several advantages
over typical in-house services, including the following:
-SHORTENED BILLING CYCLES. The "billing cycle" refers to the time
between receipt of the electronic billing data from the service
provider and the date the service provider receives payment of the bill
from its customer. By rapidly generating billing statements and
presorting to reduce mailing time, the Company's systems can
significantly reduce the time required to place a statement in the
postal stream, thereby shortening the client's billing cycle. In
addition, the Company has the ability to dynamically change the due
date of a particular batch of statements to allow a previously produced
batch of statements to have an earlier due date than later batches,
further shortening the overall billing cycle.
-MINIMIZED MAILING COSTS. The Company has developed procedures, such as
certified Manifest Mailing, that allow the Company's clients to secure
the lowest available postal rate for their statements. Additionally,
the Company's systems can automatically calculate the maximum number of
inserts that can be placed in an envelope without causing the envelope
to exceed certain specified weights.
-STATEMENT-BASED MARKETING CAPABILITIES. The Company offers custom
statement and envelope design services, custom formatting, insert
production services, selective inserting capability and a variety of
other services that enhance its clients' statement-based marketing
activities.
-REDUCED CUSTOMER CARE COSTS. By providing custom formatting and other
design services, the Company has helped certain of its clients achieve
demonstrated savings in customer care costs by substantially reducing
the number of customer inquiries and complaints regarding their bill
and the billing process.
STATEMENT PRODUCTION. The Company, which currently generates statements for
53% of U.S. cable television subscribers under bundled contracts, 33% of U.S.
cellular customers and 9% of U.S. land-line telephony users, has achieved its
industry position in part through the development and deployment of
technologically innovative systems and software. The Company operates two
statement production facilities in the Northern California area. These
facilities receive a data stream from the client's customer management software
(whether a client's legacy system, a competitor's system or the Company's
software), manipulate the data into a usable format, create cost-effective,
informative, easy-to-read and accurate customized billing statements and mail
the statements to the end-users. The Company is the largest centralized first
class mailer in the U.S., responsible for generating more than 1.5% of the total
volume of all U.S. first class mail, including customer remittance volume. The
Company processes over 60 million
statements containing approximately 200 million images (generally one page side)
per month. The Company generates bill presentment revenue based on the number of
statements and/or images produced and mailed. The Company has developed
automation technologies that have led to a demonstrated 99.9% statement accuracy
level for the 12 months ended March 31, 1996, based on reported client
complaints.
Using patented processes and technologies, the Company provides a
fully-integrated, computerized and automated production environment that (i)
processes, logs, verifies and authenticates all customer data, (ii) creates
automated production controls for every statement, including form bar codes,
weight and
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thickness parameters, unique statement tracking numbers, "due out" dates,
address correction, carrier route/delivery point bar codes and postal processing
parameters, (iii) models every production run on-line before printing and (iv)
enables postal processing, sorting and discounting to be performed on-line.
Full real-time automation enables the Company to monitor quality, control
remakes, predict and schedule production loading, verify customer data, forecast
production volumes and maintain production system history on-line. The system is
controlled by an on-line production control system that is based on advanced
client/server architecture and has high-speed data transmission capabilities. A
local area network links the production equipment to the production control
system. To provide clients with real-time information regarding the progress of
the billing statement production process, the Company has developed its
"VantagePLUS" client information system, which provides a customized "view into
the facility" to allow clients to monitor the status of their jobs. VantagePLUS,
which is currently undergoing final testing with selected clients, includes a
client/server architecture and a PC-based graphical user interface that provides
traceability of an individual statement from the beginning of statement
production until 45 days after distribution. VantagePLUS is expected to provide
clients with greater control over the billing process in an outsourced
environment. See "Risk Factors -- New Products and Technological Changes."
The Company also offers consolidated billing statements for multi-service
providers, which combine data from multiple services, such as wireless and
land-line telephony, into a single integrated statement. Consolidated statements
can offer clients significant savings both in paper and mailing costs.
Consolidated statements can also be a powerful marketing tool for companies
seeking to establish brand name recognition and sell combined services.
STATEMENT-BASED MARKETING SERVICES. The Company provides statement-based
marketing services that allow its clients to transform regular customer billing
statements into communication tools. The billing statement is often the only
form of regular communication between a service provider and its customers. Many
clients have the opportunity, through the Company's statement-based marketing
and creative design services, to use the billing statement to reinforce a
corporate image, advertise special offers and features, deliver
customer-specific messages and otherwise market their services to their
customers. The Company believes that as competition in the communications market
increases, the ability to differentiate based on marketing and service will
become increasingly critical.
Statement design and marketing services are provided by the Company's
Creative Design Group, which works with clients to design flexible,
user-friendly statements. The Company offers its clients a choice of statement
sizes and formats, on-site forms analysis, logo and graphic design and
customer-specific messaging and advertising options. The Company also offers
custom envelope and forms design and manufacturing services.
The Company operates a full service graphics and printing facility through
which the Company offers color electronic publishing and pre-press and
multi-color printing of inserts. The Company works with its clients to design
and produce high-quality inserts that feature special offerings, promotions or
other messages from the client to its customers. The Company uses proprietary
selective inserting technology, which allows each statement to have a unique
combination of marketing inserts at the time the billing statement is produced.
The automated insert process allows clients to define an insert mailing with
precision, offering over 100 insert combinations in any given statement run.
FUTURE ELECTRONIC DELIVERY ALTERNATIVES. The Company's automated
information and technology infrastructure, which electronically prepares and
monitors the statement until final printing, provides the basis for the
Company's planned development of an electronic bill presentment alternative. The
proliferation of on-line services and the Internet provides an opportunity for
communications service providers to bill customers electronically through a PC
or other device. The Company believes that as electronic billing and payment
solutions become more accepted, communications service providers will require
electronic statement presentment capabilities. USCS is in preliminary
discussions with potential strategic partners to begin integrating electronic
presentment technologies into the Company's systems and is currently developing
a prototype. See "Risk Factors -- New Products and Rapid Technological Changes."
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PROFESSIONAL SERVICES AND SUPPORT
The Company has expanded and refocused its fee-based professional services
and support functions to better serve the needs of its clients in the global
communications industry and to expand its revenue base. The Company maintains a
Professional Services Group to provide global consulting services to its
software customers. This group provides assistance with database definition and
initialization, system operations, network consolidation and performance and
decision support services. This group also offers a variety of consulting,
educational and technical writing services. See "-- Customer Management Software
- -- Product Documentation and Training."
The Company's Integration Strategies Group assists clients in developing
custom-tailored applications and interfaces that are interoperable with the
Company's customer management software to enhance client operations. The
Integration Strategies Group is comprised of experienced developers who provide
clients with client specific software modules.
The Company's Customer Systems Group provides a full range of technical
support for the Company's bill presentment clients. This group has developed
customized programming tools that allow it to receive electronic information
streams from a variety of client systems without the need to make changes to the
customer's system. These tools allow for rapid and smooth transitions when
clients outsource bill presentment functions to the Company.
HARDWARE LEASING AND SALES
The Company sells computer equipment and provides leasing and maintenance
services to selected software clients which purchase stand-alone systems
primarily in the U.S. Maintenance is typically billed in advance of providing
the service. Revenue from sales of computer hardware and providing associated
maintenance and leasing services has been declining in absolute dollars and as a
percentage of total revenue. In 1995, revenue from these activities was less
than 14% of total revenue as compared to 30% in 1993. While the Company will
continue to offer hardware and services to current and future clients, the
Company expects the decline as a percentage of total revenue to continue.
CLIENTS
The Company sells customer management software and services to clients in
the U.S. and 13 other countries. The following are selected clients of the
Company:
<TABLE>
<CAPTION>
CABLE TELEVISION CLIENTS TELEPHONY CLIENTS MULTI-SERVICE PROVIDERS
- ----------------------------- ------------------------ ------------------------
<S> <C> <C>
Adelphia AirTouch Paging BellSouth Interactive
Cablevision Systems Ameritech Birmingham Cable
Comcast CBIS GTE Video
Continental Cablevision Frontier Optus Vision
TCI
Time Warner
</TABLE>
In addition to communications service providers, the Company provides bill
presentment services to companies in other industries, including Amerigas
Corporation (utilities) and GT Global Investor Services, Inc. (financial
services). The Company intends to seek additional non-communications clients for
its bill presentment services. See "-- USCS Strategy."
CLIENT SUPPORT AND CARE
USCS provides worldwide training and support to its clients. As of December
31, 1995, USCS employed 192 persons in its client service groups, representing
9% of its total employees. In the U.S., client care is divided into product
specific teams, with one team focusing on customer management software and the
other team focusing on bill presentment services. Both teams provide broadbased,
24 hour, 7 day support and technical assistance. The Company has developed a
full range of training products and documentation including what the Company
believes to be the first CD-ROM based training product for its software clients.
31
<PAGE>
Supplementing the front line software support groups for service bureau software
customers is the Company's Technical Response Center, which monitors traffic and
network availability to identify and respond to outages in the system.
Internationally, Intelecable is supported by teams located in the U.S. and the
U.K. as well as by alliance partners.
SALES AND MARKETING
The Company markets its products and services in the U.S. with a 72-person
direct sales force, including account management and technical support teams,
and internationally through partners supported by an 11-person sales staff. The
Company's sales and marketing teams are coordinated by the Company's Strategic
Accounts Council to promote a unified marketing and sales effort to its clients.
A marketing communications group, resident in both the U.S. and the U.K.,
supports the Company's sales teams.
Software and services are sold primarily to cable, DBS and multi-service
providers through direct sales channels and in conjunction with international
alliance partners. In North America the Company operates a 42-person software
and services sales and marketing team, including account management and
technical support teams.
The Company's international sales staff is coordinated by geographic area,
including dedicated account and technical support personnel located in the U.K.
office. In addition to direct sales, the Company has allied with 10 distribution
partners throughout the world who are responsible for sales, marketing, support
and local customization.
The Company believes that sales of separate bill presentment services to
telecommunications service providers such as RBOCs and cellular providers offers
both increased revenue opportunities as well as increased visibility for the
Company. The Company maintains a 30-person sales staff, including account
management and technical support teams and significant design resources, to
target this market. The Company has also begun a bill presentment international
marketing effort that seeks to exploit what the Company believes is significant
growth potential in that market. The Company is currently pursuing opportunities
for technology licensing and joint ventures for bill presentment in Europe and
South America. See "Risk Factors -- Technological Advances and New Product
Development."
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on introducing
new products and services as well as ongoing enhancement of its existing
products and services. The Company believes that its investment in research and
development is critical to maintaining its leadership position. The Company
works closely with development partners such as Tandem and IBM to enhance its
products. The Company's research and development partnerships typically provide
for funding by development partners and include joint marketing and other
arrangements. In software product development, significant emphasis is placed on
compliance with world wide development standards and quality benchmarks. The
Company's processes used at its Research and Development Center in El Dorado
Hills, California, have received ISO 9001 certification, the globally recognized
quality standard. The Company also continually enhances its bill presentment
services by developing software and processes that increase production
efficiency and aid clients in accessing bill processing information. See "--
USCS Strategy."
The Company's research and development staff consisted of 223 employees as
of December 31, 1995, compared to 165 as of December 31, 1993. The Company's
total expenses for Company-sponsored research and development were $17.8
million, $16.7 million, and $16.0 million for the years ended December 31, 1995,
1994 and 1993, respectively. In addition, the Company spent $2.0 million, $1.3
million and $0.6 million in 1995, 1994 and 1993, respectively, for further
development of Intelecable, which amounts are reimbursable by third parties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and Note 2 of Notes to Consolidated Financial Statements.
32
<PAGE>
COMPETITION
The market for the Company's products and services is highly competitive,
and competition is increasing as additional market opportunities arise. The
Company competes with both independent providers and developers of in-house
systems. The Company believes its most significant competitors for software
systems are Information Systems Development (owned by CBIS), CSG Systems
International, Inc., and its own clients to the extent such clients develop
in-house systems. The most significant competitors for bill presentment services
are in-house service providers.
The Company believes that the principal competitive factors in the market
for customer management software include functionality and features of software,
quality of client care and support, type of hardware platform used and quality
of research and development. The principal competitive factors for bill
presentment services include statement production accuracy, ability to meet
statement production deadlines, product quality and price. The Company believes
that it competes favorably with respect to these factors. However, the Company
believes that to remain competitive, it will require significant financial
resources in order to market its existing products and services, to maintain
customer service and support and to invest in research and development. Many of
the Company's existing and potential competitors may have greater resources than
the Company. The Company expects its competitors to continue to improve the
design and performance of their current systems and processes and to introduce
new systems and processes with improved price/performance characteristics. No
assurance can be given that the Company will be able to compete successfully in
the U.S. or internationally. See "Risk Factors -- Competition."
INTELLECTUAL PROPERTY
The Company holds eight U.S. patents covering various aspects of its bill
presentment services. In addition, the Company has applied for 13 additional
U.S. patents. The Company has no foreign patents. The Company believes that
although the patents it holds are valuable, they will not determine the
Company's success, which depends principally upon its product quality, marketing
and service skills. However, despite patent protection, the Company may be
vulnerable to competitors who attempt to imitate the Company's systems or
processes and manufacturing techniques and processes. In addition, other
companies and inventors may receive patents that contain claims applicable to
the Company's system and processes. The sale of the Company's systems covered by
such patents could require licenses that may not be available on acceptable
terms, if at all. In addition, there can be no assurances that patent
applications will result in issued patents.
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, there can be no
assurance that the Company will be able to protect its technology adequately or
that competitors will not be able to develop similar technology independently.
There can be no assurance that any patent applications that the Company may file
will be issued or that foreign intellectual property laws will protect the
Company's intellectual property rights. There can be no assurance that others
will not independently develop similar systems, duplicate the Company's systems
or design around the patents licensed by or issued to the Company.
A significant cable television client has advised the Company that RAKTL has
asserted that patents held by RAKTL may be infringed by the client's use of
certain interfaces offered by the Company. The patents relate to telephone call
processing with audio response unit and automatic number identification
capabilities of certain interfaces offered by the Company. The client recently
informed the Company that, should it become necessary, it would seek
indemnification from the Company. The Company believes that if the patents are
valid, and if they apply to the Company's business, they would also apply to
many users and suppliers of interactive computer telephony systems, including
the Company's competitors. The Company believes that it is adequately protected
by its patent position, but, to the extent that the RAKTL patents are valid and
apply to the Company's business, the Company could be required to seek licenses
from RAKTL and provide indemnification to its customers.
Although there currently are no pending claims or lawsuits against the
Company regarding possible infringement claims, there can be no assurance that
infringement claims by third parties, or claims for indemnification resulting
from infringement claims, will not be asserted in the future or that such
assertions,
33
<PAGE>
if proven to be true, will not materially adversely affect the Company's
business, financial condition and results of operations. In the future,
litigation may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of others. Any such litigation could result
in substantial cost and diversion of effort by the Company, which by itself
could have a material adverse effect on the Company's financial condition and
operating results. Further, adverse determinations in such litigation could
result in the Company's loss of proprietary rights, subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
systems, any of which could have a material adverse effect on the Company's
financial condition and results of operations. In addition, there can be no
assurance that a license under a third party's intellectual property rights will
be available on reasonable terms, if at all. See "Risk Factors -- Dependence on
Proprietary Technology."
EMPLOYEES
Many of the Company's employees are highly skilled, and the Company's
success will depend in part upon its ability to attract, retain and develop such
employees. Skilled employees, especially employees with extensive technological
backgrounds, are currently in great demand. There can be no assurance that the
Company will be able to attract or retain the skilled employees which may be
necessary to continue its research and development or marketing programs. See
"Risk Factors -- Attraction and Retention of Key Personnel."
As of April 30, 1996, the Company had 2,181 employees, of which 1,943 were
full-time employees and 238 were part-time employees. None of the Company's
employees are represented by a labor union or covered by a collective bargaining
agreement. The Company considers its employee relations to be good.
FACILITIES
The Company owns two buildings in El Dorado Hills, California on
approximately 29 acres. One building of approximately 245,050 square feet is
utilized for statement production operations and supporting activities and the
other of approximately 48,200 square feet is the Company's system and software
research and development center. In addition, the Company owns approximately 278
acres of undeveloped land adjacent to its buildings. The Company leases a total
of approximately 476,000 square feet in Rancho Cordova and El Dorado Hills,
California of which approximately 287,000 square feet is utilized primarily for
statement production operations and warehousing. The other 189,000 square feet
is utilized primarily for corporate headquarters, sales and marketing, customer
support, and research and development.
The Company leases approximately 14,891 square feet in Norcross, Georgia for
its Eastern Regional Data Center, 1,762 square feet in Englewood, Colorado for a
sales office and approximately 2,000 square feet in Harrison, Arkansas for use
by its subsidiary, CUO, Inc. The Company also leases approximately 9,420 square
feet in the U.K. The leases for these facilities expire in the years 1997
through 2018.
The Company believes that its facilities are adequate for its proposed needs
through 1996 and that additional suitable space will be available as required.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of May
20, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------------------------------------
<S> <C> <C>
James C. Castle, Ph.D. 59 Chairman of the Board, Chief Executive Officer and Director
Michael F. McGrail 49 President of CableData, Inc. and Director
C. Randles Lintecum 51 President of International Billing Services, Inc.
Douglas L. Shurtleff 49 Senior Vice President, Finance and Chief Financial Officer
Claudia D. Coleman 44 Vice President, Corporate Development
George L. Argyros, Sr. (1)(2) 59 Director
George M. Crandell, Jr. (1) 50 Director
Charles D. Martin (2) 59 Director
Larry W. Wangberg (1)(2) 53 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
JAMES C. CASTLE, PH.D. joined the Company as Chairman of the Board, Chief
Executive Officer and Director in August 1992. Prior to joining USCS, Dr. Castle
served as Chief Executive Officer and Director of Teradata Corporation, a
manufacturer of high capacity, high performance parallel processing database
systems, from August 1991 until April 1992. Dr. Castle served as President and
Chief Executive Officer of Infotron Systems Corporation, a manufacturer of data
and voice transmission equipment, from October 1987 until August 1991 and was
named Chairman of the Board in May 1989. Prior to October 1987, Dr. Castle held
various senior management positions with TBG Information Systems, Inc., Memorex
Corporation, Honeywell, Inc. and General Electric. Dr. Castle is also a Director
of PAR Technology Corp., Leasing Solutions, Inc. and ADC Telecommunications,
Inc. Dr. Castle received his B.S. from the U.S. Military Academy at West Point
and a M.S.E.E. and Ph.D. in Computer and Information Sciences from the
University of Pennsylvania.
MICHAEL F. MCGRAIL has been President of CableData, Inc., the Company's
wholly owned subsidiary, and a Director of the Company since April 1995. From
December 1993 to March 1995, Mr. McGrail was President of CableData
International, Ltd., a wholly-owned subsidiary of CableData, Inc. From August
1991 to December 1993, Mr. McGrail served as President of Gandalf International,
Ltd. ("Gandalf"), a wide and local area network communications products company.
From January 1988 to July 1991, Mr. McGrail was Managing Director of Infotron
Systems International Ltd., which was acquired by Gandalf in 1991. Mr. McGrail
received a B.Sc. with honors from the University of Sussex and a M.Sc. in
Management from Trinity College, Dublin.
C. RANDLES LINTECUM has been the President of International Billing
Services, Inc. ("IBS"), a wholly-owned subsidiary of the Company, since July
1995. From February 1995 to July 1995, Mr. Lintecum was Senior Vice President,
Marketing and Business Development of USCS and from May 1993 to February 1995
Mr. Lintecum was Vice President, Corporate Development of USCS. From June 1985
to May 1993, Mr. Lintecum was Executive Vice President of Corporate Marketing
for Infonet Services Corporation ("Infonet"), an international data network
services company. Mr. Lintecum received a B.S. in Business Administration from
the University of Kansas and a M.B.A. from the University of Missouri.
DOUGLAS L. SHURTLEFF has been Senior Vice President, Finance and Chief
Financial Officer of the Company since May 1995. From September 1988 to May
1995, Mr. Shurtleff was Vice President, Finance and Administration of Infonet.
From October 1984 to September 1988, Mr. Shurtleff was Group Vice President,
Finance and Administration of Computer Sciences Corporation, a computer services
company. Previously, Mr. Shurtleff held various senior management positions at
Pacesetter Systems, Inc., and Deloitte & Touche. Mr. Shurtleff received a B.S.
in Accounting and his M.B.A. from the University of Southern California and is a
certified public accountant.
35
<PAGE>
CLAUDIA D. COLEMAN has been Vice President, Corporate Development of the
Company since December 1995. From March 1988 to December 1995, Ms. Coleman held
various positions, including Principal, at Alex. Brown & Sons ("Alex. Brown"),
an investment banking firm. Prior to joining Alex. Brown, Ms. Coleman was a Vice
President at Drexel Burnham Lambert from 1984 to 1988. From 1979 to 1984, Ms.
Coleman held various positions, including Vice President, at Bank of America.
Ms. Coleman received a B.A. from the University of California, Davis and a
M.B.A. from the University of California, Berkeley.
GEORGE L. ARGYROS, SR. has been a Director of the Company since November
1990. Mr. Argyros is Chairman and Chief Executive Officer of Arnel & Affiliates,
a West Coast diversified investment company. Mr. Argyros is sole shareholder of
GLA Financial Corp. ("GLA Financial"), a general partner of Westar Capital
Associates, which is the sole general partner of Westar Capital ("Westar"), a
private equity investment firm and a principal shareholder of the Company. Mr.
Argyros is also a limited partner of Westar. Mr. Argyros is a Director of First
American Financial Corporation, The Newhall Land and Farming Company, Tecstar
Corporation, All Post Corporation ("All Post"), Dogloo, Inc. and El Dorado
Communications. Mr. Argyros is President and Chief Executive Officer of the
Horatio Alger Association of Distinguished Americans, is Chairman of the Board
of Trustees of Chapman University, a Trustee of the California Institute of
Technology (CalTech), Chairman of the Board of Directors of The Beckman
Foundation, director of the Beckman Laser Institute and Medical Clinic, Vice
Chairman of the Estele Doheny Eye Foundation, and Chairman of the Orange County
Business Committee for the Arts. See "Certain Transactions" and "Principal and
Selling Stockholders."
GEORGE M. CRANDELL, JR. has been a Director of the Company since March 1989.
Mr. Crandell is President of George M. Crandell, Jr., A Law Corporation and is a
limited partner of Westar Capital Associates, the general partner of Westar.
Prior to joining Westar in 1988, Mr. Crandell was a partner of Brentwood
Associates ("Brentwood"), an investment firm. Prior to joining Brentwood, Mr.
Crandell was a Senior Consultant with the international consulting firm of
McKinsey & Company. He also held positions at Planning Research Corporation and
IBM. Mr. Crandell is on the Board of Directors of Tecstar Corporation and All
Post. He is also a board member and past President of the California State
Sacramento Trust Foundation and a board member of the Dean's Advisory Council of
the University of California, Davis Graduate School of Management. See "Certain
Transactions."
CHARLES D. MARTIN has been a Director of the Company since November 1990.
Mr. Martin has been a general partner of the general partner of Enterprise
Partners, a Southern California-based venture capital firm, since its formation
in 1985. He is a general partner of Westar Capital Associates, which is the sole
general partner of Westar. Mr. Martin also serves on the Board of Directors of
Apria Healthcare, Inc., Premier Ambulatory Systems, Pages Software, Tecstar,
Inc., All Post, Dogloo and El Dorado Communications. He is also a Director and
stockholder of Vedax Sciences Corporation, a firm that operates the TEC
Organization, the largest proprietary membership program in the nation for
company Presidents and Chief Executive Officers. Mr. Martin also serves as a
Trustee of Chapman University and the Newport Harbor Art Museum. See "Certain
Transactions" and "Principal and Selling Stockholders."
LARRY W. WANGBERG has been a Director of the Company since April 1996. Mr.
Wangberg has served as President, Chief Executive Officer and a Director of
StarSight Telecast, Inc. ("StarSight"), a developer of interactive electronic
television program guides and other navigation tools and services since
February, 1995. From November 1983 to February 1995, Mr. Wangberg was Senior
Vice President of The Times Mirror Company and President and Chief Executive
Officer of Times Mirror Cable Television. Mr. Wangberg has also served as
President and Chief Operating Officer (Metro Division) of Warner Amex Cable
Communications and President and COO of Coaxial Communications, Inc. Mr.
Wangberg is also on the Board of Directors of Zilog, Inc. Mr. Wangberg recently
served as Chairman of the National Cable Television Association.
36
<PAGE>
Upon completion of this offering, the Company's Board will be classified
into three classes. Class one, whose terms will expire at the conclusion of the
1997 Annual Meeting, consists of Dr. Castle and Mr. Martin. Class two, whose
terms will expire at the conclusion of the 1998 Annual Meeting, consists of
Messrs. Crandell and Wangberg. Class three, whose terms will expire at the
conclusion of the 1999 Annual Meeting, consists of Messrs. Argyros and McGrail.
See "Description of Capital Stock -- Anti-takeover Effects of Provisions of the
Certificate of Incorporation, Bylaws and the Proposed Stockholders' Rights
Plan."
There are no family relationships between any directors or executive
officers of the Company.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Messrs. Argyros, Crandell and
Wangberg, reviews the adequacy of internal controls and the results and scope of
the audit and other services provided by the Company's independent auditors. The
Audit Committee meets periodically with management and the independent auditors.
The Compensation Committee, consisting of Messrs. Argyros, Martin and
Wangberg establishes salaries, incentives and other forms of compensation for
officers and other employees of the Company and administers the incentive
compensation and benefit plans of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company is party to a letter agreement with Westar pursuant to which
Westar provides financial, management and strategic advisory services to the
Company for a monthly fee of $35,875 plus out-of-pocket expenses. The agreement
may be terminated at any time, with or without cause, by either the Company or
Westar. The Company paid Westar approximately $430,500 for such advisory
services during 1995. George L. Argyros, a Director of the Company, is sole
shareholder of GLA Financial, which is a general partner of Westar Capital
Associates, which is the general partner of Westar. Charles D. Martin, a
Director of the Company, is a general partner of Westar Capital Associates.
Messrs. Argyros and Martin are members of the Compensation Committee. See
"Certain Transactions" and "Principal and Selling Stockholders."
NON-EMPLOYEE DIRECTOR COMPENSATION
On April 12, 1996, the Company adopted a non-employee director compensation
plan pursuant to which the non-employee directors will be compensated as
follows: (1) $20,000 annual retainer payable in quarterly installments; (ii)
$1,500 per day for each physical Board meeting and $1,000 per day for each
physical committee meeting held on a different day; (iii) $250 for each
telephonic Board meeting; and (iv) options to purchase 10,000 shares of Common
Stock issued pursuant to the 1996 Directors Stock Option Plan upon joining the
Board. This plan was approved by the Company's stockholders on May 16, 1996. No
amounts have been paid or options issued pursuant to this plan as of the date of
this Prospectus. See "-- Employee and Director Plans -- 1996 Directors' Stock
Option Plan."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that a
Company's certificate of incorporation may contain a provision eliminating or
limiting the personal liability of directors for monetary damages for breach of
their fiduciary duties as directors, except for liability (i) for any breach of
their duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which a director derived an
improper personal benefit. The Company's Certificate of Incorporation and Bylaws
also provide that the Company shall indemnify its directors and officers and may
indemnify its employees and agents to the fullest extent permitted by law.
The Company has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Company's
Certificate of Incorporation and Bylaws. These agreements, among other things,
indemnify the Company's directors and officers for certain expenses (including
37
<PAGE>
attorney's fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or officer of
the Company, any subsidiary of the Company or any other company or enterprise to
which the person provides services at the request of the Company. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for fiscal 1995 of the
Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company whose total salary and bonus for fiscal 1995
exceeded $100,000 or would have exceeded $100,000 on an annualized basis
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
------------------------------------- NUMBER OF
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) OPTIONS (#) ($)
- ----------------------------------- --------- ---------- ---------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James C. Castle, Ph.D. 1995 $ 300,000 $ 102,337 $ 57,146(1) 94,500 $ 23,623(2)
Chairman of the Board and Chief
Executive Officer
Michael F. McGrail 1995 168,311 97,033 100,484(3) -- 11,732(4)
President of CableData, Inc.
C. Randles Lintecum 1995 171,223 51,048 9,230(5) 18,900 11,012(6)
President of International Billing
Services, Inc.
Douglas L. Shurtleff (7) 1995 111,000 43,652 84,399(8) 94,500 2,243(9)
Senior Vice President, Finance and
Chief Financial Officer
Claudia D. Coleman 1995 -- (10) -- -- 63,000 --
Vice President, Corporate
Development
</TABLE>
- ------------------------
(1) The amount represents a $24,839 relocation payment, $23,077 in lieu of paid
time off and a $9,230 car allowance.
(2) The amount represents a contribution by the Company of $12,000 to the
Company's 401(k) Plan, $10,699 in imputed interest payable on deferred
compensation, and payment by the Company of a $924 life insurance premium.
(3) The amount represents $77,289 of relocation expenses, $15,780 in imputed
income with respect to a leased vehicle and $7,415 in lieu of paid time off.
(4) The amount represents contributions by the Company to Mr. McGrail's
self-funded pension plan.
38
<PAGE>
(FOOTNOTES FROM PRECEDING PAGE)
(5) The amount represents a car allowance.
(6) The amount represents a contribution by the Company of $10,536 to the
Company's 401(k) Plan and payment by the Company of a $476 life insurance
premium.
(7) Mr. Shurtleff joined the Company in May 1995. Salary represents amounts
actually paid to Mr. Shurtleff during 1995.
(8) The amount represents $79,145 of relocation payments and a $5,254 car
allowance.
(9) The amount represents payment by the Company of a $333 life insurance
premium and $1,910 in imputed interest payable on deferred compensation.
(10) Ms. Coleman joined the Company in late December 1995. Ms. Coleman's annual
salary for 1996 is $160,000.
OPTION GRANTS DURING 1995
The following table sets forth for each of the Named Officers certain
information concerning stock options granted during 1995:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE PRICE FOR OPTION TERM (5)
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION ----------------------
NAME GRANTED(#)(1) 1995(2) ($/SH.)(3) DATE(4) 5%($) 10%($)
- ----------------------------- ------------- --------------- ----------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James C. Castle.............. 94,500 17.1% $ 5.05 2/12/05 $ 300,000 $ 761,000
Michael F. McGrail........... -- -- -- -- -- --
C. Randles Lintecum.......... 18,900 3.4 5.05 5/23/05 60,000 152,000
Douglas L. Shurtleff......... 94,500 17.1 5.05 7/20/05 300,000 761,000
Claudia D. Coleman........... 63,000 11.4 5.05 12/29/05 200,000 507,000
</TABLE>
- ------------------------
(1) These options are incentive stock options granted pursuant to the 1988 or
1993 Incentive Stock Option Plans and have ten year terms. The options vest
over four to five years.
(2) In 1995, the Company granted options to purchase an aggregate of 551,775
shares.
(3) In determining the fair market value of the Company's Common Stock, the
Board of Directors considered various factors, including the Company's
financial condition and business prospects, its operating results, the
absence of a market for its Common Stock, the risks normally associated with
high technology companies and the report of an independent appraisal firm
with respect to the shares of the Company's Common Stock held by the
Company's ESOP. The exercise price may be paid in cash, check, shares of the
Company's Common Stock, through a cashless exercise procedure involving
same-day sale of the purchased shares or such other method as determined by
the Board of Directors.
(4) Options may terminate before their expiration dates if the optionee's status
as an employee or consultant is terminated or upon the optionee's death or
disability.
(5) Potential Realizable Value is based on certain assumed rates of appreciation
pursuant to rules prescribed by the Securities and Exchange Commission (the
"SEC"). Actual gains, if any, on stock option exercises are dependent on the
future performance of the stock. There can be no assurance that the amounts
reflected in this table will be achieved. In accordance with rules
promulgated by the SEC, Potential Realizable Value is based upon the
exercise price of the options, which is substantially less than the expected
initial public offering price. If the Potential Realizable Value is
calculated based on an assumed initial public offering price of $16.00 per
share and the assumed rates of appreciation over the ten-year term of the
options, the resulting stock price at the end of the term would be $26.06
and $41.50 per share at 5% and 10%, respectively. This would result in the
following Potential Realizable Values: Dr. Castle ($1,985,000; $3,445,000);
Mr. Lintecum ($397,000; $689,000); Mr. Shurtleff ($1,985,000; $3,445,000);
and Ms. Coleman ($1,324,000; $2,296,000).
39
<PAGE>
OPTION GRANTS DURING 1996
In April 1996, the Company granted incentive stock options to each of the
Named Officers as follows: Dr. Castle (420,000 shares); Mr. McGrail (154,770
shares); Mr. Lintecum (117,810 shares); Mr. Shurtleff (43,050 shares) and Ms.
Coleman (21,000 shares). Such options vest annually over a period of five years
and have an exercise price of $12.50 per share.
AGGREGATED OPTION EXERCISES DURING 1995 AND YEAR-END OPTION VALUES
The following table sets forth for each of the Named Officers certain
information concerning options exercised during fiscal year 1995 and the number
of shares subject to both exercisable and unexercisable stock options as of
December 31, 1995. Also reported are values for "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding options and the fair market value of the Company's Common Stock as
of December 31, 1995:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUE
<TABLE>
<CAPTION>
VALUE
REALIZED NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF (MARKET PRICE OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES AT EXERCISE DECEMBER 31, 1995 DECEMBER 31, 1995(1)
ACQUIRED ON LESS EXERCISE -------------------------- --------------------------
NAME EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James C. Castle.............. 189,000 $ 493,000 12,214 201,986 $ 146,000 $ 2,463,000
Michael F. McGrail........... -- -- 29,484 46,116 362,000 546,000
C. Randles Lintecum.......... -- -- 60,480 52,920 790,000 665,000
Douglas L. Shurtleff......... -- -- -- 94,500 -- 1,035,000
Claudia D. Coleman........... -- -- -- 63,000 -- 690,000
</TABLE>
- ------------------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1995 and the exercise
price of the Named Officer's option. There was no established public trading
market for the Common Stock underlying the options as of December 31, 1995.
Accordingly, the amounts set forth have been calculated based on the
difference between an assumed initial public offering price of $16.00 per
share and the exercise price of the option.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company has an employment agreement with James C. Castle, Ph.D., the
Company's Chairman of the Board and Chief Executive Officer, terminable at will
by either the Company or Dr. Castle. The agreement provides for an initial base
salary of $22,500 per month and an annual bonus of up to 40% of base salary,
contingent on meeting certain performance targets. The agreement may be
terminated at any time by either the Company or Dr. Castle upon 30 days' notice.
In connection with such agreement, Dr. Castle was granted an option to purchase
283,500 shares of the Company's Common Stock at an exercise price of $2.44 per
share, vesting over five years. Upon termination for any reason, Dr. Castle will
receive $0.35 per share for all unvested options. If Dr. Castle is terminated
without cause he will receive one year's salary, which will cease to be paid
upon Dr. Castle starting new employment. Upon a change of control, defined as a
sale of substantially all assets, certain mergers or acquisition by any person
of 50% or more of the Company's voting securities, such options immediately
vest.
The Company has entered into an agreement with Michael F. McGrail, President
of CableData, Inc. and a Director of the Company. The Company may terminate Mr.
McGrail's employment upon 12 months notice, with or without cause. The Company
shall have the right to pay salary in lieu of any notice. Mr. McGrail may
terminate his employment with the Company at any time, with or without cause.
The Company has entered into severance agreements with C. Randles Lintecum,
Douglas L. Shurtleff and Claudia D. Coleman, the President of IBS, the Company's
Chief Financial Officer and the Company's Vice President, Corporate Development,
respectively, pursuant to which Mr. Lintecum, Mr. Shurtleff and Ms. Coleman are
entitled to receive certain benefits in the event of termination without cause
upon a change
40
<PAGE>
of control. Benefits consist primarily of a lump-sum payment of one year's
compensation. Change of control is defined as sale of substantially all assets,
merger or upon 50% of outstanding stock of the Company becoming held by a person
or entity other than Westar, Enterprise Partners, the ESOP or any employee stock
purchase plan.
EMPLOYEE AND DIRECTOR PLANS
1988 STOCK OPTION PLAN. The Board of Directors adopted the 1988 Incentive
Stock Option Plan (the "1988 Plan") in May 1988. A total of 945,000 shares have
been authorized for issuance under the 1988 Plan, of which 227,115 shares are
subject to outstanding options, 161,952 shares are available for future grant
and 555,933 shares have been issued on exercise of options as of May 20, 1996.
The 1988 Plan provides for the grant of "incentive stock options" as defined in
Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), to
key employees and officers of the Company (including any director who is also an
employee). The exercise price of any option granted under the 1988 Plan may not
be less than 100% of the fair market value of the Company's Common Stock on the
date of grant and, in the case of a participant owning stock possessing more
than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price shall be 110% of the fair market value of the Company's Common
Stock on the date of grant. Shares subject to an option granted under the 1988
Plan may be purchased for cash, in exchange for shares of Common Stock owned by
the optionee, or such other consideration as set forth in the 1988 Plan. The
1988 Plan is administered by the Compensation Committee. Under the 1988 Plan,
options generally vest over two to five years and have a term of ten years
(except with respect to 10% stockholders, which have five-year terms). All
shares received upon exercise of an option under the 1988 Plan are subject to a
right of first refusal by the Company. Shares subject to outstanding options
held at least six months prior to an acquisition of the Company by merger or
sale of all or substantially all of the Company's assets shall be exercisable
pro rata plus one year vesting acceleration. Shares subject to outstanding
options held less than six months prior to such event will be canceled.
1990 NONQUALIFIED STOCK OPTION PLAN. The Board of Directors adopted the
1990 Nonqualified Stock Option Plan (the "1990 Plan") in December 1990. A total
of 1,039,500 shares have been authorized under the 1990 Plan, of which 301,589
shares are subject to outstanding options, 88,074 shares are available for
future grant and 649,837 shares have been issued on exercise of options as of
May 20, 1996. The 1990 Plan provides for the grant of options to senior
executives of the Company subject to terms and conditions set forth in
individual option plan agreements between the Company and each optionee. Options
granted under the 1990 Plan do not qualify as incentive stock options under
Section 422A of the Code.
1993 STOCK OPTION PLAN. The Board of Directors adopted the 1993 Incentive
Stock Option Plan (the "1993 Plan") in April 1993. A total of 1,260,000 shares
have been authorized for issuance under the 1993 Plan, of which 806,352 shares
are subject to outstanding options, 303,036 shares are available for future
grant and 150,612 shares have been issued on exercise of options as of May 20,
1996. The 1993 Plan provides for the grant of "incentive stock options" as
defined in Section 422A of the Internal Revenue Code of 1986, as amended (the
"Code"), to senior executives of the Company. The exercise price of any option
granted under the 1993 Plan may not be less than 100% of the fair market value
of the Company's Common Stock on the date of grant and 110% of fair market value
in the case of a participant owning stock possessing more than 10% of the voting
rights of the Company's outstanding capital stock. Shares subject to an option
granted under the 1993 Plan may be purchased for cash, in exchange for shares of
Common Stock owned by the optionee, or other consideration as set forth in the
1993 Plan. The 1993 Plan is administered by the Compensation Committee. Under
the 1993 Plan, options generally vest over three to five years and have ten-year
terms (except with respect to 10% stockholders, which have five-year terms).
Shares subject to outstanding options held at least six months prior to an
acquisition of the Company by merger or sale of all or substantially all of the
Company's assets shall be exercisable pro rata plus one year vesting
acceleration. Shares subject to outstanding options held less than six months
prior to such event will be canceled.
1996 STOCK OPTION PLAN. The Board of Directors adopted the 1996 Incentive
Stock Option Plan (the "1996 Plan") in April 1996. A total of 2,940,000 shares
have been authorized for issuance under the 1996 Plan, of which 974,694 shares
are subject to outstanding options and 1,965,306 shares are available for future
41
<PAGE>
grant as of May 20, 1996. The 1996 Plan provides for the grant of "incentive
stock options" as defined in Section 422A of the Internal Revenue Code of 1986,
as amended (the "Code"), to employees of the Company. The 1996 Plan also
provides for the grant of options which are not intended to qualify as incentive
stock options under Section 422A of the Code to employees, non-employee
directors and consultants of the Company. The exercise price of any option
granted under the 1996 Plan may not be less than 100% of the fair market value
of the Company's Common Stock on the date of grant and 110% of fair market value
in the case of a participant owning stock possessing more than 10% of the voting
rights of the Company's outstanding capital stock. Shares subject to an option
granted under the 1996 Plan may be purchased for cash, in exchange for shares of
Common Stock owned by the optionee, or other consideration as set forth in the
1996 Plan. The 1996 Plan is administered by the Board of Directors. Under the
1996 Plan, options generally vest 20% per year over 5 years and have ten year
terms (except with respect to 10% stockholders which have five-year terms). If
the Company dissolves, sells substantially all of its assets, is acquired in a
stock-for-stock or security exchange or is party to a merger or reorganization
in which it is not the surviving corporation (a "Change of Control"), then 50%
of the unvested portion of each option held 6 months prior to the effective date
of a Change of Control shall immediately vest and shall be exercisable by the
holder thereof for a period of not less than thirty (30) days prior to the
effective date of such Change of Control. All options shall terminate in their
entirety to the extent not exercised on or prior to the last day of such 30 day
period.
1996 DIRECTORS' STOCK OPTION PLAN. The Board of Directors adopted the 1996
Directors' Stock Option Plan (the "Directors' Plan") in April 1996. A total of
150,000 shares have been authorized for issuance under the Directors' Plan, of
which no shares are subject to outstanding options. Effective upon completion of
an initial public offering, the Directors' Plan provides for the grant to each
non-employee director of the Company upon joining the Board of a stock option to
purchase 10,000 shares of the Company's Common Stock. Under the Directors' Plan,
the exercise price of each option is 100% of the fair market value of the
Company's Common Stock on the date of grant. Options vest annually over three
years and have a term of five years. If an optionee ceases to serve as a
director for any reason, the option may be exercised, to the extent vested,
within 90 days after the date such individual ceases to be a director. In the
event of a Change of Control, then 50% of the unvested portion of each option
held at least six months prior to the effective date of a Change of Control
shall immediately vest and shall be exercisable by the holder thereof for a
period of not less than 30 days prior to the effective date of such Change of
Control. All options shall terminate in their entirety to the extent not
exercised on or prior to the last day of such 30-day period.
EMPLOYEE STOCK PURCHASE PLAN. The Board adopted the Employee Stock Purchase
Plan (the "Purchase Plan") in April 1996. A total of 200,000 shares have been
authorized for issuance under the Purchase Plan, of which none have been issued.
The Purchase Plan provides for employees of the Company to purchase shares of
the Company's Common Stock through payroll deductions. Under the Purchase Plan,
shares are purchased on a quarterly basis at the lower of 95% of the fair market
value of the Company's Common Stock on the first and last business days of each
calendar quarter. Shares purchased under the Purchase Plan may not be sold or
otherwise transferred for six months after issuance under the Purchase Plan. The
Purchase Plan is intended to qualify as an "employee stock purchase plan" under
Sections 421 and 423 of the Code.
DEFERRED COMPENSATION PLAN. The Board adopted the Deferred Compensation
Plan (the "Deferred Plan") effective as of August 1994. The Deferred Plan
permits senior executives of the Company to defer any portion of their
compensation until their termination of employment and allows such executives to
elect to receive the deferred payment in a lump sum or in five, ten or fifteen
annual installments. All deferred payments accrue deemed interest as the Board
of Directors may determine from time to time. The current interest rate is 9.5%.
401(K) RETIREMENT PLAN. The Company has a tax-qualified employee savings
and retirement plan (the "401(k) Plan") covering substantially all of the
Company's employees. Pursuant to the 401(k) Plan, employees may elect to
contribute up to 12% of their compensation, up to the statutorily prescribed
limit, to the 401(k) Plan as a savings contribution. The Company matches
employee contributions of up to 6% of compensation at a ratio of fifty percent.
The plan has a profit sharing element whereby the Company can make a
contribution of up to 5% of each eligible employee's compensation determined at
the discretion of
42
<PAGE>
the Board of Directors and limited in the aggregate to up to 10% of the
Company's consolidated pretax income effective January 1, 1996. The Company is
required to make an additional contribution of 3% of each eligible employee's
annual compensation. The Company's contribution to the 401(k) Plan was
$4,204,000 in 1995. An employee's interest in the savings contributions made by
the employee and matching contributions made by the Company of the 401(k) Plan
are 100% vested when contributed. An employee's interest in profit-sharing and
the Company's required contributions under the 401(k) Plan vest over five years
from date of employment. The 401(k) Plan is intended to qualify under Section
401 of the Code such that contributions made by the employees of the Company to
the 401(k) Plan and income earned on such contributions are not taxable to the
employees until withdrawn from the 401(k) Plan and contributions made by the
Company to the 401(k) Plan are deductible by the Company when made.
The 401(k) Plan is administered by an Administrative Committee composed of
ten members. The current members of the Administrative Committee are Andrew
Beard, Deborah Beitz, Shelley Butler, Randy Gorrell, Arthur Hawkins, Mary
Jordan, Richard Langan, Terence Rooney, Douglas Shurtleff and David Smith, all
of whom are officers or employees of the Company. CG Trust Company serves as
trustee of the 401(k) Plan (the "401(k) Plan Trustee") and follows the
directions of the Administrative Committee with respect to administration of the
401(k) Plan. The 401(k) Plan Trustee, at the direction of each participant, may
invest the assets of the 401(k) Plan in any of six investment options.
EMPLOYEE STOCK OWNERSHIP PLAN. Effective January 1, 1974, the Company
established the ESOP to provide for the accumulation of Company Stock for the
benefit of eligible employees. The ESOP is a non-contributory, individual
account retirement plan which is qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended. Effective as of January 1, 1992, the Company
ceased making contributions to the ESOP and replaced such contributions with
increased Company contributions to the Company's 401(k) Retirement Plan. The
ESOP will be selling shares of Common Stock in this offering based upon
elections of the ESOP participants (who have been given the opportunity to
direct the sale of a portion of the shares allocated to their individual ESOP
accounts).
The ESOP is administered by an Administrative Committee composed of six
members. The current members of the Administrative Committee are Andrew Beard,
Deborah Beitz, Randy Gorrell, Arthur Hawkins, Mary Jordan and Douglas Shurtleff,
all of whom are officers or employees of the Company. Imperial Trust Company
serves as the trustee of the ESOP (the "ESOP Trustee") and follows the
directions of the Administrative Committee with respect to ESOP investments and
benefit distributions. The ESOP provides that participating employees are
entitled to direct the ESOP Trustee as to the voting of shares of Common Stock
allocated to their ESOP Accounts on all matters presented for a vote of
stockholders. The Administrative Committee directs the ESOP Trustee as to the
voting of any shares with respect to which participants do not provide voting
directions. Following retirement, disability, death or other termination of
employment, a participant's ESOP Account is made available for distribution. Any
ESOP participant who has attained age 55 and has participated in the ESOP for at
least ten years is entitled to request that a portion of his ESOP Account be
transferred to the 401(k) Retirement Plan for investment in assets other than
Common Stock.
43
<PAGE>
CERTAIN TRANSACTIONS
The Company is party to a letter agreement with Westar pursuant to which
Westar provides financial management and strategic advisory services to the
Company for a monthly fee of $35,875 plus out-of-pocket expenses. The agreement
may be terminated at any time, with or without cause, by either the Company or
Westar. The Company paid Westar approximately $430,500 for advisory services
during 1995. George L. Argyros, a Director of the Company, is sole shareholder
of GLA Financial, which is a general partner of Westar Capital Associates, which
is the general partner of Westar. Charles D. Martin, a Director of the Company,
is a general partner of Westar Capital Associates. George M. Crandell, a
Director of the Company, is a limited partner of Westar Capital Associates.
The Company, Westar and Enterprise Partners have entered into a Shareholder
Rights Agreement dated December 30, 1988 pursuant to which Westar and Enterprise
Partners have certain registration rights with respect to shares of the
Company's Common Stock owned by them. Charles D. Martin is a general partner of
Enterprise Partners. See "Management -- Executive Officers and Directors,"
"Description of Capital Stock -- Registration Rights" and "Principal and Selling
Stockholders."
In August 1992, the Company entered into an employment agreement with James
C. Castle, Chairman of the Board and Chief Executive Officer. In June 1995, the
Company entered into an employment agreement with Michael McGrail, President of
CableData, Inc. and a Director of the Company. In April, 1996, the Company
entered into severance agreements with C. Randles Lintecum, Douglas L. Shurtleff
and Claudia D. Coleman pursuant to which such individuals will be paid one
year's compensation upon a change of control, as defined in such agreements. See
"Management -- Employment and Severance Agreements." The Company has also
entered into indemnification agreements with each of its officers and directors.
See "Management -- Limitation of Liability and Indemnification Matters."
In March 1995, U.S. Computer Services, the predecessor to the Company,
entered into asset acquisition agreements with two new wholly-owned
subsidiaries, CableData, Inc. ("CableData") and IBS, whereby U.S. Computer
Services transferred the net assets of its Cable Division to CableData and the
net assets of its billing division to IBS in consideration for the issuance of
shares of CableData and IBS, respectively, and the assumption of specified
obligations and liabilities of U.S. Computer Services by CableData and IBS.
Additionally, U.S. Computer Systems Leasing ("USCSL"), a subsidiary of U.S.
Computer Services, entered into asset acquisition agreements with CableLease,
Inc. ("CableLease"), and RPA, Inc. ("RPA"), whereby USCSL transferred its
equipment leasing assets to CableLease and its real property and associated
assets to RPA in consideration for the issuance of shares of CableLease and RPA,
respectively, and the assumption of specified obligations and liabilities of
USCSL by CableLease and IBS.
With respect to each transaction between the Company and an affiliate of the
Company, the Company believes that such transactions were on terms at least as
favorable to the Company as they would have been had they been consummated with
unrelated third parties under similar circumstances. Under Delaware law, a
transaction between the Company and any of its officers or directors or
affiliates of any officer or director may be void or voidable unless the
transaction is approved by a majority of the disinterested directors or a
majority of the stockholders after disclosure of material facts or is fair to
the Company at the time it is authorized.
44
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of May 20,
1996, and as adjusted to reflect the sale of the shares offered hereby by the
Company and the Selling Stockholders, of (i) each Selling Stockholder, (ii) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (iii) each of the Company's directors, (iv)
each of the Named Executive Officers and (v) all directors and executive
officers of the Company as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the securities listed below, based on
information furnished by such owner, have sole investment and voting power with
respect to the Common Stock shown as being beneficially owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED NUMBER OF OWNED
PRIOR TO OFFERING SHARES AFTER OFFERING (2)
NAME AND ADDRESS OF --------------------------- BEING ---------------------------------
BENEFICIAL OWNER NUMBER PERCENT (1) OFFERED NUMBER PERCENT (1)
- ------------------------------------------ ------------ ------------- ---------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Westar Capital,
a California limited partnership (3)
Attn: Charles Martin
950 S. Coast Drive, Suite 165
Costa Mesa, CA 92626..................... 8,718,276 44.8% -- 8,718,276 39.2%
ESOP -- Imperial Trust Co.,
Trustee for U.S. Computer Services
Employee Stock Ownership Plan (4)
456 Montgomery Street, Suite 600
San Francisco, CA 94101.................. 5,558,645 28.5 1,616,998 3,941,647 17.7
Gerald S. Knapp (5)
5150 Fair Oaks Blvd., #101-134
Carmichael, CA 95608..................... 1,153,219 5.9 200,000 953,219 4.3
George L. Argyros, Sr. (6)................ 8,718,276 44.8 -- 8,718,276 39.2
Charles D. Martin (7)..................... 9,907,062 50.9 -- 9,907,062 44.6
George M. Crandell, Jr.................... -- -- -- -- --
Larry W. Wangberg......................... -- -- -- -- --
Frank Delfer (8).......................... 369,940 1.9 156,744 213,196 1.0
James C. Castle, Ph.D. (9)................ 232,415 1.2 -- 232,415 1.0
C. Randles Lintecum (10).................. 60,480 * -- 60,480 *
Michael F. McGrail (11)................... 39,942 * -- 39,942 *
Douglas L. Shurtleff (12)................. 18,900 * -- 18,900 *
Claudia D. Coleman........................ -- -- -- -- --
All current directors and executive
officers as a group (9 persons)
(6)(7)(13)............................... 10,258,799 52.3 % -- 10,258,799 45.9 %
Other Selling Shareholders (each
beneficially owning less than 1% of the
Company's Common Stock)
(13 persons)............................. 189,724 1.0 62,403 128,703 *
----------
Total.............................................................. 2,036,145
----------
----------
</TABLE>
- ------------------------
* Less than 1%.
45
<PAGE>
(FOOTNOTES FROM PRECEDING PAGE)
(1) Applicable percentage of ownership is based on 19,471,719 shares of Common
Stock outstanding (on an as-converted basis) as of May 20, 1996 and
22,235,574 shares of Common Stock outstanding after completion of this
offering. The number of shares of Common Stock beneficially owned and
calculation of percent ownership, in each case, takes into account those
shares underlying stock options that are exercisable within 60 days after
May 20, 1996, but that may or may not be subject to repurchase rights.
(2) Assumes the Underwriters' over-allotment option to purchase up to 720,000
shares of Common Stock is not exercised.
(3) Shares held of record by Westar Capital, a California limited partnership
("Westar"). The sole general partner of Westar is Westar Capital Associates.
GLA Financial, Charles D. Martin and John Clark are general partners of
Westar Capital Associates. George L. Argyros, Jr. is sole shareholder of GLA
Financial and a limited partner of Westar and Westar Capital Associates. GLA
Financial and Messrs. Argyros, Clark and Martin may be deemed to have shared
voting or dispositive power with respect to the shares held by Westar. GLA
Financial and Messrs. Argyros, Clark and Martin disclaim beneficial
ownership of shares held by Westar except to the extent of their interests
described above.
(4) See "Management -- Employee and Director Plans -- Employee Stock Ownership
Plan."
(5) Consists of 772,884 shares held by Gerald S. Knapp and Susan G. Knapp,
Trustees of the Knapp 1996 Revocable Trust and 380,335 shares held by the
Gerald S. Knapp Individual Retirement Account. Mr. Knapp was President of
the Company's CableData subsidiary and a Director of the Company until April
1995.
(6) Consists of 8,718,276 shares held by Westar, a private equity investment
firm. Mr. Argyros disclaims beneficial ownership of the shares held by
Westar, except to the extent of his ownership interests in GLA Financial and
Westar.
(7) Consists of 8,718,276 shares held by Westar, and 691,212 shares held by
Enterprise Partners, 456,183 shares held by Enterprise Partners II, L.P. and
41,391 shares held by Enterprise Partners II Associates, L.P., each a
venture capital firm (collectively, the "Enterprise Entitites"). Mr. Martin
is a general partner of Westar Capital Associates and is a general partner
of each of Enterprise Management Partners (which is general partner of
Enterprise Partners) and Enterprise Management Partners II (which is general
partner of Enterprise Partners II, L.P. and Enterprise Partners II
Associates, L.P.). Mr. Martin disclaims beneficial ownership of the shares
held by Westar and the Enterprise Entities, except to the extent of his
ownership interest in Westar, Enterprise Management Partners and Enterprise
Management Partners II, respectively.
(8) Includes 132,657 shares issuable pursuant to stock options within 60 days
of May 20, 1996 and 16,632 shares of Common Stock held of record by Debbie
Delfer, Mr. Delfer's spouse. Of the 156,744 shares offered by Mr. Delfer
hereby, 16,632 shares are held of record by Mrs. Delfer. Mr. Delfer was
President and General Manager of International Billing Services, a
subsidiary of the Company, until July 1995.
(9) Includes 15,368 shares issuable pursuant to stock options within 60 days of
May 20, 1996.
(10) Includes 58,380 shares issuable pursuant to stock options within 60 days of
May 20, 1996.
(11) Consists of 39,942 shares issuable pursuant to stock options within 60 days
of May 20, 1996.
(12) Consists of 18,900 shares issuable pursuant to stock options within 60 days
of May 20, 1996.
(13) Includes 132,590 shares issuable pursuant to stock options within 60 days
of May 20, 1996. See "Management -- Employee and Director Plans."
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary is a description of certain provisions of the
Company's Certificate of Incorporation and Bylaws that will be in effect as of
the closing of this offering. Such summary does not purport to be complete and
is subject to, and is qualified in its entirety by, all of the provisions of the
Certificate of Incorporation and Bylaws, including the definitions therein of
certain terms. Copies of the Certificate of Incorporation and Bylaws are filed
as exhibits to the Registration Statement of which this Prospectus forms a part.
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $.05 par value and
10,000,000 shares of Preferred Stock. After this offering, 22,235,574 shares of
Common Stock will be outstanding, after giving effect to the 2-for-1 stock split
of the Common Non-Voting Stock, the 2.1-for-1 stock split of the Common Voting
Stock and the conversion of Common Non-Voting Stock into Common Voting Stock on
a 1-for-1 basis.
COMMON STOCK
As of May 20, 1996, there were 19,471,719 shares of Common Stock outstanding
(as adjusted to reflect the conversion of 3,117,159 shares of Common Non-Voting
Stock into 6,234,318 shares of Common Stock and 6,303,524 shares of Common
Voting Stock into 13,237,401 shares of Common Stock) held of record by
approximately 260 stockholders. Each outstanding share of Common Stock is fully
paid and nonassessable. Each holder of record of Common Stock is entitled to one
vote per share on all matters submitted to a vote of the stockholders. There are
no cumulative voting or preemptive rights applicable to any shares of Common
Stock. All shares of Common Stock are entitled to participate pro rata in
distributions and in such dividends as may be declared by the Board of Directors
out of funds legally available therefor, subject to any preferential divided
rights of any outstanding shares of Preferred Stock. Subject to the prior rights
of creditors, all shares of Common Stock are entitled in the event of
liquidation, dissolution or winding up of the Company to participate ratably in
the distribution of all the remaining assets of the Company after distribution
in full of preferential amounts, if any, to be distributed to holders of
Preferred Stock. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of any series
of Preferred Stock which the Company may designate and issue in the future.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority, without further action by the stockholders, to
issue up to 10,000,000 shares of Preferred Stock in one or more series and to
fix the designations, powers, preferences, privileges, and relative
participating, optional or special rights and the qualifications, limitations or
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, any or all of which may
be greater than the rights of the Common Stock. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting, conversion or other
rights that could adversely affect the voting power and other rights of the
holders of Common Stock. Preferred Stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of the Company or make
removal of management more difficult. Additionally, the issuance of Preferred
Stock may have the effect of decreasing the market price of the Common Stock,
and may adversely affect the voting and other rights of the holders of Common
Stock. As of the date of the Offering, there are no issued and outstanding
shares of Preferred Stock and no such shares are being offered hereby. However,
a right to purchase shares of Series A Preferred Stock has been attached to each
share of Common Stock in connection with the Company's adoption of the
Stockholder Rights Plan discussed below. The Company has authorized 52,000
shares of Series A Preferred Stock initially for issuance upon exercise of such
rights.
Holders of Series A Preferred Stock shall be entitled prior to the payment
of any dividends of shares ranking junior to the Series A Preferred Stock to
receive, when, as and if declared by the Board out of funds legally available
therefor, quarterly dividends in an amount determined under the terms of the
Certificate of Designation. The dividends shall be cumulative and shall begin to
accrue on outstanding shares as set forth in such Certificate.
47
<PAGE>
Holders of Series A Preferred Stock are entitled to one vote for each
1/1000th share of Series A Preferred Stock on all matters submitted to a vote of
stockholders and, except as otherwise provided in the Certificate of
Designation, shall vote together with the holders of Common Stock as one class
on all such matters. The number of votes per share are subject to adjustment
under certain circumstances as set forth in the Certificate of Designation. The
affirmative vote of the holders of a majority of the outstanding shares of
Series A Preferred Stock, voting separately as a class, is required on any
amendment to the Company's Certificate that would materially alter or change in
an adverse manner the powers, preferences, rights, qualifications, limitations
and restrictions of the Series A Preferred Stock.
Except as set forth in the Certificate of Designation, in the event of any
liquidation, dissolution or winding up of the Company, the holders of Series A
Preferred Stock are entitled to receive an amount per share equal to 1,000 times
the aggregate amount to be distributed per share to holders of the Common Stock
prior to any distribution on shares of capital stock of the Company that rank
junior to the Series A Preferred Stock.
The Series A Preferred Stock shall not be redeemable. No shares of Series A
Preferred Stock have been issued and no shares will be issued except upon
exercise of the rights distributed under the Stockholders' Rights Plan.
REGISTRATION RIGHTS
Pursuant to an agreement among the Company, Westar and Enterprise Partners,
Westar and Enterprise Partners are entitled to certain rights with respect to
the registration of such shares under the Securities Act. If the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders, Westar and
Enterprise Partners are entitled to notice of such registration and are entitled
to include shares of such Common Stock therein. Additionally, Westar and
Enterprise Partners are also entitled to certain demand registration rights
pursuant to which they may require the Company to file a registration statement
under the Securities Act with respect to their shares of Common Stock, and the
Company is required to use its best efforts to effect such registration. All of
these registration rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration. Westar and Enterprise Partners have agreed
to waive their registration rights in this offering.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND THE PROPOSED STOCKHOLDERS' RIGHTS PLAN
CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
could be deemed to have an anti-takeover effect. These provisions are intended
to enhance the likelihood of continuity and stability in the composition of the
Board and in the policies formulated by the Board, and to discourage an
unsolicited takeover of the Company if the Board determines that such takeover
is not in the best interests of the Company and its stockholders. However, these
provisions could have the effect of discouraging certain attempts to acquire the
Company or remove incumbent management even if some or a majority of
stockholders deemed such an attempt to be in their best interests.
The Certificate of Incorporation provides for a classified Board consisting
of three classes, as nearly equal in number as the then authorized number of
directors constituting the Board permits. The initial terms of the first class,
the second class and the third class are set to expire at the conclusion of the
1996 annual meeting, the 1997 annual meeting, and the 1998 annual meeting of
stockholders, respectively. At each annual meeting of stockholders beginning in
1996, successors to the directors whose terms expire at that annual meeting
shall be elected for a three-year term, with each director to hold office until
a successor has been duly elected and qualified. As a result, approximately
one-third of the Board will be elected each year.
The Bylaws provide that stockholders may remove a director with cause only
upon the affirmative vote of a majority of shares entitled to vote at an
election of directors. This provision, combined with the provisions in the
Bylaws authorizing the Board to fill vacant directorships, precludes a
stockholder from removing incumbent directors and simultaneously gaining control
of the Board by filling the vacancies
48
<PAGE>
created by such removal with its own nominees. The Certificate of Incorporation
also provides that the affirmative vote of 66 2/3% of the outstanding shares is
required to amend certain provisions in the Company's Certificate of
Incorporation.
The Bylaws establish an advance notice procedure for the nomination, other
than by or at the direction of the Board, of candidates for election as
directors as well as for other stockholder proposals to be considered at annual
meetings of stockholders. Notice must be received by the Company not less than
60 days prior to the annual meeting and must contain certain specified
information concerning the persons to be nominated or the matters to be brought
before the meeting and concerning the stockholder submitting the proposal. The
Bylaws also provide that special meetings of stockholders of the Company may be
called by a stockholder holding not less than 20% of the Company's outstanding
voting stock only upon 60 days advance notice.
STOCKHOLDERS' RIGHTS PLAN
The Company has entered into a Stockholders' Rights Plan (the "Rights Plan")
by and between the Company and Chase/Mellon Shareholder Services, LLC, as rights
agent with the following terms. Under the Rights Plan, the Board declared and
distributed a dividend of one right ("Right") for each outstanding share of the
Common Stock to the stockholders of record as of the date of this Prospectus.
Shares of Common Stock issued in the Offering (assuming no triggering event)
automatically receive these Rights. The Rights are not exercisable or
transferrable separately from the shares of Common Stock until the earlier of
(the "Distribution Date"): (i) ten days following a public announcement that a
person or group has acquired or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of the Common Stock; or (ii)
ten days following the commencement or announcement of an intention to make a
tender or exchange offer that would result in an acquiring person or group
beneficially owning 15% or more of such outstanding shares of the Common Stock,
unless the Board sets a later date in either event. The Board has the option to
redeem the Rights at a nominal cost to prevent the Rights from being triggered
by designating certain offers for all the outstanding Common Stock as a
permitted offer. Prior to the Distribution Date, the Company may amend or
supplement the Rights Plan without the consent of any of the holders of the
Rights. Following the Distribution Date, the Rights Plan may be so amended to
cure any ambiguity, to correct or supplement any inconsistent provision or any
other provision so long as such amendment or supplement does not adversely
affect the holders of the Rights (other than an acquiring person or group). The
Rights expire ten years after the date of adoption of the Rights Plan by the
Board unless earlier redeemed by the Company.
The Rights, when exercisable, entitle their holders (other than those held
by an acquiring person or group) to purchase 1/1,000th of a share of Preferred
Stock (subject to adjustment) or, in certain instances, other securities of the
Company. In certain circumstances, if the Company is involved in a merger or
consolidation and is not the surviving entity or disposes of more than 50
percent of the Company's assets or earnings power, the Rights would also entitle
their holders (other than an acquiring person or group) to purchase the highest
priority voting shares in the surviving entity or its affiliates having a market
value of two times the exercise price of the Rights.
The Rights Plan is intended to encourage a potential acquiring person or
group to negotiate directly with the Board, but may have certain anti-takeover
effects. The Rights Plan could significantly dilute the interests in the Company
of an acquiring person or group. The Rights Plan may therefore have the effect
of delaying, deterring or preventing a change in control of the Company.
The foregoing description of the Rights Plan is qualified in its entirety by
reference to the Rights Plan, a copy of which is included as an exhibit to the
Registration Statement of which this Prospectus is a part.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporations
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the
49
<PAGE>
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines business combinations to include: (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii) any
sale, transfer, pledge or other disposition involving the interested stockholder
of 10% or more of the assets of the corporation, (iii) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder, (iv)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder, or (v) the receipt by the
interested stockholder of the benefits of any loans, advances, guarantees,
pledges, or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
Chase/Mellon Shareholder Services, LLC has been appointed as the transfer
agent and registrar for the Company's Common Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation and Bylaws provide for expanded
indemnification of directors and officers of the Company and limits the
liability of directors of the Company. The Bylaws provide that the Company shall
indemnify each person who is or was an officer or director of the Company, or is
or was serving as an officer, director, employee or agent of any other
corporation, partnership, joint venture, trust or other enterprise at the
request of the Company, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement (if such settlement is approved in advance
by the Company, which approval shall not be unreasonably withheld) actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she believed
to be in or not opposed to the best interests of the Company, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. Such right to indemnification includes the right to
advancement of expenses incurred by such person prior to final disposition of
the proceeding, provided that such director or officer shall provide the Company
with an undertaking to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision that such person is not entitled to be
indemnified for such expenses. The Bylaws also provide that the Company shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he or she
is or was a director, officer, employee or agent of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him or her in connection with the defense or settlement of such action or suit,
if he or she acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the Company, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Company unless
and only to the extent that the Delaware Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Delaware
50
<PAGE>
Court of Chancery or such other court shall deem proper. No person shall be
indemnified by the Company for any expenses or amounts paid in settlement with
respect to any action to recover short-swing profits under Section 16(b) of the
Securities Exchange Act of 1934, as amended. The Certificate of Incorporation
provides that if the Delaware General Corporation Law is amended to further
eliminate or limit the personal liability of directors, then the liability of a
director of the Company shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended. The Company
has also entered into agreements to indemnify its officers and directors in
addition to the indemnification provided for in the Company's Bylaws.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that market sales of the
Company's Common Stock or the availability of the Company's Common Stock for
sale will have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of the Common Stock of the Company in the public
market after the restrictions described below lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of this offering (assuming no exercise of the Underwriters'
over-allotment option), the Company will have outstanding 22,235,574 shares of
Common Stock. In addition to the 4,800,000 shares to be sold in this offering,
approximately 741,000 additional shares issued and outstanding as of May 20,
1996, will be eligible for immediate sale in the public market without
restriction following consummation of this offering pursuant to Rule 144(k) of
the Securities Act. Commencing 30 days and 60 days after the date of this
Prospectus, an additional 50,000 shares and 50,000 shares, respectively, will be
eligible for immediate sale in the public market without restriction pursuant to
Rule 144(k). Commencing 90 days after the date of the Prospectus, approximately
168,000 shares outstanding and 18,000 shares subject to options will be eligible
for sale in the public market pursuant to Rule 701 or Rule 144 of the Securities
Act. Commencing 120 days after the date of this Prospectus, an additional 50,000
shares will be eligible for immediate sale in the public market without
restriction pursuant to Rule 144. Commencing 180 days after the date of the
Prospectus, upon the expiration of lock-up agreements with the Underwriters,
approximately 16,372,000 shares of Common Stock issued and outstanding as of May
20, 1996, will be eligible for immediate sale in the public market pursuant to
Rule 144 or Rule 701, subject to compliance with certain volume limitations and
other restrictions under Rule 144 as well as, in some cases, certain contractual
restrictions on sale. See "Risk Factors -- Shares Eligible for Future Sale."
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least two years,
including the holding period of any securities which converted into the
Restricted Shares and including the holding period of any prior owner except an
affiliate, will be entitled to sell within any three month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
Common Stock (222,356 shares immediately after this offering assuming no
exercise of the Underwriters' over-allotment option) or the average weekly
trading volume of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who has beneficially owned shares
for at least three years (including any period of ownership of preceding non-
affiliated holders), will be entitled to sell such shares under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to stock options granted by the Company
before this offering, along with the shares acquired upon exercise of such
options. Securities issued in reliance on Rule 701 are deemed to be Restricted
Shares and, beginning 90 days after the date of this
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<PAGE>
Prospectus (unless subject to the contractual restrictions described above), may
be sold by persons other than affiliates subject only to the manner of sale
provisions of Rule 144 and by affiliated under Rule 144 without compliance with
its two-year minimum holding period requirements.
The Company intends to file a Registration Statement under the Securities
Act covering approximately 6,534,500 shares of Common Stock which have been
issued, are reserved for issuance or which the Company intends to reserve for
issuance under the Company's 1988 Incentive Stock Option Plan, 1990 Nonstatutory
Stock Option Plan, 1993 Incentive Stock Option Plan, 1996 Incentive Stock Option
Plan, 1996 Directors' Stock Option Plan and the Employee Stock Purchase Plan.
See "Management -- Employee and Director Plans." Such Registration Statement is
expected to be filed as soon as practicable after the date of this Prospectus
and will automatically become effective upon filing. Accordingly, shares
registered under such Registration Statement will be available for sale in the
open market, unless such shares are subject to vesting restrictions and subject
to limitations on resale by affiliates.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), the Company and each of the Selling Stockholders have
agreed to sell to each of the Underwriters named below, and each of the
Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Montgomery Securities are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Company and the
Selling Stockholders, the aggregate number of shares of Common Stock set forth
opposite its name below. The Underwriters are committed to purchase all of such
shares if any are purchased. Under certain circumstances, the commitments of
non-defaulting Underwriters may be increased as set forth in the Purchase
Agreement.
<TABLE>
<S> <C>
NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------------------------- ----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................................................... 1,550,000
Montgomery Securities................................................................................ 1,550,000
Alex. Brown & Sons Incorporated...................................................................... 100,000
CS First Boston Corporation.......................................................................... 100,000
Dean Witter Reynolds Inc............................................................................. 100,000
Hambrecht & Quist LLC................................................................................ 100,000
Lehman Brothers Inc.................................................................................. 100,000
Prudential Securities Incorporated................................................................... 100,000
Robertson, Stephens & Company LLC.................................................................... 100,000
Salomon Brothers Inc................................................................................. 100,000
Smith Barney Inc..................................................................................... 100,000
Adams, Harkness & Hill, Inc.......................................................................... 50,000
William Blair & Company, L.L.C....................................................................... 50,000
Brean Murray, Foster Securities Inc.................................................................. 50,000
Gerard Klauer Mattison & Co. LLC..................................................................... 50,000
Interstate/Johnson Lane Corporation.................................................................. 50,000
Jefferies & Company, Inc............................................................................. 50,000
Legg Mason Wood Walker, Incorporated................................................................. 50,000
Needham & Company, Inc............................................................................... 50,000
Pennsylvania Merchant Group Ltd...................................................................... 50,000
Punk, Ziegel & Knoell, L.P........................................................................... 50,000
Raymond James & Associates, Inc...................................................................... 50,000
Soundview Financial Group, Inc....................................................................... 50,000
Utendahl Capital Partners, L.P....................................................................... 50,000
Vector Securities International, Inc................................................................. 50,000
Wheat, First Securities, Inc......................................................................... 50,000
William K. Woodruff & Company Incorporated........................................................... 50,000
----------
Total.................................................................................... 4,800,000
----------
----------
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose initially to offer the shares of Common Stock to
the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $
per share. The Underwriters may allow, and such dealers may reallow, a discount
not in excess of $ per share on sales to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
The Company has granted the Underwriters an option, exercisable for 30 days
after the date hereof, to purchase up to 720,000 additional shares of Common
Stock, respectively, solely to cover over-allotments, if any, at the initial
public offering price, less the underwriting discount. If the Underwriters
exercise this
53
<PAGE>
option, each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it in the foregoing table is
of the 4,800,000 shares of Common Stock initially offered hereby.
The Company's officers and directors, the Selling Stockholders, certain
other stockholders of the Company, and the Company, subject to certain limited
exceptions, have agreed not to offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer, directly or indirectly, any shares of the Company's Common Stock or
any securities convertible into or exchangeable or exercisable for Common Stock,
or enter into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence of
ownership of the Common Stock, without the prior written consent of Merrill
Lynch, for a period of 180 days after the date of this Prospectus. Such
officers, directors and stockholders have executed 180-day lock-up agreements
with respect to an aggregate of approximately 16,372,000 shares of Common Stock.
The Underwriters have reserved for sale at the initial public offering price
up to 300,000 shares which may be sold to the Company's management employees,
customers and suppliers and other persons associated with the Company or
affiliated with any director, officer or management employee of the Company. The
number of shares available for sale to the general public will be reduced to the
extent any reserved shares are purchased. Any reserved shares not so purchased
will be offered by the Underwriters on the same basis as the other shares
offered hereby.
Prior to this offering, there has been no public market for the shares of
Common Stock of the Company. The initial public offering price will be
determined through negotiations among the Company, the Selling Stockholders and
the Representatives. Among the factors to be considered in determining the
initial public offering price, in addition to prevailing market conditions, are
price-earnings ratios of publicly traded companies that the Representatives
believe to be comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common Stock
will trade in the public market subsequent to this offering at or above the
initial public offering price.
The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Graham & James LLP,
Sacramento, California. Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California, are acting as counsel for the Underwriters
in connection with certain legal matters relating to the shares of Common Stock
offered hereby.
EXPERTS
The consolidated financial statements as of December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 included in
this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
54
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act, and the rules and regulations promulgated thereunder,
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in the Prospectus as to the contents of
any contract or other document that is filed as an exhibit to the Registration
Statement are not necessarily complete and each such statement is qualified in
all respects by reference to the full text of such contract or document. For
further information with respect to the Company and the Common Stock, reference
is hereby made to such exhibits and schedules thereto, which may be inspected
and copied at the principal office of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of each such
document may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the charges prescribed by the Commission.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent certified public
accountants and with quarterly reports containing unaudited financial
information for each of the three quarters of each fiscal year.
55
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)................ F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the three
months ended March 31, 1995 (unaudited) and 1996 (unaudited).............................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and
the three months ended March 31, 1996 (unaudited)......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the three
months ended March 31, 1995 (unaudited) and 1996 (unaudited).............................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of USCS International, Inc. (formerly U.S. Computer Services)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of USCS
International, Inc. (formerly U.S. Computer Services) and its subsidiaries at
December 31, 1994 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Sacramento, California
March 4, 1996, except for Note 13 which is as of June 20, 1996
F-2
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash...................................................................... $ 1,966 $ 6,627 $ 5,930
Accounts receivable....................................................... 51,519 59,907 62,768
Current portion of net investment in leases (note 12)..................... 9,705 6,868 5,746
Paper products and other inventory........................................ 4,710 5,608 6,134
Other..................................................................... 4,803 4,904 5,618
---------- ---------- -----------
Total current assets.................................................... 72,703 83,914 86,196
Property and equipment, net (note 3)........................................ 72,256 85,385 86,274
Net investment in leases, net of current portion (note 12).................. 10,998 7,320 6,125
Other....................................................................... 1,374 3,831 4,229
---------- ---------- -----------
Total assets................................................................ $ 157,331 $ 180,450 $ 182,824
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (note 3)............................ $ 44,641 $ 44,974 $ 43,944
Current portion of long-term debt (note 5)................................ 14,711 11,679 10,143
Deferred revenue.......................................................... 1,897 3,821 3,766
---------- ---------- -----------
Total current liabilities............................................... 61,249 60,474 57,853
Long-term debt, net of current portion (note 5)............................. 37,647 51,155 53,090
Customer deposits........................................................... 11,640 13,497 13,364
Other liabilities........................................................... 6,934 8,734 9,430
---------- ---------- -----------
Total liabilities....................................................... 117,470 133,860 133,737
---------- ---------- -----------
Commitments and Contingencies (note 6)
Stockholders' Equity (notes 7, 10 and 13):
Preferred Stock, $.05 par value, 10,000,000 shares authorized; no shares
issued and outstanding................................................... -- -- --
Common Stock, $.05 par value
Voting: Authorized 40,000,000 shares; Issued and outstanding: 12,516,903
shares at December 31, 1994, 12,813,313 shares at December 31, 1995 and
12,812,404 shares at March 31, 1996 (unaudited)........................ 626 641 641
Non-Voting: Authorized 12,000,000 shares; Issued and outstanding:
6,861,240 shares at December 31, 1994, 6,228,702 shares at December 31,
1995 and 6,222,182 shares at March 31, 1996 (unaudited)................ 343 311 311
Retained earnings......................................................... 39,185 45,966 48,487
Foreign currency translation adjustment................................... (293) (328) (352)
---------- ---------- -----------
Total stockholders' equity.............................................. 39,861 46,590 49,087
---------- ---------- -----------
Total liabilities and stockholders' equity.................................. $ 157,331 $ 180,450 $ 182,824
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenue:
Software and services.............. $ 116,563 $ 155,247 $ 197,282 $ 46,484 $ 55,421
Equipment sales and services....... 49,501 33,558 31,981 6,528 4,834
------------- ------------- ------------- ------------- -------------
Total revenue.................... 166,064 188,805 229,263 53,012 60,255
Cost of revenue:
Software and services.............. 72,758 103,046 127,702 29,813 35,228
Equipment sales and services....... 31,561 19,476 19,538 3,701 2,933
------------- ------------- ------------- ------------- -------------
Total cost of revenue............ 104,319 122,522 147,240 33,514 38,161
------------- ------------- ------------- ------------- -------------
Gross profit......................... 61,745 66,283 82,023 19,498 22,094
------------- ------------- ------------- ------------- -------------
Operating Expenses:
Research and development........... 16,007 16,700 17,815 4,504 5,642
Selling, general and
administrative.................... 28,148 34,160 42,102 10,057 11,009
Consolidation and relocation
expenses (note 8)................. 4,096 (364) -- -- --
------------- ------------- ------------- ------------- -------------
Total operating expenses......... 48,251 50,496 59,917 14,561 16,651
------------- ------------- ------------- ------------- -------------
Operating income..................... 13,494 15,787 22,106 4,937 5,443
Interest expense..................... 4,609 4,284 4,966 1,168 1,206
------------- ------------- ------------- ------------- -------------
Income before income taxes and
cumulative effect of accounting
change.............................. 8,885 11,503 17,140 3,769 4,237
Income tax provision (note 9)........ 4,330 5,334 6,770 1,488 1,674
------------- ------------- ------------- ------------- -------------
Income before cumulative effect of
accounting change................... 4,555 6,169 10,370 2,281 2,563
Cumulative effect to January 1, 1993
of change in method of accounting
for income taxes (note 9)........... 2,408 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income........................... $ 6,963 $ 6,169 $ 10,370 $ 2,281 $ 2,563
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Earnings per share (note 13):
Income before cumulative effect of
accounting change................. $ 0.20 $ 0.28 $ 0.49 $ 0.11 $ 0.12
Cumulative effect of accounting
change............................ 0.11 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net income......................... $ 0.31 $ 0.28 $ 0.49 $ 0.11 $ 0.12
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average common shares and
equivalents......................... 22,129,307 21,881,516 21,137,863 21,493,604 20,659,378
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
-------------------------------------- CURRENCY
NUMBER OF PAID-IN RETAINED TRANSLATION
SHARES VOTING NON- VOTING CAPITAL EARNINGS ADJUSTMENT
------------ ----------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993........................ 20,058,219 $ 627 $ 376 $ 4 $ 29,288 $ (850)
Issuance of common stock........................ 10,962 -- -- 15 -- --
Repurchase of common stock...................... (292,377) (3) (11) (19) (1,089) --
Translation adjustment.......................... -- -- -- -- -- 332
Net income...................................... -- -- -- -- 6,963 --
------------ ----- ----- --------- --------- -----
Balance, December 31, 1993...................... 19,776,804 624 365 -- 35,162 (518)
Issuance of common stock........................ 161,406 8 -- 332 -- --
Repurchase of common stock...................... (560,067) (6) (22) (332) (2,146) --
Translation adjustment.......................... -- -- -- -- -- 225
Net income...................................... -- -- -- -- 6,169 --
------------ ----- ----- --------- --------- -----
Balance, December 31, 1994...................... 19,378,143 626 343 -- 39,185 (293)
Issuance of common stock........................ 708,393 35 -- 1,608 --
Repurchase of common stock...................... (1,044,521) (20) (32) (1,608) (3,589) --
Translation adjustment.......................... -- -- -- -- -- (35)
Net income...................................... -- -- -- -- 10,370 --
------------ ----- ----- --------- --------- -----
Balance, December 31, 1995...................... 19,042,015 641 311 -- 45,966 (328)
Repurchase of common stock (unaudited).......... (7,429) -- -- -- (42) --
Translation adjustment (unaudited).............. -- -- -- -- -- (24)
Net income (unaudited).......................... -- -- -- -- 2,563 --
------------ ----- ----- --------- --------- -----
Balance, March 31, 1996 (unaudited)............. 19,034,586 $ 641 $ 311 -- $ 48,487 $ (352)
------------ ----- ----- --------- --------- -----
------------ ----- ----- --------- --------- -----
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income............................................ $ 6,963 $ 6,169 $ 10,370 $ 2,281 $ 2,563
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization....................... 11,987 13,734 16,000 3,721 4,684
Loss on sale of assets.............................. 74 148 102 -- 35
Provision for consolidation and relocation,
net of payments.................................... 4,028 (364) -- -- --
Cumulative effect of accounting change.............. (2,408) -- -- -- --
Changes in operating assets and liabilities:
Accounts receivable............................... (19,819) (2,955) (8,388) (2,850) (2,861)
Net investment in leases.......................... (11,876) (8,904) (7,230) (715) (512)
Collections on leases............................. 10,651 11,201 13,745 3,486 2,829
Paper products and other inventory................ 4,109 (1,961) (898) (1,923) (526)
Other assets...................................... (294) (372) (558) (1,952) (862)
Customer deposits................................. 8,914 4,820 1,857 195 (133)
Other liabilities................................. 8,967 6,076 4,022 (3,362) (413)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities... 21,296 27,592 29,022 (1,119) 4,804
---------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures, net........................... (18,546) (33,412) (29,231) (8,427) (5,608)
Capitalized software expenditures................... -- -- (2,000) (128) (250)
---------- ---------- ---------- ---------- ----------
Net cash used in investing activities................. (18,546) (33,412) (31,231) (8,555) (5,858)
---------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Net borrowings under revolving credit agreement..... -- 8,000 22,000 17,164 8,000
Proceeds from issuance of long-term debt............ 11,627 4,678 4,096 -- --
Payments on long-term debt.......................... (14,165) (10,884) (15,620) (7,037) (7,601)
Proceeds from issuance of common stock.............. 15 340 1,643 4 --
Repurchase of common stock.......................... (1,122) (2,506) (5,249) (13) (42)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities... (3,645) (372) 6,870 10,118 357
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash....................... (895) (6,192) 4,661 444 (697)
Cash at beginning of period........................... 9,053 8,158 1,966 1,966 6,627
---------- ---------- ---------- ---------- ----------
Cash at end of period................................. $ 8,158 $ 1,966 $ 6,627 $ 2,410 $ 5,930
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Supplemental cash flow information:
Cash paid during the year for:
Interest............................................ $ 4,580 $ 4,277 $ 5,145 $ 1,129 $ 1,412
Income taxes........................................ $ 4,783 $ 7,228 $ 4,210 $ 16 $ 60
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THE INFORMATION PRESENTED AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. GENERAL
U.S. Computer Services (the Company) was incorporated in California in 1969.
On April 18, 1996, the Board of Directors authorized the reincorporation of the
Company into USCS International Inc., a Delaware corporation. See Note 13. The
Company operates in one segment providing transaction based comprehensive
customer management software and services and bill presentment services to the
global communications industry, and sells, maintains and leases computer systems
primarily in North America. The Company generally provides software and bill
presentment services to cable television and multi-service providers under
long-term bundled service contracts. The Company also provides bill presentment
services on a stand-alone basis primarily to clients in the telecommunications
market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION -- The consolidated financial statements include the
accounts of USCS International, Inc. and its wholly owned subsidiaries after
elimination of intercompany accounts and transactions.
FINANCIAL STATEMENT PREPARATION -- The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION -- The Company recognizes services revenue monthly as
the services are performed. Fixed fees and the present value of minimum fees
under software licenses are recognized as revenue upon installation. Variable
software license fees are a component of fees billed under bundled service
contracts and are recognized as revenue over the life of the license based on
usage. Revenue from equipment sales is recognized as equipment is shipped.
Income from sales-type leases is recognized as revenue at a constant periodic
rate of return on the net investment in the lease. Billing for services in
advance of performance is recorded as deferred revenue.
CONCENTRATION OF CREDIT RISK -- Financial instruments that subject the
Company potentially to significant concentrations of credit risk consist
principally of trade accounts receivable. A majority of the Company's trade
receivables are derived from sales to cable television and telecommunications
companies. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral. The Company
maintains an allowance for doubtful accounts on its receivables based upon
expected collectibility. Uncollectible accounts have not been significant.
PAPER PRODUCTS AND OTHER INVENTORY -- Paper products and other inventory
is stated at the lower of standard cost, which approximates actual cost
(determined on a first-in, first-out basis), or market.
PROPERTY AND EQUIPMENT -- Property and equipment is recorded at cost.
Depreciation and amortization expense is recognized on the declining balance and
straight-line methods over useful lives ranging from two to seven years on
equipment and thirty-one to forty years on buildings.
RESEARCH AND DEVELOPMENT -- Research and development costs are expensed as
incurred and consist primarily of software development costs incurred prior to
the achievement of technological feasibility. The Company capitalizes software
development costs after the products reach technological feasibility. These
costs are amortized on a product-by-product basis using the greater of the
amount computed by taking the ratio of current year net revenue to estimated
future net revenue or the amount computed by the straight-line method over the
estimated useful life of the product. No amortization has been recorded to date.
The
F-7
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT (CONTINUED)
Company evaluates the net realizable value of capitalized software development
costs on a product-by-product basis in accordance wtih SFAS 86. The cost of
custom development that is required by a specific client is charged to cost of
revenue.
The Company has entered into strategic alliances with vendors which
underwrite a portion of the enhancements to the Company's software. The Company
retains the rights to the enhancements and the vendors may be entitled to
repayment if certain milestones are not achieved. Funding subject to repayment
is deferred until the related repayment obligations lapse. Funding not subject
to repayment is offset against related software development costs.
CUSTOMER DEPOSITS -- The Company requires postage deposits of its clients
based on long-term contractual arrangements. The Company does not anticipate
repaying in the next year amounts classified as non-current.
FOREIGN CURRENCY TRANSLATION -- The functional currency of the Company's
foreign subsidiaries is the foreign currency. Adjustments arising from the
translation of balance sheets to U.S. dollars at the year-end exchange rates are
included in stockholders' equity. Income and expenses are translated at the
average prevailing rate during the year.
INCOME TAX -- The Company adopted Statement of Financial Accounting
Standards (SFAS) 109, "Accounting for Income Taxes," in 1993. The adoption of
SFAS 109 changed the Company's method of accounting for income taxes from the
deferred method to an asset and liability method. The Company recognizes
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between tax bases and financial reporting bases of assets
and liabilities.
EARNINGS PER SHARE -- Earnings per share are based on the weighted average
number of shares outstanding and common stock equivalents during the respective
periods, including the assumed net shares issuable upon exercise of stock
options when dilutive. Common and common equivalent shares issued during the
twelve month period prior to an initial public offering (IPO) are included in
the calculations as if they were outstanding for all periods presented (using
the treasury stock method at the anticipated public offering price).
INTERIM FINANCIAL DATA (UNAUDITED) -- The unaudited consolidated financial
statements as of March 31, 1996 and for the three months ended March 31, 1995
and 1996 have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
the financial position and results of operations, in accordance with generally
accepted accounting principles.
F-8
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
3. BALANCE SHEET COMPONENTS
Property and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- -----------
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer and production equipment....................... $ 90,121 $ 102,381 $ 100,980
Plant and property...................................... 29,957 31,375 31,375
Leasehold improvements.................................. 4,228 10,532 10,508
Office equipment........................................ 5,823 7,271 7,428
Capital projects-in-progress............................ 6,703 6,795 11,373
---------- ---------- -----------
136,832 158,354 161,664
Less accumulated depreciation and amortization.......... 64,576 72,969 75,390
---------- ---------- -----------
$ 72,256 $ 85,385 $ 86,274
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Accounts payable and accrued expenses consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------- -----------
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts payable.................................. $ 22,181 $ 19,981 $ 16,465
Book overdraft.......................................... 3,454 2,720 2,343
Accrued payroll and related expenses.................... 10,709 11,752 12,774
Accrued retirement contributions........................ 3,864 4,419 4,671
Other accrued expenses.................................. 4,433 6,102 7,691
---------- ---------- -----------
$ 44,641 $ 44,974 $ 43,944
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
4. BENEFIT PLANS
The Company has an employee savings and pension benefit plan (known as the
401(k) Retirement Plan). This plan covers substantially all employees. The
Company matches employee contributions of up to six percent of compensation at a
rate of fifty percent. The plan has a profit-sharing element whereby the Company
can make a contribution of up to 3% of each eligible employee's compensation
determined at the discretion of the Board of Directors. The Company is required
to make an additional contribution of 3% of each eligible employee's annual
compensation. The Company's contribution to the 401(k) Retirement Plan was
$2,995,000, $3,763,000, and $4,204,000 in 1993, 1994 and 1995, respectively, and
$1,234,000 and $1,511,000 for the three months ended March 31, 1995 and 1996,
respectively.
The Company also has two defined contribution stock ownership plans covering
substantially all employees who were employed by the Company as of February 18,
1993. There were no contributions to the plans in 1993, 1994, 1995 and the three
months ended March 31, 1995 and 1996. Under the plans, the Company is obligated,
at the employees' option, to repurchase vested shares at the current fair market
value upon termination or retirement. Substantially all share repurchases in
1993, 1994 and 1995 resulted from the repurchase of shares from former
employees. At December 31, 1995, the estimated fair market value of shares
subject to repurchase obligations under the plans totaled approximately
$6,240,000. The Company's repurchase obligations under the plans lapse upon the
effective date of an IPO.
F-9
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
4. BENEFIT PLANS (CONTINUED)
In August 1994, the Company adopted a non-qualified deferred compensation
plan for senior management. The plan permits participants to defer a portion of
their compensation until termination of their employment at which time payment
of amounts deferred is made in a lump sum or annual installments. Deferred
amounts accrue interest at a rate determined by the Board of Directors. At
December 31, 1995, amounts deferred under the plan and the related accrued
interest were not significant.
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- MARCH 31,
MATURITIES 1994 1995 1996
----------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Notes payable to insurance companies, without collateral,
interest at 7.91% payable semi-annually, principal payable in 1996 to
five equal annual installments of $4,500. 1999 $ 22,500 $ 18,000 $ 13,500
1999 to
Credit lines with a bank, refinanced in February 1996. 2001 8,000 30,000 38,000
Credit agreement with a finance company, collateralized,
without recourse, by minimum rentals receivable of $12,346.
Principal and interest payable monthly at fixed interest rates
resulting in a weighted average interest rate of 8.75% at 1996 to
December 31, 1995. 1999 11,424 9,486 7,971
Notes payable to a bank, collateralized, without recourse, by
minimum rentals receivable of $2,844. Principal and interest
payable monthly at fixed interest rates resulting in a
weighted average interest rate of 9.69% at December 31, 1995. 1996 5,436 1,653 402
Bonds payable, with interest (rates at 5.75% and 6.83% at
December 31, 1995), principal repayable in approximately equal
monthly installments, collateralized by first deeds of trust 1998 to
on buildings with a net book value of $12,900. 1999 4,998 3,695 3,360
--------- --------- -----------
52,358 62,834 63,233
Less current portion 14,711 11,679 10,143
--------- --------- -----------
Total long-term debt $ 37,647 $ 51,155 $ 53,090
--------- --------- -----------
--------- --------- -----------
</TABLE>
In 1995, the Company entered into a revolving credit agreement which enables
the Company to borrow up to 85% of eligible accounts receivable through July 31,
1995, and 75% of eligible accounts receivable through June 1, 1996, to a maximum
of $35 million. The line of credit was not collateralized and bore interest at
the bank's reference rate, plus percentage points (ranging from .25% to 1.25%)
or one of two optional interest rates if elected by the Company. At December 31,
1995, there were outstanding borrowings of $30 million bearing interest at a
rate of 8.75% per annum.
Subsequent to December 31, 1995, the Company replaced its revolving credit
agreement with a new three year revolving unsecured credit line with a bank in
the amount of $20 million. In addition, a subsidiary entered into a new five
year term agreement with two banks in the amount of $45 million. The amount of
F-10
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
availability is reduced by $5 million per year after the third year. Borrowings
under both agreements bear interest at the Company's choice of LIBOR (plus a
margin ranging from .75% to 1.25%) or the bank's reference rate.
Under the borrowing agreements, the Company and/or its subsidiaries are
required to maintain certain financial ratios and meet certain net worth and
indebtedness tests. In addition, the Company has two outstanding standby letters
of credit totaling $3,244,000 at December 31, 1995.
Maturities of long-term debt at December 31, 1995, after the refinancing as
discussed above, are as follows (in thousands):
<TABLE>
<S> <C>
1996....................................................... $ 11,679
1997....................................................... 7,853
1998....................................................... 7,349
1999....................................................... 5,895
2000....................................................... 30,058
---------
$ 62,834
---------
---------
</TABLE>
Based on the borrowing rates currently available to the Company for bank
loans and bonds with similar terms and average maturities, the carrying value of
long-term debt at December 31, 1995, is considered to approximate fair value.
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under operating leases
with terms ranging from one to fifteen years. Rental expense was $5,752,000,
$7,317,000 and $8,798,000 in 1993, 1994 and 1995, respectively and $2,019,000
and $2,255,000 for the three months ended March 31, 1995 and 1996, respectively.
Future minimum rental commitments under operating leases are (in thousands):
<TABLE>
<S> <C>
1996....................................................... $ 6,730
1997....................................................... 4,517
1998....................................................... 3,539
1999....................................................... 2,544
2000....................................................... 1,491
Thereafter................................................. 1,555
</TABLE>
The Company has legal proceedings incidental to its normal business
activities. In the opinion of the Company, the outcome of the proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
The Company has been advised by a major cable customer that a third party
has asserted that patents held by the third party may be infringed by the
customer's use of interactive computer telephony systems, and that, should it
become necessary, the customer would seek indemnification from the Company. The
Company believes that it has substantial defense against that third party's
patent infringement claims and the Company does not believe that efforts by the
third party to enforce the patents against the Company or its clients are likely
to have a material adverse effect on the Company's financial position, results
of operations or cash flows.
F-11
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
7. STOCK OPTION PLANS
The Company has three stock option plans under which shares of the Company's
voting common stock have been reserved for issuance to officers and key
employees.
Under the Incentive Stock Option Plans, options may be granted at prices not
less than the fair market value at the date of grant. Options granted under the
incentive plans become exercisable generally in annual installments over a
period of two to five years from the date of grant. The options expire ten years
from the date of grant.
Under the Non-Qualified Stock Option Plan, options may be granted at prices
and with terms and conditions established by the Company's Board of Directors at
the date of grant. Options vest over periods of up to sixty months and expire
ten years after the date of grant.
Information regarding the Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
Shares under option:
Outstanding at January 1, 1993................................. 1,749,951 $ .20 - $2.80
Granted...................................................... 585,963 2.80 - 3.73
Exercised.................................................... (10,962) 1.39
Canceled..................................................... (29,169) 1.39 - 1.59
---------- --------------
Outstanding at December 31, 1993............................... 2,295,783 .20 - 3.73
Granted...................................................... 305,550 4.35
Exercised.................................................... (161,406) .20 - 2.62
Canceled..................................................... (257,040) .20 - 4.35
---------- --------------
Outstanding at December 31, 1994............................... 2,182,887 .20 - 4.35
Granted...................................................... 551,775 5.05
Exercised.................................................... (708,393) .20 - 4.35
Canceled..................................................... (243,663) .20 - 4.35
---------- --------------
Outstanding at December 31, 1995............................... 1,782,606 .20 - 5.05
Granted (unaudited).......................................... 6,300 7.38
Canceled (unaudited)......................................... (43,770) 2.62 - 5.05
---------- --------------
Outstanding at March 31, 1996 (unaudited)...................... 1,745,136 $ .20 - $7.38
---------- --------------
---------- --------------
Options exercisable
at December 31, 1995........................................... 880,988 $ .20 - $5.05
at March 31, 1996 (unaudited).................................. 902,423 $ .20 - $7.38
</TABLE>
At December 31, 1995, 569,352 shares were available for future grants under
the stock option plans. Compensation expenses under the non-qualified plan was
$252,000, $140,000 and $296,000 in 1993, 1994 and 1995, respectively. See Note
13 for additional option and purchase plans authorized subsequent to year-end.
8. CONSOLIDATION AND RELOCATION EXPENSES
In 1993, the Company decided to consolidate and reorganize the North
American customer support operations to the Sacramento, California area.
Additionally, the decision was made to relocate the office in Leeds, United
Kingdom, to the London area. Consequently, expenses related to severance and
other
F-12
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
8. CONSOLIDATION AND RELOCATION EXPENSES (CONTINUED)
compensation, moving and relocation, and early lease terminations are reflected
in the 1993 statement of operations. Expenses were determined to be less than
had been expected and, in 1994, a reversal of the consolidation and relocation
accrual of $364,000 was recorded.
9. INCOME TAXES
The deferred tax assets and liabilities are comprised of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Compensation and employee benefits related items................................... $ 3,264 $ 3,527
Differences in revenue recognition for book and tax purposes....................... 453 1,097
Accrual and other non-deductible reserves.......................................... 2,532 2,700
--------- ---------
Total deferred tax assets........................................................ 6,249 7,324
--------- ---------
Deferred tax liabilities:
Tax in excess of book depreciation................................................. 1,517 5,259
Capital leases recorded as operating leases for tax purposes....................... 4,355 2,619
Other.............................................................................. 466 584
--------- ---------
Total deferred tax liabilities................................................... 6,338 8,462
--------- ---------
Net deferred tax liability........................................................... $ 89 $ 1,138
--------- ---------
--------- ---------
</TABLE>
The income tax provision is comprised of the following for the years ended
December 31
(in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................................. $ 3,957 $ 4,644 $ 4,883
State.................................................................... 678 1,033 838
--------- --------- ---------
4,635 5,677 5,721
--------- --------- ---------
Deferred:
Federal.................................................................. (260) 72 924
State.................................................................... (45) (415) 125
--------- --------- ---------
(305) (343) 1,049
--------- --------- ---------
$ 4,330 $ 5,334 $ 6,770
--------- --------- ---------
--------- --------- ---------
</TABLE>
The income tax rate varies from amounts computed by applying the U.S.
statutory rate to income before provision for income taxes. The tax rates for
the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income tax computed using U.S. statutory rate.............................. 34.0% 34.1% 34.7%
State income taxes, net of federal benefits................................ 6.1 6.1 6.1
Effect of loss by foreign subsidiary....................................... 7.7 6.6 --
Other...................................................................... .9 (0.4) (1.3)
--- --- ---
Income tax provision..................................................... 48.7% 46.4% 39.5%
--- --- ---
--- --- ---
</TABLE>
F-13
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
10. STOCK SPLIT
On March 31, 1995, the Board of Directors authorized a thirty-for-one stock
split to be distributed to stockholders of record on May 1, 1995, and increased
the authorized voting and non-voting shares from 2,000,000 shares to 6,000,000
shares, respectively. On May 3, 1995, authorized voting shares were increased to
7,500,000. References in the financial statements to number of shares and per
share amounts have been retroactively reflected. See also Note 13.
11. SIGNIFICANT CUSTOMERS AND RELATED PARTY TRANSACTIONS
During the years ended December 31, 1993, 1994 and 1995 and the three months
ended March 31, 1995 and 1996, revenues from a significant customer totaled
$31,753,000, $34,777,000, $39,253,000, $10,238,000 and $9,840,000 or 19%, 18%,
17%, 19% and 16% of total revenues, respectively. Revenues from another
significant customer totaled $24,569,000, $37,151,000, $7,080,000 and $9,723,000
or 13%, 16%, 13% and 16% of total revenues, for the years ended December 31,
1994 and 1995 and the three months ended March 31, 1995 and 1996, respectively.
Advisory services were provided to the Company in the amount of $300,000,
$400,000, and $430,500 in 1993, 1994 and 1995, respectively, and $107,600 for
each of the three months ended March 31, 1995 and 1996, by Westar Capital, a
shareholder.
12. LEASING ACTIVITIES
LEASES
The net investment in leases held by the Company and its leasing subsidiary
reflects the gross lease receivable and the estimated residual value of the
leased equipment less unearned income. The net investment in sales-type leases
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- --------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Total minimum lease payments receivable.................... $ 23,174 $ 16,100 $ 13,289
Estimated unguaranteed residual value of leased property... 146 203 163
--------- --------- -----------
Gross investment in leases................................. 23,320 16,303 13,452
Less unearned income....................................... 2,617 2,115 1,581
--------- --------- -----------
Net investment in leases................................... 20,703 14,188 11,871
Less current portion....................................... 9,705 6,868 5,746
--------- --------- -----------
Non-current portion........................................ $ 10,998 $ 7,320 $ 6,125
--------- --------- -----------
--------- --------- -----------
</TABLE>
At December 31, 1995, equipment which cost $2,582,000 and has a net book
value of $355,000 is leased to others under non-cancellable and month-to-month
leases.
F-14
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
12. LEASING ACTIVITIES (CONTINUED)
Future payments to be received under leases are (in thousands):
<TABLE>
<CAPTION>
SALES-TYPE OPERATING
----------- -----------
<S> <C> <C>
1996................................................................... $ 7,811 $ 293
1997................................................................... 3,891 225
1998................................................................... 2,754 --
1999................................................................... 1,309 --
2000................................................................... 335 --
----------- -----
$ 16,100 $ 518
----------- -----
----------- -----
</TABLE>
The Company performs ongoing credit evaluations of its clients and generally
maintains a perfected security interest on all equipment leased under sales-type
and operating leases as collateral for lease payments receivable. Substantially
all lease contracts have been pledged and the related receipts have been
assigned to various lenders as collateral for nonrecourse borrowings. The
borrowing agreements provide that the debt is to be satisfied solely from
amounts due under the terms of the lease contracts and the value of the leased
equipment. The lenders' collateral interest in both the lease agreement and the
equipment terminates upon repayment of the debt.
SUBSIDIARY
Condensed balance sheets of the Company's wholly owned leasing subsidiary
and condensed statements of operations are (in thousands):
Condensed Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Assets:
Cash........................................................................................ $ 594 $ 1,876
Net investment in leases.................................................................... 20,703 14,188
Other assets................................................................................ 1,301 2,192
--------- ---------
Total assets............................................................................ $ 22,598 $ 18,256
--------- ---------
--------- ---------
Liabilities and Shareholder's Equity:
Accrued expenses and liabilities............................................................ $ 413 $ 440
Long-term debt.............................................................................. 16,860 11,139
Shareholder's equity........................................................................ 5,325 6,677
--------- ---------
Total liabilities and shareholder's equity.............................................. $ 22,598 $ 18,256
--------- ---------
--------- ---------
</TABLE>
F-15
<PAGE>
USCS INTERNATIONAL, INC.
(FORMERLY U.S. COMPUTER SERVICES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED AS OF MARCH 31, 1996 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
12. LEASING ACTIVITIES (CONTINUED)
Condensed Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................................. $ 6,392 $ 5,108 $ 4,437
Interest expense..................................................................... 1,963 1,633 1,120
Other expenses....................................................................... 1,759 1,135 1,064
--------- --------- ---------
Income before income taxes........................................................... 2,670 2,340 2,253
Provision for income taxes........................................................... 1,068 937 901
--------- --------- ---------
Net income....................................................................... $ 1,602 $ 1,403 $ 1,352
--------- --------- ---------
--------- --------- ---------
</TABLE>
13. SUBSEQUENT EVENTS
On April 18, 1996, the Board of Directors authorized the reincorporation of
the Company into USCS International, Inc., a newly formed Delaware corporation.
This reincorporation was approved by a majority of the Company's stockholders on
May 16, 1996. The Board and a majority of the Company's stockholders also
authorized a 2.1 for 1 stock split of the Company's Common Voting Stock and a 2
for 1 stock split of the Common Non-Voting Stock upon the effective date of an
IPO. The Board also increased the authorized amount of Common Voting Stock and
Common Non-Voting Stock to 40,000,000 and 12,000,000, respectively and
authorized 10,000,000 shares of Preferred Stock, par value $.05. The effect of
these transactions has been retroactively reflected in the financial statements.
Also upon the effective date of an IPO, the Common Non-Voting Stock converts to
Common Voting Stock on a one-for one basis.
On April 12, 1996, the Board adopted the 1996 Incentive Stock Option Plan
(1996 Plan), the 1996 Directors Stock Option Plan (1996 Directors Plan) and the
Employee Stock Purchase Plan (ESPP). A total of 3,290,000 shares have been
authorized for issuance under these plans. The options issued under the 1996
Plan and 1996 Directors' Plan must be issued at fair market value, except for
options granted under the 1996 Plan to employees possessing more than 10% of
voting stock, in which case the grant price may not be less than 110% of the
fair market value. Options under the 1996 Plan generally vest 20% per year and
have a ten year term. The Company granted 993,174 options under the 1996 Plan at
$12.50 per share. Options under the 1996 Directors' Plan vest annually over
three years and have a five year term. Stock purchased under the ESPP may be
purchased on a quarterly basis at the lower of 95% of the fair market value of
the Company's common stock on the first and last business days of each calendar
quarter.
F-16
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 11
Dividend Policy................................ 11
Capitalization................................. 12
Dilution....................................... 13
Selected Consolidated Financial Data........... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 15
Business....................................... 23
Management..................................... 35
Certain Transactions........................... 44
Principal and Selling Stockholders............. 45
Description of Capital Stock................... 47
Shares Eligible for Future Sale................ 51
Underwriting................................... 53
Legal Matters.................................. 54
Experts........................................ 54
Additional Information......................... 54
Index to Consolidated Financial Statements..... F-1
</TABLE>
-------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
4,800,000 SHARES
[LOGO]
COMMON STOCK
-------------------
PROSPECTUS
-------------------
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
commissions, payable by the Company in connection with the issuance and
distribution of the securities being registered hereunder. All of the amounts
shown are estimates (except for the SEC and NASD registration fees and the
Nasdaq National Market listing fee).
<TABLE>
<CAPTION>
PAYABLE BY
COMPANY
------------
<S> <C>
SEC registration fee............................................................ $ 32,359
NASD fee........................................................................ 9,885
Nasdaq National Market listing fee.............................................. 50,000
Printing and engraving expenses................................................. 250,000
Accounting fees................................................................. 150,000
Legal fees...................................................................... 400,000
Blue Sky fees and expenses...................................................... 10,000
Transfer agent and registrar fees............................................... 10,000
Legal Fees of Selling Stockholders.............................................. 10,000
Director and officer liability insurance premiums............................... 500,000
Stockholder solicitation costs.................................................. 50,000
Fee of Custodian for Selling Stockholders....................................... 5,000
Miscellaneous expenses.......................................................... 22,756
------------
Total....................................................................... $ 1,500,000
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has provisions in its Certificate of Incorporation which
eliminate the liability of the Company's directors to the Company and its
stockholders for monetary damages to the fullest extent permissible under
Delaware law and provisions which authorize the Company to indemnify its
directors and agents by bylaws, agreements or otherwise, to the fullest extent
permitted by law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by Delaware law, including circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Company has entered into agreements with its directors and executive officers
that will require the Registrant, among other things, to indemnify them against
certain liabilities that may arise by reason of their status or service as
directors or executive officers to the fullest extent not prohibited by law.
Reference is made to the form of Purchase Agreement filed as Exhibit 1.1 to
this Registration Statement for certain provisions regarding the indemnification
of officers and directors of the Company by the several Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Between May 20, 1993 and May 20, 1996, the Registrant granted options to
purchase 2,151,849 shares of Common Stock to employees pursuant to its 1988
Incentive Stock Option Plan, 1990 Nonstatutory Stock Option Plan and 1993
Incentive Stock Option Plan and issued an aggregate of 1,301,950 shares subject
to options under such plans at exercise prices ranging from $0.20 to $5.05 per
share. None of these grants or issuances were registered under the Securities
Act of 1933 (the "Securities Act"). Each of the options issued and the shares
issued upon exercise of such options was issued under the exemption afforded
such grants and exercises pursuant to Rule 701 under the Securities Act.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
1.1 Form of Purchase Agreement.*
2.1 Agreement and Plan of Merger dated April 18, 1996 among USCS International, Inc., a Delaware
corporation, and U.S. Computer Services, a California corporation.*
2.2 Reference exhibits 10.37, 10.38, 10.39 & 10.40.
3.1 First Amended and Restated Certificate of Incorporation of USCS International, Inc.*
3.2 Bylaws of the Company.*
3.3 Certificate of Designation of Rights, Preferences and Privileges of Series A Preferred Stock.*
4.1 Reference Exhibit 3.1.
4.2 Shareholder Rights Agreement dated December 30, 1988 among U.S. Computer Services, Westar
Capital and Enterprise Partners.**
4.3 Stockholder Rights Plan.* **
5.1 Opinion of Graham & James LLP, Counsel to the Registrant, as to legality of securities being
registered.*
10.1 1988 Incentive Stock Option Plan.*
10.2 The Company's Employee Stock Ownership Plan ("ESOP") as amended and restated as of January 1,
1991, and as amended effective January 1, 1991, January 1, 1992, January 1, 1993, February 19,
1993, January 1, 1994, December 31, 1994, January 1, 1995, March 31, 1995, January 1, 1996 and
March 21, 1996.*
10.3 1993 Incentive Stock Option Plan.*
10.4 1996 Stock Option Plan.*
10.5 1996 Directors' Stock Option Plan.*
10.6 Employee Stock Purchase Plan.*
10.7 Agreement pursuant to Rule 601(b)(4)(iii)(A) to file Trust Indenture dated as of December 1,
1987 between the Company and Sun Bank, as Trustee.*
10.8 Agreement pursuant to Rule 601(b)(4)(iii)(A) to file Reimbursement Agreement dated as of
December 1, 1987 between the Company and Sanwa Bank of California.*
10.9 Agreement pursuant to Rule 601(b)(4)(iii)(A) to file Trust Indenture dated as of June 30, 1989
between the Company and Sun Bank, as Trustee.*
10.10 Agreement pursuant to Rule 601(b)(4)(iii)(A) to file Reimbursement Agreement dated as of June
30, 1989 between the Company and Sanwa Bank of California.*
10.11 Note Agreement dated as of February 19, 1992 (re: $22,500,000 7.91% Senior Notes due February
19, 1999) between the Company and Great-West Life and Annuity Insurance Company and Phoenix
Mutual Life Insurance Company and as amended as of February 17, 1993, April 30, 1993, August 1,
1994, March 31, 1995 and February 15, 1996.*
10.12 Credit Agreement dated as of February 15, 1996 among IBS, Nationsbank of Texas and the Lender
Parties named therein.*
10.13 Credit Agreement dated as of February 15, 1996 among The Company, Nationsbank of Texas and the
Lender Parties named therein.*
10.14 Form of Standard On/Line Operating and License Agreement.*
10.15 Form of Standard Equipment Maintenance Agreement.*
10.16 Form of Master Lease, Lease Request and Certificate of Acceptance.*
10.17 Form of Standard Agreement for the Sale and Installation of Equipment.*
10.18 Form of Standard Statement Production Services Agreement.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
10.19 Strategic Business Agreement dated January 19, 1992 between the Company and International
Business Machines Corporation and Addendum Number One to Strategic Business Agreement dated
June 4, 1993 between the Company and International Business Machines Corporation.* **+
10.20 Business Alliance Program Agreement between Oracle Corporation and CableData.* **+
10.21 Development Agreement dated December 5, 1994 between the Company and Tandem Computers
Incorporated.* **+
10.22 Porting Agreement dated January 25, 1996 between CableData and Hewlett-Packard Company.* **+
10.23 [Intentionally omitted]
10.24 On/Line Operating and License Agreement dated June 7, 1996 between CableData, Inc. and TCI Cable
Management Corporation.* **+
10.25 Master Lease Agreement No. DO4347 dated as of April 16, 1993 between the Company and First
Equipment Company.*
10.26 On/Line Operating and Licensing Agreement dated December 17, 1993 between the Company dba
CableData and Continental Cablevision.* **+
10.27 Statement Production Services Agreement dated August 20, 1993 between the Company dba
International Billing Services and Ameritech Corporation.* ***+
10.28 Software Development Agreement dated December 27, 1995 between CableData and BellSouth
Interactive Media Services.* **+
10.29 CableData's Intelecable-TM- Operating and License Agreement dated December 27, 1995 between
CableData. and BellSouth Interactive Media Services, Inc.* **+
10.30 Software License and Service Agreement and Network User License Addendum dated May 18, 1994
between the Company and Oracle Corporation.* **+
10.31 Statement Production Services Agreement dated October 9, 1990 between the Company and CBIS and
First Addendum to Statement Production Services Agreement dated July 17, 1991 between the
Company and CBIS.* **+
10.32 Tandem Alliance Agreement dated January 1, 1995, between Tandem and CableData.* **+
10.33 Contract for Computer Software (Postalsoft Software License Agreement) dated February 13, 1996
between IBS and Postalsoft, Inc.* **+
10.34 Employment Agreement dated August 10, 1992 between the Company and James C. Castle.*
10.35 Employment Agreement dated June 29, 1995 with Michael McGrail.*
10.36 Form of Severance Agreement.*
10.37 Asset Acquisition Agreement dated March 31, 1995 by and between the Company and CableData.*
10.38 Asset Acquisition Agreement dated March 31, 1995 by and between the Company and IBS.*
10.39 Asset Acquisition Agreement dated March 15, 1995 by and between U.S. Computer Systems Leasing
and CableLease, Inc.*
10.40 Asset Acquisition Agreement dated March 15, 1995 by and between U.S. Computer Systems Leasing
and RPA, Inc.*
10.41 Building Lease for property located at 2969 Prospect Park Drive between the Company and F.I.A.
Profile Fund I dated January 19, 1994.*
10.42 Alternate Mailing System Agreement dated March 28, 1996 between the United States Postal Service
and IBS.* **+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO.
- -------------
<C> <S>
10.43 Alternate Mailing Systems Agreement dated April 18, 1996 between the United Postal Service and
International Billing Services, Inc.*
10.44 Form of Directors' Indemnification Agreement.*
10.45 Form of Custody and Escrow Agreement for Selling Stockholders.*
10.46 Form of Selling Stockholders' Irrevocable Power of Attorney.*
10.47 Amendment No. 11 to the ESOP.*
21.1 List of Subsidiaries.*
23.1 Consent of Graham & James LLP (included in Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP.
24.1 Powers of Attorney.*
27.1 Financial Data Schedule.*
</TABLE>
- ------------------------
* Indicates Exhibit previously filed.
** Indicates Exhibit was filed in paper format pursuant to a temporary hardship
exemption under Rule 201 of Regulation S-T.
*** Indicates Exhibit was filed in paper format pursuant to a continuing
hardship exemption under Rule 202 of Regulation S-T.
+ Portions omitted pursuant to a request for confidential treatment pursuant
to Rule 406 of the Securities Act.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Rancho Cordova, State of
California, on the 20th day of June, 1996.
USCS INTERNATIONAL, INC.
By /S/ DOUGLAS L. SHURTLEFF
------------------------------------
Douglas L. Shurtleff,
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
Dated: June 20, 1996 *
-------------------------------------------
James C. Castle
Chief Executive Officer and Chairman of the
Board of Directors (Principal Executive
Officer)
Dated: June 20, 1996 *
-------------------------------------------
George L. Argyros, Sr.
Director
Dated: June 20, 1996 *
-------------------------------------------
George M. Crandell, Jr.
Director
Dated: June 20, 1996 *
-------------------------------------------
Charles D. Martin
Director
*By /S/ DOUGLAS L. SHURTLEFF
- -------------------------------------------
Douglas L. Shurtleff
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
Dated: June 20, 1996 *
-------------------------------------------
Michael F. McGrail
Director
Dated: June 20, 1996 *
-------------------------------------------
Larry W. Wangberg
Director
Dated: June 20, 1996 /S/ DOUGLAS L. SHURTLEFF
-------------------------------------------
Douglas L. Shurtleff
Senior Vice-President of Finance and Chief
Financial Officer (Principal Financial
Officer)
Dated: June 20, 1996 /S/ ARTHUR O. HAWKINS
-------------------------------------------
Arthur O. Hawkins
Vice-President and Treasurer (Principal
Accounting Officer)
*By /S/ DOUGLAS L. SHURTLEFF
- -------------------------------------------
Douglas L. Shurtleff
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
Draft: June 12, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
USCS INTERNATIONAL, INC.
(a Delaware corporation)
4,800,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: , 1996
--------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1. Representations and Warranties....................................2
(a) Representations and Warranties by the Company......................3
(i) Compliance with Registration Requirements..................3
(ii) Independent Accountants....................................3
(iii) Financial Statements.......................................3
(iv) No Material Adverse Change in Business.....................4
(v) Good Standing of the Company...............................4
(vi) Good Standing of Subsidiaries..............................4
(vii) Capitalization.............................................5
(viii) Authorization of Agreement.................................5
(ix) Authorization and Description of Securities................5
(x) Absence of Defaults and Conflicts..........................6
(xi) Absence of Labor Dispute...................................6
(xii) Absence of Proceedings; Statutes...........................6
(xiii) Accuracy of Exhibits.......................................7
(xiv) Possession of Intellectual Property........................7
(xv) Absence of Further Requirements............................7
(xvi) Possession of Licenses and Permits.........................7
(xvii) Title to Property..........................................8
(xviii) Compliance with Cuba Act...................................8
(xix) Investment Company Act.....................................8
(xx) Environmental Laws.........................................8
(xxi) Registration Rights........................................9
(xxii) Insurance..................................................9
(xxiii) Accounting Controls........................................9
(xxiv) Foreign Corrupt Practices Act..............................9
(xxv) Taxes......................................................9
(b) Representations and Warranties by the Selling Shareholders........10
(i) Accurate Disclosure.......................................10
(ii) Authorization of Agreements...............................10
(iii) Good and Marketable Title.................................10
(iv) Due Execution of Power of Attorney and Custody Agreement..11
(v) Absence of Manipulation...................................11
(vi) Absence of Further Requirements...........................11
(vii) Certificates Suitable for Transfer........................11
(viii) No Association with NASD..................................11
(c) Officer's Certificates............................................12
SECTION 2. Sale and Delivery to Underwriters, Closing........................12
(a) Initial Securities................................................12
(b) Option Securities.................................................12
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TABLE OF CONTENTS
(CONTINUED)
PAGE
(c) Payment...........................................................12
(d) Denominations; Registration.......................................13
SECTION 3. Covenants of the Company..........................................13
(a) Compliance with Securities Regulations and Commission Requests....13
(b) Filing of Amendments..............................................14
(c) Delivery of Registration Statements...............................14
(d) Delivery of Prospectuses..........................................14
(e) Continued Compliance with Securities Laws.........................14
(f) Blue Sky Qualifications...........................................15
(g) Rule 158..........................................................15
(h) Use of Proceeds...................................................15
(i) Listing...........................................................15
(j) Restriction on Sale of Securities.................................15
(k) Reporting Requirements............................................16
(l) Form SR...........................................................16
SECTION 4. Payment of Expenses...............................................16
(a) Expenses..........................................................16
(b) Expenses of the Selling Shareholders..............................17
(c) Termination of Agreement..........................................17
SECTION 5. Conditions of Underwriters' Obligations...........................17
(a) Effectiveness of Registration Statement...........................17
(b) Opinions of Counsel for Company...................................17
(c) Opinion of Counsel for the Selling Shareholders...................18
(d) Opinion of Counsel for Underwriters...............................18
(e) Officers' Certificate.............................................18
(f) Certificate of Selling Shareholders...............................19
(g) Accountant's Comfort Letter.......................................19
(h) Bring-down Comfort Letter.........................................19
(i) Approval of Listing...............................................19
(j) No Objection......................................................19
(k) Lock-up Agreements................................................19
(l) Conditions to Purchase of Option Securities.......................19
(i) Officers' Certificate.....................................20
(ii) Certificate of Selling Shareholders.......................20
(iii) Opinion of Counsel for Company............................20
(iv) Opinion of Counsel for the Selling Shareholders...........20
(v) Opinion of Counsel for Underwriters.......................20
(vi) Bring-down Comfort Letter.................................20
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TABLE OF CONTENTS
(CONTINUED)
PAGE
(m) Additional Documents..............................................20
(n) Termination of Agreement..........................................20
SECTION 6. Indemnification...................................................21
(a) Indemnification of Underwriters...................................21
(b) Indemnification of Company, Directors and Officers................22
(c) Actions against Parties; Notification.............................22
(d) Settlement without Consent if Failure to Reimburse................23
(e) Prior Indemnification Agreements..................................23
SECTION 7. Contribution......................................................23
SECTION 8. Representations, Warranties and Agreements to Survive Delivery....25
SECTION 9. Termination of Agreement..........................................25
(a) Termination; General..............................................25
(b) Liabilities.......................................................25
SECTION 10. Default by One or More of the Underwriters........................25
SECTION 11. Default by one or more of the Selling Shareholders or
the Company.......................................................26
SECTION 12. Notices...........................................................27
SECTION 13. Parties...........................................................27
SECTION 14. GOVERNING LAW AND TIME............................................27
SECTION 15. Effect of Headings................................................27
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<PAGE>
Draft of June 12, 1996
USCS International, Inc.
(a Delaware corporation)
4,800,000 Shares of Common Stock
(Par Value $.05 Per Share)
PURCHASE AGREEMENT
, 1996
------------------
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
MONTGOMERY SECURITIES
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
USCS International, Inc., a Delaware corporation (the "Company") and the
persons listed in Schedule B hereto (the "Selling Shareholders") confirm their
respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch and Montgomery Securities are acting as
representatives (in such capacity, the "Representatives"), with respect to
(i) the issue and sale by the Company and the sale by the Selling Shareholders,
acting severally and not jointly, and the purchase by the Underwriters, acting
severally and not jointly, of the respective numbers of shares of Common Stock,
par value $.05 per share, of the Company ("Common Stock") set forth in
Schedules A and B hereto and (ii) the grant by the Company to the Underwriters
of the option described in Section 2(b) hereof to purchase all or any part of
720,000 additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 4,800,000 shares of Common Stock (the "Initial Securities") to be
purchased by the Underwriters and all or any part of the 720,000 shares of
Common Stock subject to the option described in Section 2(b) hereof (the "Option
Securities") are hereinafter called, collectively, the "Securities".
<PAGE>
The Company and the Selling Shareholders understand that the Underwriters
propose to make a public offering of the Securities as soon as the
Representatives deem advisable after this Agreement has been executed and
delivered.
The Company, the Selling Shareholders and the Underwriters agree that up to
300,000 shares of the Securities to be purchased by the Underwriters (the
"Reserved Securities") shall be reserved for sale by the Underwriters to certain
eligible employees and persons having business relationships with the Company,
as part of the distribution of the Securities by the Underwriters, subject to
the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that such Reserved
Securities are not so purchased by such eligible employees and persons having
business relationships with the Company, such Reserved Securities may be offered
to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-3842) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon
Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet
(a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b).
The information included in such prospectus or in such Term Sheet, as the case
may be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules, if any, at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated May 29, 1996 together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet.
SECTION 1. REPRESENTATIONS AND WARRANTIES.
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<PAGE>
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows.
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statements and any Rule 462(b) Registration Statement has become
effective under the 1933 Act and no stop order suspending the effectiveness of
the Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or, to the knowledge of the Company, are contemplated
by the Commission, and any request on the part of the Commission for additional
information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are purchased,
at the Date of Delivery), the Registration Statement, the Rule 462(b)
Registration Statement and any amendments and supplements thereto complied and
will comply in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations and did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading. Neither the
Prospectus nor any amendments or supplements thereto, at the time the Prospectus
or any such amendment or supplement was issued and at the Closing Time (and, if
any Option Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. If Rule 434 is
used, the Company will comply with the requirements of Rule 434 and the
Prospectus shall not be "materially different", as such term is used in
Rule 434, from the prospectus included in the Registration Statement at the time
it became effective. The representations and warranties in this subsection
shall not apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information furnished to
the Company in writing by any Underwriter through Merrill Lynch expressly for
use in the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all
material respects with the 1933 Act Regulations.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified
the financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act and the
1933 Act Regulations.
(iii) FINANCIAL STATEMENTS. The financial statements
included in the Registration Statement, any preliminary prospectus and the
Prospectus, together with the related schedules and notes, present fairly the
financial position of the Company and its consolidated subsidiaries at the dates
indicated and the statement of operations, stockholders' equity and cash flows
of the Company and its consolidated
-3-
<PAGE>
subsidiaries for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved. The supporting
schedules, if any, included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein. The
selected financial data and the summary financial information included in any
preliminary prospectus or the Prospectus present fairly the information shown
therein and have been compiled on a basis consistent with that of the audited
financial statements included in the Registration Statement.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company or its
Subsidiaries (as defined below considered as one enterprise), whether or not
arising in the ordinary course of business (a "Material Adverse Effect"),
(B) there have been no transactions entered into by the Company or any of its
Subsidiaries, other than those in the ordinary course of business, which are
material with respect to the Company and its Subsidiaries considered as one
enterprise, (C) there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of its capital stock, (D) the Company
has not purchased any of its outstanding capital stock, nor declared, paid or
otherwise made any dividend or distribution of any kind on its capital stock,
and (E) there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its Subsidiaries, except in each case
as described in or contemplated by the Prospectus.
(v) GOOD STANDING OF THE COMPANY. The Company has been
duly organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in any
preliminary prospectus or the Prospectus and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a Material
Adverse Effect. The execution and delivery of the Agreement and Plan of Merger
dated as of April 18, 1996 (the "Merger Agreement") between U.S. Computer
Services, a California corporation (the "California Corporation") and the
Company, effecting the reincorporation of the California Corporation under the
laws of the State of Delaware, was duly authorized by all necessary corporate
action on the part of each of the California Corporation and the Company. Each
of the California Corporation and the Company had all corporate power and
authority to execute and deliver the Merger Agreement, to file the Merger
Agreement with the Secretary of State of California and the Secretary of State
of Delaware and to consummate the reincorporation contemplated by the Merger
Agreement, and the Merger Agreement at the time of execution and filing
constituted a valid and binding obligation of each of the California Corporation
and the Company, enforceable in accordance with its terms.
(vi) GOOD STANDING OF SUBSIDIARIES. The Company does not
own or control, directly or indirectly, any corporation, association or other
entity other than the entities listed in Exhibit
-4-
<PAGE>
21.1 to the Registration Statement (each a "Subsidiary" and collectively, the
"Subsidiaries"). Each Subsidiary has been duly organized and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in any preliminary
prospectus or the Prospectus and is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued and
outstanding capital stock of each Subsidiary has been duly authorized and
validly issued, is fully paid and non-assessable and is owned by the Company,
directly or through Subsidiaries, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding
shares of capital stock of any Subsidiary was issued in violation of the
preemptive or similar rights of any securityholder of such Subsidiary.
(vii) CAPITALIZATION. The authorized, issued and
outstanding capital stock of the Company is as set forth in the Prospectus in
the column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the Prospectus
or pursuant to the exercise of options referred to in the Prospectus). The
shares of issued and outstanding capital stock, including the Securities to be
purchased by the Underwriters from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company or any Subsidiary, including
the Securities to be purchased by the Underwriters from the Selling
Shareholders, was issued in violation of the preemptive or other similar rights
of any securityholder of the Company. Except as set forth in the Prospectus,
neither the Company nor any Subsidiary has outstanding any options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. All outstanding shares of capital stock
and options and other rights to acquire capital stock have been issued in
compliance with the registration and qualification provisions of all applicable
securities laws.
(viii) AUTHORIZATION OF AGREEMENT. This Agreement has been
duly authorized, executed and delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The
Securities to be purchased by the Underwriters from the Company have been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement
and the Securities to be sold by the Selling Shareholders are, and the
Securities to be sold by the Company, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set forth herein
will be, validly issued and fully paid and non-assessable; the Common Stock
conforms to all statements relating thereto contained in the Prospectus and such
description conforms to the rights set forth in the instruments defining the
same; no holder of the Securities will be subject to personal liability by
reason of being such a holder; and the
-5-
<PAGE>
issuance of the Securities is not subject to the preemptive or other similar
rights of any securityholder of the Company.
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company
nor any of its Subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, deed of trust, loan
or credit agreement, note, lease or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which it or any of them may
be bound, or to which. any of the property or assets of the Company or any
Subsidiary is subject (collectively, "Agreements and Instruments") except for
such defaults violations or that would not result in a Material Adverse Effect;
and the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein and in the Registration
Statement (including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in any preliminary
prospectus or the Prospectus under the caption "Use of Proceeds") and compliance
by the Company with its obligations hereunder have been duly authorized by all
necessary corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined below) under, or result in
the creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any Subsidiary pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens, charges
or encumbrances that would not result in a Material Adverse Effect), nor will
such action result in any violation of the provisions of the charter or by-laws
of the Company or any Subsidiary or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any Subsidiary or any of their assets, properties or operations. As
used herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness (or any person
acting on such holder's behalf) the right to require the repurchase, redemption
or repayment of all or a portion of such indebtedness by the Company or any
Subsidiary.
(xi) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or any Subsidiary exists or, to the knowledge of the
Company, is imminent, and the Company is not aware of any existing or imminent
labor disturbance by the employees of any of its or any Subsidiary's principal
suppliers, manufacturers, customers or contractors, which, in either case, may
reasonably be expected to result in a Material Adverse Effect.
(xii) ABSENCE OF PROCEEDINGS; STATUTES. There is no action,
suit, proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or any
Subsidiary, which is required to be disclosed in the Registration Statement
(other than as disclosed therein), or which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in this Agreement or the
performance by the Company of its obligations hereunder; the aggregate of all
pending legal or governmental proceedings to which the Company or any
Subsidiary is a party or of which any of their respective property or assets
-6-
<PAGE>
is the subject which are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, could not reasonably be
expected to result in a Material Adverse Effect.
(xiii) ACCURACY OF EXHIBITS. There are no contracts or
documents which are required to be described in the Registration Statement, the
Prospectus or to be filed as exhibits thereto which have not been so described
and filed as required.
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and
its Subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks,
trade names or other intellectual property (collectively, "Intellectual
Property") necessary to carry on the business now operated by them, and, except
as described in the Registration Statement or the Prospectus, neither the
Company nor any of its Subsidiaries has received any notice or is otherwise
aware of any infringement of or conflict with asserted rights of others with
respect to any Intellectual Property or of any facts or circumstances which
would render any Intellectual Property invalid or inadequate to protect the
interest of the Company or any of its Subsidiaries therein, and which
infringement or conflict (if the subject of any unfavorable decision, ruling or
finding) or invalidity or inadequacy, singly or in the aggregate, would result
in a Material Adverse Effect and, except as disclosed in the Prospectus, the
Intellectual Property of the Company and its Subsidiaries referred to in the
Prospectus do not, to the best knowledge of the Company or any of its
Subsidiaries, infringe or conflict with any right or patent of any third party,
or any discovery, invention, product or process which is the subject of a patent
application filed by any third party, known to the Company or any of its
Subsidiaries which could result in a Material Adverse Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration, qualification or
decree of, any court or governmental authority or agency is necessary or
required for the performance by the Company of its obligations hereunder, in
connection with the offering, issuance or sale of the Securities hereunder or
the consummation of the transactions contemplated by this Agreement, except such
as have been already obtained or as may be required under the 1933 Act or the
1933 Act Regulations, state securities laws or the rules and regulations of the
National Association of Securities Dealers, Inc. (the "NASD").
(xvi) POSSESSION OF LICENSES AND PERMITS. The Company and
its Subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the appropriate
federal, state, local or foreign regulatory agencies or bodies necessary to
conduct the business now operated by them; the Company and its Subsidiaries are
in compliance with the terms and conditions of all such Governmental Licenses,
except where the failure so to comply would not, singly or in the aggregate,
have a Material Adverse Effect; all of the Governmental Licenses are valid and
in full force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full force and
effect would not have a Material Adverse Effect; and neither the Company nor any
of its Subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses
-7-
<PAGE>
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a Material Adverse Effect.
(xvii) TITLE TO PROPERTY. The Company and its Subsidiaries
have good and marketable title to all real property owned by the Company and its
Subsidiaries and good title to all other properties owned by them, in each case,
free and clear of all mortgages, pledges, liens, security interests, claims,
restrictions or encumbrances of any kind except such as (a) are described in the
Prospectus or (b) do not, singly or in the aggregate, materially affect the
value of such property and do not interfere with the use made and proposed to be
made of such property by the Company or any of its Subsidiaries; and all of the
leases and subleases material to the business of the Company and its
Subsidiaries, considered as one enterprise, and under which the Company or any
of its Subsidiaries holds properties described in the Prospectus, are in full
force and effect, and neither the Company nor any Subsidiary has any notice of
any material claim of any sort that has been asserted by anyone adverse to the
rights of the Company or any Subsidiary under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company or such
Subsidiary to the continued possession of the leased or subleased premises under
any such lease or sublease.
(xviii) COMPLIANCE WITH CUBA ACT. The Company has complied
with, and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba, codified as
Section 517.075 of the Florida statutes, and the rules and regulations
thereunder (collectively, the "Cuba Act") or is exempt therefrom.
(xix) INVESTMENT COMPANY ACT. The Company is not, and
upon the issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus will
not be, an "investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of 1940, as
amended (the "1940 Act").
(xx) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement, the Prospectus and except such violations as would not,
singly or in the aggregate, result in a Material Adverse Effect, (A) neither the
Company nor any of its Subsidiaries is in violation of any federal, state, local
or foreign statute, law, rule, regulation, ordinance, code, policy or rule of
common law and any judicial or administrative interpretation thereof including
any judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata) or wildlife, including, without limitation, laws and regulations
relating to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum or
petroleum products (collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the
Company and its Subsidiaries have all permits, authorizations and approvals
required under any applicable Environmental Laws and are each in compliance with
their requirements, (C) there are no pending or, to the Company's knowledge,
threatened administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or
-8-
<PAGE>
violation, investigations or proceedings relating to any Environmental Law
against the Company or any of its Subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an order
for clean-up or remediation, or an action, suit or proceeding by any private
party or governmental body or agency, against or affecting the Company or any of
its Subsidiaries relating to any Hazardous Materials or the violation of any
Environmental Laws.
(xxi) REGISTRATION RIGHTS. There is no owner of any
securities of the Company who has any rights, not effectively satisfied or
waived, to require registration of any shares of capital stock of the Company in
connection with the filing of the Registration Statement.
(xxii) INSURANCE. The Company and each of its Subsidiaries
are insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not result in a Material Adverse Effect except as
described in or contemplated by the Prospectus.
(xxiii) ACCOUNTING CONTROLS. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(xxiv) FOREIGN CORRUPT PRACTICES ACT. The Company has not
at any time during the last five years, nor has any of its Subsidiaries since
acquisition or formation by the Company, (i) made any unlawful contribution to
any candidate for foreign office, or failed to disclose fully any contribution
in violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws of
the United States or any jurisdiction thereof.
(xxv) TAXES. The Company and its subsidiaries have filed
on a timely basis all federal, state, local and foreign tax returns that are
required to be filed or have duly requested extensions thereof and have paid all
taxes required to be paid by any of them and any related assessments, fines or
penalties, except for any such tax, assessment, fine or penalty that is being
contested in good faith and by appropriate proceedings; and adequate charges,
accruals and reserved have been provided for in the financial statements
referred to in Section 1(a)(iii) above in respect to all federal, state, local
and foreign taxes for all periods up to the dates of such financial statements
as to which the tax liability of the Company or any of its subsidiaries has not
been finally determined or remains open to examination by applicable taxing
authorities. Neither the Company nor any of the Subsidiaries have any knowledge
of
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any tax deficiency that has been or might be asserted against the Company or the
Subsidiaries that might have a Material Adverse Effect.
(b) REPRESENTATIONS AND WARRANTIES BY THE SELLING SHAREHOLDERS. Each
Selling Shareholder severally represents and warrants to each Underwriter as of
the date hereof, as of the Closing Time, and, if the Selling Shareholder is
selling Option Securities on a Date of Delivery, as of each such Date of
Delivery, and agrees with each Underwriter, as follows:
(i) ACCURATE DISCLOSURE. Such Selling Shareholder has no
active knowledge that any of the representations and warranties of the Company
contained in Section 1(a) hereof are not true and correct; such Selling
Shareholder has reviewed and is familiar with the Registration Statement and the
Prospectus and such Selling Shareholder has no actual knowledge that the
Prospectus contains any statement of a material fact that is untrue or omits to
state a material fact or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading; such
Selling Shareholder is not prompted to sell the Securities to be sold by such
Selling Shareholder hereunder by any information concerning the Company or any
subsidiary of the Company which is not set forth in the Prospectus.
(ii) AUTHORIZATION OF AGREEMENTS. Each Selling Shareholder
has the full right, power and authority to enter into this Agreement and the
Power of Attorney and Custody Agreement and to sell, transfer and deliver the
Securities to be sold by such Selling Shareholder hereunder. The execution and
delivery of this Agreement and the Power of Attorney and Custody Agreement and
the sale and delivery of the Securities to be sold by such Selling Shareholder
and the consummation of the transactions contemplated herein and compliance by
such Selling Shareholder with its obligations hereunder have been duly
authorized by such Selling Shareholder and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with or
constitute a breach of, or default under, or result in the creation or
imposition of any tax, lien, charge or encumbrance upon the Securities to be
sold by such Selling Shareholder or any property or assets of such Selling
Shareholder pursuant to any contract, indenture, mortgage, deed of trust, loan
or credit agreement, note, license, lease or other agreement or instrument to
which such Selling Shareholder is a party or by which such Selling Shareholder
may be bound, or to which any of the property or assets of such Selling
Shareholder is subject, nor will such action result in any violation of the
provisions of the charter or by-laws or other organizational instrument of such
Selling Shareholder, if applicable, or any applicable treaty, law, statute,
rule, regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over such
Selling Shareholder or any of its properties.
(iii) GOOD AND MARKETABLE TITLE. Such Selling Shareholder
has and will at the Closing Time and, if any Option Securities are purchased, on
the Date of Delivery have good and marketable title to the Securities to be sold
by such Selling Shareholder, free and clear of any security interest, mortgage,
pledge, lien, charge, claim, equity or encumbrance of any kind, other than
pursuant to this Agreement; and upon delivery of such Securities and payment of
the purchase price therefor as herein contemplated, each of the Underwriters
will receive good and marketable title to the Securities
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purchased by it from such Selling Shareholder, free and clear of any security
interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any
kind.
(iv) DUE EXECUTION OF POWER OF ATTORNEY AND CUSTODY
AGREEMENT. Such Selling Shareholder has duly executed and delivered, in the
form heretofore furnished to the Representatives, a Power of Attorney and
Custody Agreement (the "Power of Attorney and Custody Agreement") with
_____________ and _______________, or either of them, as attorneys-in-fact (the
"Attorneys-in-Fact") and _________________, as custodian (the "Custodian"); the
Custodian is authorized to deliver the Securities to be sold by such Selling
Shareholder hereunder and to accept payment therefor; and either Attorney-in-
Fact is authorized to execute and deliver this Agreement and the certificate
referred to in Section 5(f) or that may be required pursuant to Sections 5(l)
and 5(m) on behalf of such Selling Shareholder, to sell, assign and transfer to
the Underwriters the Securities to be sold by such Selling Shareholder
hereunder, to determine the purchase price to be paid by the Underwriters to
such Selling Shareholder, as provided in Section 2(a) hereof, to authorize the
delivery of the Securities to be sold by such Selling Shareholder hereunder, to
accept payment therefor, and otherwise to act on behalf of such Selling
Shareholder in connection with this Agreement.
(v) ABSENCE OF MANIPULATION. Such Selling Shareholder has
not taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be expected to
cause or result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Securities.
(vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
consent, approval, authorization, order, registration, qualification or decree
of, any court or governmental authority or agency, domestic or foreign, is
necessary or required for the performance by each Selling Shareholder of its
obligations hereunder or in the Power of Attorney and Custody Agreement, or in
connection with the sale and delivery of the Securities hereunder by such
Selling Shareholder or the consummation of the transactions contemplated by this
Agreement by such Selling Shareholder, except such as may have previously been
made or obtained or as may be required under the 1933 Act or the 1933 Act
Regulations, state securities laws or the rules and regulations of the NASD.
(vii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for
all of the Securities to be sold by such Selling Shareholder pursuant to this
Agreement, in suitable form for transfer by delivery or accompanied by duly
executed instruments of transfer or assignment in blank with signatures
guaranteed, have been placed in custody with the Custodian with irrevocable
conditional instructions to delivery such Securities to the Underwriters
pursuant to this Agreement.
(viii) NO ASSOCIATION WITH NASD. Neither such Selling
Stockholder nor any of his, her or its affiliates directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, or has any other association with (within the meaning of
Article I, Section 1(m) of the By-laws of the National Association of Securities
Dealers, Inc.), any member firm of the National Association of Securities
Dealers, Inc. except as disclosed in writing to Merrill Lynch.
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(c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of
the Company or any subsidiary delivered to the Representatives or to counsel for
the Underwriters shall be deemed a representation and warranty by the Company to
each Underwriter as to the matters covered thereby; and any certificate signed
by or on behalf of the Selling Shareholders as such and delivered to the
Representatives or to counsel for the Underwriters pursuant to the terms of this
Agreement shall be deemed a representation and warranty by such Selling
Shareholder to the Underwriters as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS, CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company and the Selling Shareholders, severally and not jointly,
agree to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company and
each Selling Shareholder, at the price per share set forth in Schedule C, that
proportion of the number of Initial Securities set forth in Schedule B opposite
the name of the Company or such Selling Shareholder, as the case may be, which
the number of Initial Securities set forth in Schedule A opposite the name of
such Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof bears to the total number of Initial Securities, subject, in
each case, to such adjustments among the Underwriters as the Representatives in
their sole discretion shall make to eliminate any sales or purchases of
fractional securities.
(b) OPTION SECURITIES. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase up to an additional 720,000
shares of Common Stock at the price per share set forth in Schedule C. The
option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Securities upon notice by the Representatives to the
Company and the Selling Shareholders setting forth the number of Option
Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for such Option Securities. Any
such time and date of delivery (a "Date of Delivery") shall be determined by the
Representatives, but shall not be later than five full business days after the
exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Securities, each of the Underwriters, acting severally and not jointly,
will purchase that proportion of the total number of Option Securities then
being purchased which the number of Initial Securities set forth in Schedule A
opposite the name of such Underwriter bears to the total number of Initial
Securities, subject in each case to such adjustments as the Representatives in
their discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Graham
& James LLP, 400 Capitol Mall, 24th Floor,
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Sacramento, California, or at such other place as shall be agreed upon by the
Representatives and the Company and the Selling Shareholders, at 7:00 A.M.
(California time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives and the Company and the Selling Shareholders (such time and date
of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company and the Selling Shareholders, on each Date of Delivery as
specified in the notice from the Representatives to the Company and the Selling
Shareholders.
Payment shall be made to the Company and the Selling Shareholders by
wire transfer or certified or official bank check or checks in federal (same-
day) funds payable to the order of the Company and to the Custodian pursuant to
each Selling Shareholder's Power of Attorney and Custody Agreement, as the case
may be, against delivery to the Representatives for the respective accounts of
the Underwriters of certificates for the Securities to be purchased by them. It
is understood that each Underwriter has authorized the Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial Securities and the Option Securities, if any, which it
has agreed to purchase. Merrill Lynch, individually and not as representative
of the Underwriters, may (but shall not be obligated to) make payment of the
purchase price for the Initial Securities or the Option Securities, if any, to
be purchased by any Underwriter whose funds have not been received by the
Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representatives may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A or Rule 434, as applicable, and will notify the Representatives
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement, shall become effective, or any
supplement to the Prospectus or any amended Prospectus shall have been filed,
(ii) of the receipt of any comments
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from the Commission, (iii) of any request by the Commission for any amendment to
the Registration Statement or any amendment or supplement to the Prospectus or
for additional information, and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or of any
order preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any of
such purposes. The Company will promptly effect the filings necessary pursuant
to Rule 424(b) and will take such steps as it deems necessary to ascertain
promptly whether the form of prospectus transmitted for filing under Rule 424(b)
was received for filing by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectus,
will furnish the Representatives with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or counsel
for the Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished
or will deliver to the Representatives and counsel for the Underwriters, without
charge, [three] signed copies of the Registration Statement as originally filed
and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the Representatives, without
charge, a conformed copy of the Registration Statement as originally filed and
of each amendment thereto (without exhibits) for each of the Underwriters.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement and in the Prospectus. If at any time when a prospectus is required
by the 1933 Act to be delivered in connection with sales of the Securities, any
event shall occur or condition shall exist as a result of which it is necessary,
in the opinion of counsel for the Underwriters or for the Company, to amend the
Registration Statement or amend or supplement the Prospectus in order that the
Prospectus will not include any untrue statement of a material fact or omit
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to state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Company will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Company will
furnish to the Underwriters such number of copies of such amendment or
supplement as the Underwriters may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts,
in cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
(domestic or foreign) as the Representatives may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any
Rule 462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market and will
file with the Nasdaq National Market all documents and notices required by the
Nasdaq National Market of companies that have securities that are traded in the
over-the-counter market and quotations for which are reported by the Nasdaq
National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period 180 days from
the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any share of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or file any registration
statement under the 1933 Act with respect to any of the foregoing or
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(ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction described
in clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Securities to be sold hereunder, (B) any shares of Common Stock
issued by the Company upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof and referred to in the
Prospectus or (C) any shares of Common Stock issued or options to purchase
Common Stock granted pursuant to existing employee benefit plans of the Company
referred to in the Prospectus.
(k) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) FORM SR. The Company will file with the Commission such reports
on Form SR as may be required pursuant to Rule 463 of the 1933 Act Regulations.
SECTION 4. PAYMENT OF EXPENSES.
(a) EXPENSES. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors and
counsel for the Selling Shareholders, (v) the qualification of the Securities
under securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable and accountable fees and disbursements
of counsel for the Underwriters in connection therewith and in connection with
the preparation of the Blue Sky Survey and any supplement thereto, (vi) the
printing and delivery to the Underwriters of copies of each preliminary
prospectus, any Term Sheets and of the Prospectus and any amendments or
supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto,
(viii) the fees and expenses of any transfer agent or registrar for the
Securities, (ix) the filing fees incident to the review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of
the Securities, (x) the fees and expenses incurred in connection with the
inclusion of the Securities in the Nasdaq National Market and (xi) all costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the Underwriters, in connection with matters related to the Reserved
Securities which are designated by the Company for sale to employees and others
having a business relationship with the Company. The
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foregoing shall not affect any agreements between the Company and the
SellingShareholders with respect to payment of expenses.
(b) EXPENSES OF THE SELLING SHAREHOLDERS. The Selling Shareholders,
jointly and severally, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by this Agreement, including (i) any stamp duties, capital duties
and stock transfer taxes, if any, payable upon the sale of the Securities to the
Underwriters, and their transfer between the Underwriters pursuant to an
agreement between such Underwriters, and (ii) the fees and disbursements of
their respective counsel and accountants, other than counsel to the Selling
Shareholders who is also counsel to the Company.
(c) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company and the Selling Shareholders shall reimburse
the Underwriters for all of their out-of-pocket expenses, including the
reasonable fees and disbursements of counsel for the Underwriters.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Selling Shareholders
contained in Section 1 hereof or in certificates of any officer of the Company
or any Subsidiary or on behalf of any Selling Shareholder delivered pursuant to
the provisions hereof, to the performance by the Company of its covenants and
other obligations hereunder, and to the following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission, and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with
Rule 424(b).
(b) OPINIONS OF COUNSEL FOR COMPANY. At Closing Time the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of (i) Graham & James LLP, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, together with signed or reproduced
copies of such letter for each of the other Underwriters to the effect set forth
in Exhibit A hereto and to such further effect as counsel to the Underwriters
may reasonably request, (ii) __________, intellectual property counsel to the
Company, in form and substance satisfactory to counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the other
Underwriters to the effect set forth in Exhibit B hereto and to such further
effect as counsel to the
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Underwriters may reasonably request and (iii) Mary Jordan, General Counsel to
the Company, in form and substance satisfactory to counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the other
Underwriters to the effect set forth in Exhibit C hereto and to such further
effect as counsel to the Underwriters may reasonably request. In giving such
opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of California, the federal law of
the United States and the General Corporation Law of the State of Delaware, upon
the opinions of counsel satisfactory to the Representatives. Such counsel may
also state that, insofar as such opinion involves factual matters, they have
relied, to the extent they deem proper, upon certificates of officers of the
Company and its Subsidiaries and certificates of public officials.
(c) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. At Closing Time
the Representatives shall have received the favorable opinion, dated as of
Closing Time, of Graham & James, counsel for the Selling Shareholders, in form
and substance satisfactory to counsel for the Underwriters, together with signed
or reproduced copies of such letter for each of the other Underwriters to the
effect set forth in Exhibit D hereto and to such further effect as counsel to
the Underwriters may reasonably request. In giving such opinion such counsel
may rely, as to all matters governed by the laws of jurisdictions other than the
law of the State of California, the federal law of the United States and the
General Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representatives. Such counsel may also state that, insofar
as such opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its Subsidiaries
and certificates of public officials.
(d) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel
for the Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters with respect to the matters set forth in (i),
(v), (vi) (solely as to preemptive or other similar rights arising by operation
of law or under the charter or by-laws of the Company), (viii) to (x),
inclusive, (xiv) (solely as to the information in the Prospectus under
"Description of Capital Stock--Common Stock") and the penultimate paragraph of
Exhibit A hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the State of
California, the federal law of the United States and the General Corporation Law
of the State of Delaware, upon the opinions of counsel satisfactory to the
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its Subsidiaries and certificates of
public officials.
(e) OFFICERS' CERTIFICATE. At Closing Time there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its Subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and the
Representatives shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of Closing Time, to the effect that (i) there has been
no such material adverse change, (ii) the
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representations and warranties in Section l(a) hereof are true and correct with
the same force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied at or prior to Closing Time, and
(iv) no stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been instituted or are
pending or are contemplated by the Commission.
(f) CERTIFICATE OF SELLING SHAREHOLDERS. At Closing Time, the
Representatives shall have received a certificate of an Attorney-in-Fact on
behalf of each Selling Shareholder, dated as of Closing Time, to the effect that
(i) the representations and warranties of each Selling Shareholder contained in
Section 1(b) hereof are true and correct in all respects with the same force and
effect as through expressly made at and as of Closing Time and (ii) each Selling
Shareholder has complied in all material respects with all agreements and all
conditions on its part to be performed under this Agreement at or prior to
Closing Time.
(g) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of
this Agreement, the Representatives shall have received from Price Waterhouse
LLP a letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(h) BRING-DOWN COMFORT LETTER. At Closing Time the Representatives
shall have received from Price Waterhouse LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (g) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to
Closing Time.
(i) APPROVAL OF LISTING. At the Closing Time the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject only to
official notice of issuance.
(j) NO OBJECTION. The NASD shall not have raised any objection with
respect to the fairness and reasonableness of the underwriting terms and
arrangements.
(k) LOCK-UP AGREEMENTS. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit E hereto signed by the persons listed on Schedule D hereto, except with
respect to Gerald Knapp, whose lock-up agreement is attached hereto as Exhibit
F.
(l) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event that
the Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any portion of the Option Securities, the representations and
warranties of the Company and the Selling Shareholders contained herein and the
statements in any certificates furnished by the Company, any Subsidiary of the
Company and the Selling Shareholders hereunder shall be true and correct as of
each Date of Delivery and, at the relevant Date of Delivery, the Representatives
shall have received:
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<PAGE>
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of the chief
financial or chief accounting officer of the Company confirming that the
certificate delivered at the Closing Time pursuant to Section 5(e) hereof
remains true and correct as of such Date of Delivery.
(ii) CERTIFICATE OF SELLING SHAREHOLDERS. A certificate,
dated such Date of Delivery, of an Attorney-in-Fact on behalf of each Selling
Shareholder confirming that the certificate delivered at Closing Time pursuant
to Section 5(f) remains true and correct as of such Date of Delivery.
(iii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion
of Graham & James LLP, counsel for the Company, together with the favorable
opinion of __________, intellectual property counsel for the Company and the
favorable opinion of Mary Jordan, General Counsel of the Company, each in form
and substance satisfactory to counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(b) hereof.
(iv) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. The
favorable opinion of Graham & James, counsel for the Selling Shareholders in
form and substance satisfactory to counsel for the Underwriters, dated such Date
of Delivery, relating to the Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(c).
(v) OPINION OF COUNSEL FOR UNDERWRITERS. The favorable
opinion of Wilson, Sonsini, Goodrich & Rosati, P.C., counsel for the
Underwriters, dated such Date of Delivery, relating to the Option Securities to
be purchased on such Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(d) hereof.
(vi) BRING-DOWN COMFORT LETTER. A letter from Price
Waterhouse LLP, in form and substance satisfactory to the Representatives and
dated such Date of Delivery, substantially in the same form and substance as the
letter furnished to the Representatives pursuant to Section 5(g) hereof, except
that the "specified date" in the letter furnished pursuant to this paragraph
shall be a date not more than five days prior to such Date of Delivery.
(m) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of
Delivery counsel for the Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated, or in
order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company and the Selling Shareholders in connection with the
issuance and sale of the Securities as herein contemplated shall be satisfactory
in form and substance to the Representatives and counsel for the Underwriters.
(n) TERMINATION OF AGREEMENT. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
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obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF UNDERWRITERS. The Company and the Selling
Shareholders jointly and severally agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the
extent and in the manner set forth in clauses (i), (ii) and (iii) below. In
addition, each Selling Shareholder, severally and not jointly (in the proportion
that the number of Securities being sold by such Selling Shareholder bears to
the total number of Securities), agrees to indemnify and hold harmless each
Underwriter, its directors, officers and employees, and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement (or
any amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the failure of eligible
employees of the Company to pay for and accept delivery of Reserved Securities
which were subject to a properly confirmed agreement to purchase and (B) any
untrue statement or alleged untrue statement of a material fact concerning the
Company contained in the supplement used in the United Kingdom in connection
with the reservation and sale of the Reserved Securities to eligible employees
of the Company;
(iii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim whatsoever
based upon any such untrue statement or omission, or any such alleged untrue
statement or omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company and the Selling
Shareholders; and
(iv) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill Lynch),
reasonably incurred in investigating, preparing or
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defending against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever
based upon any such untrue statement or omission, or any such alleged untrue
statement or omission, to the extent that any such expense is not paid under
(i), (ii) or (iii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the 430A Information and the
Rule 434 Information, if applicable, or the Prospectus (or any amendment or
supplement thereto), and PROVIDED, FURTHER, that each Selling Shareholder shall
only be liable under this indemnity agreement with respect to information
pertaining to such Selling Shareholder furnished by or on behalf of such Selling
Shareholder expressly for use in any preliminary prospectus or prospectuses,
including the Prospectus (or any amendment or supplement thereto) or the
Registration Statement (or any amendment thereto). The liability of each
Selling Shareholder under the indemnity agreement contained in the provisions of
this Section 6 shall be limited to an amount equal to the product of the
proceeds per share to the Selling Shareholders as set forth on the cover page of
the Prospectus times the number of Securities set forth in Schedule B opposite
such Selling Shareholder's name.
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act and each Selling Shareholder against any
and all loss, liability, claim, damage and expense described in the indemnity
contained in subsection (a) of this Section, as incurred, but only with respect
to untrue statements or omissions, or alleged untrue statements or omissions,
made in the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through Merrill Lynch expressly for use in
the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to
Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties
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be liable for fees and expenses of more than one counsel (in addition to any
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement
contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) PRIOR INDEMNIFICATION AGREEMENTS. The provisions of this Section
shall not affect any agreement among the Company and the Selling Shareholders
with respect to indemnification.
SECTION 7. CONTRIBUTION. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders on the one hand and the Underwriters on the
other hand from the offering of the Securities pursuant to this Agreement or
(ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Selling Shareholders on the one hand and of the Underwriters on
the other hand in connection with the statements or omissions, or in conection
with any failure of the nature referred to in Section 6(a)(ii)(A) hereof, which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations.
The relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other hand in
connection with the offering of the Securities pursuant to this Agreement shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the Securities pursuant to this Agreement (before deducting
expenses) received by the
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<PAGE>
Company and the Selling Shareholders and the total underwriting discount
received by the Underwriters, in each case as set forth on the cover of the
Prospectus, or, if Rule 434 is used, the corresponding location on the Term
Sheet bear to the aggregate initial public offering price of the Securities as
set forth on such cover.
The relative fault of the Company and the Selling Shareholders on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company and the Selling Shareholders or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission or any failure
of the nature referred to in Section 6(a)(ii)(A) hereof.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
Section 7. The aggregate amount of losses, liabilities, claims, damages and
expenses incurred by an indemnified party and referred to above in this
Section 7 shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based upon any
such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission or any failure of the
nature referred to in Section 6(a)(ii)(A) hereof.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
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<PAGE>
The provisions of this Section shall not affect any agreement among
the Company and the Selling Shareholders with respect to contribution.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or the Selling
Shareholders submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company or the
Selling Shareholders, and shall survive delivery of the Securities to the
Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representatives may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or limited by the Commission or the
Nasdaq National Market, or if trading generally on the American Stock Exchange
or the New York Stock Exchange or in the Nasdaq National Market has been
suspended or limited, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices have been required, by any of said exchanges or by
such system or by order of the Commission, the National Association of
Securities Dealers, Inc. or any other governmental authority, or (iv) if a
banking moratorium has been declared by either Federal or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6 and 7 shall survive such termination and remain in full force and effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such
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amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Representatives shall not have completed such arrangements within such
24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-defaulting
Underwriters shall be obligated, severally and not jointly, to purchase the full
amount thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number
of Securities to be purchased on such date, this Agreement or, with respect to
any Date of Delivery which occurs after the Closing Time, the obligation of the
Underwriters to purchase and of the Company to sell the Option Securities to be
purchased and sold on such Date of Delivery shall terminate without liability on
the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the obligation
of the Underwriters to purchase and the Company to sell the relevant Option
Securities, as the case may be, either the Representatives or the Company and
any Selling Shareholder shall have the right to postpone Closing Time or the
relevant Date of Delivery, as the case may be, for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS OR THE
COMPANY. If the Selling Shareholders shall fail at Closing Time to sell and
deliver the number of Securities which such Selling Shareholder are obligated to
sell hereunder, and the remaining Selling Shareholders do not exercise the right
hereby granted to increase, pro rata or otherwise, the number of Securities to
be sold by them hereunder to the total number to be sold by all Selling
Shareholders as set forth in Schedule B hereto, then the Underwriters may, at
option of the Representatives, by notice from the Representatives to the Company
and the non-defaulting Selling Shareholders, either (a) terminate this Agreement
without any liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 4, 6 and 7 shall remain in full force and effect or
(b) elect to purchase the Securities which the non-defaulting Selling
Shareholders have agreed to sell hereunder. No action taken pursuant to this
Section 11 shall relieve any Selling Shareholder so defaulting from liability,
if any, in respect of such default.
In the event of a default by any Selling Shareholder as referred to in this
Section 11, each of the Representatives, the Company and the non-defaulting
Selling Shareholders shall have the right to postpone Closing Time for a period
not exceeding seven days in order to effect any required change in the
Registration Statement or Prospectus or in any other documents or arrangements.
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<PAGE>
If the Company shall fail at Closing Time or at the Date of Delivery to
sell the number of Securities that it is obligated to sell hereunder, then this
Agreement shall terminate without any liability on the part of any nondefaulting
party; provided, however, that the provisions of Sections 4, 5 and 7 shall
remain in full force and effect. No action taken pursuant to this Section shall
relieve the Company from liability, if any, in respect of such default.
SECTION 12. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at 101 California Street,
Suite 1320, San Francisco California 94111, attention of Steven F. Strandberg;
notices to the Company shall be directed to it at 2969 Prospect Park Drive,
Rancho Cordova, California 95670-6184, attention of James C. Castle; and notices
to the Selling Shareholders shall be directed to ___________________, attention
of __________________.
SECTION 13. PARTIES. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters, the Company and the Selling
Shareholders and their respective successors. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person, firm or
corporation, other than the Underwriters, the Company and the Selling
Shareholders and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters, the Company and the Selling Shareholders
and their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Securities from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS
OTHERWISE SET FORTH HEREIN SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
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If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company and the Attorney-in-Fact for the Selling
Shareholders, a counterpart hereof, whereupon this instrument, along with all
counterparts, will become a binding agreement among the Underwriters, the
Company and the Selling Shareholders in accordance with its terms.
Very truly yours,
USCS INTERNATIONAL, INC.
By:
-----------------------------------
James C. Castle,
Chairman of the Board
and Chief Executive Officer
CONFIRMED AND ACCEPTED,
as of the date first above written: [ ]
MERRILL LYNCH & CO
By:
-----------------------------------
MERRILL LYNCH, PIERCE, FENNER & As Attorney-in-Fact acting on behalf of
SMITH INCORPORATED the Selling Shareholders named in
Schedule B hereto
MONTGOMERY SECURITIES
By: MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By:
-------------------------------
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
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<PAGE>
SCHEDULE A
NUMBER OF
INITIAL
NAME OF UNDERWRITER SECURITIES
- ------------------- ----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated . . . . . . . . . . . . . . . . . . . . . . . . .
Montgomery Securities . . . . . . . . . . . . . . . . . . . . . . .
----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800,000
----------
----------
<PAGE>
SCHEDULE B
MAXIMUM
NUMBER OF INITIAL NUMBER OF OPTION
SECURITIES TO BE SECURITIES TO BE
SOLD SOLD
----------------- ----------------
USCS INTERNATIONAL, INC.
Total 720,000
<PAGE>
SCHEDULE C
USCS International, Inc.
4,800,000 Shares of Common Stock
(Par Value $.05 Per Share)
1. The initial public offering price per share for the Securities shall
be $______________.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $__________, being an amount equal to the initial
public offering price set forth above less $__________ per share; provided that
the purchase price per share for any Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial Securities but not payable on the Option
Securities.
<PAGE>
SCHEDULE D
[List of persons and entities subject to lock-up]
<PAGE>
EXHIBIT A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus in the column entitled "Actual" under
the caption "Capitalization" (except for subsequent issuances, if any, pursuant
to the Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise of
convertible securities or options referred to in the Prospectus); the shares of
issued and outstanding capital stock of the Company, including the Securities to
be purchased by the Underwriters from the Selling Shareholders, have been duly
authorized and validly issued and are fully paid and non-assessable; and none of
the outstanding shares of capital stock of the Company was issued in violation
of the preemptive or other similar rights of any securityholder of the Company.
(v) The Securities to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale to the Underwriters
pursuant to the Purchase Agreement and the Securities to be sold by the Selling
Shareholders are, and the Securities to be sold by the Company, when issued and
delivered by the Company pursuant to the Purchase Agreement against payment of
the consideration set forth in the Purchase Agreement, will be validly issued
and fully paid and non-assessable and no holder of the Securities is or will be
subject to personal liability by reason of being such a holder.
(vi) The issuance and sale of the Securities by the Company and the
sale of the Securities by the Selling Shareholders is not subject to preemptive
or other similar rights of any securityholder of the Company.
(vii) Each of Cable Data, Inc., Cable Data International, Ltd., Cable
Lease, Inc., CUO, Inc. and International Billing Services, Inc. (each a
"Significant Subsidiary" and collectively, the "Significant Subsidiaries") has
been duly incorporated and is validly existing as a corporation in good
<PAGE>
standing under the laws of the jurisdiction of its incorporation, has corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material Adverse Effect;
except as otherwise disclosed in the Registration Statement, all of the issued
and outstanding capital stock of each Significant Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and, to the best
of our knowledge and information, is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity; none of the outstanding shares of capital stock of
any Significant Subsidiary was issued in violation of the preemptive or similar
rights of any securityholder of such Significant Subsidiary.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to the best of
our knowledge, no stop order suspending the effectiveness of the Registration
Statement has been issued under the 1933 Act and no proceedings for that purpose
have been instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434 Information,
as applicable, the Prospectus and each amendment or supplement to the
Registration Statement and Prospectus as of their respective effective or issue
dates (other than the financial statements and supporting schedules included
therein or omitted therefrom, as to which we need express no opinion) complied
as to form in all material respects with the requirements of the 1933 Act and
the 1933 Act Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the Prospectus
included in the Registration Statement at the time it became effective.
(xii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the charter and by-laws of the Company and
the requirements of the Nasdaq National Market.
(xiii) To the best of our knowledge, there is no pending or threatened
action, suit, proceeding, inquiry or investigation, to which the Company or any
Significant Subsidiary is a party, or to which the property of the Company or
any Significant Subsidiary is subject, before or brought by any court or
governmental agency or body, domestic or foreign, which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect
A-2
<PAGE>
the properties or assets thereof or the consummation of the transactions
contemplated in the Purchase Agreement or the performance by the Company of its
obligations thereunder.
(xiv) The information in the Prospectus under "Management--Limitation
of Liability and Indemnification Matters," "Management--Employee and Director
Plans," "Certain Transactions," "Description of Capital Stock" and "Shares
Eligible for Future Sale" and in the Registration Statement under Items 14 and
15, to the extent that it constitutes matters of law, summaries of legal
matters, the Company's charter and bylaws or legal proceedings, or legal
conclusions, has been reviewed by us and is correct in all material respects.
(xv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectus that are not
described as required.
(xvi) All descriptions in the Registration Statement of contracts and
other documents to which the Company or its Significant Subsidiaries are a party
are accurate in all material respects; to the best of our knowledge, there are
no franchises, contracts, indentures, mortgages, loan agreements, notes, leases
or other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto,
and the descriptions thereof or references thereto are correct in all material
respects.
(xvii) Neither the Company nor any Significant Subsidiary is in
violation of its charter or by-laws and, to the best of our knowledge, no
default by the Company or any Significant Subsidiary exists in the due
performance or observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement, note,
lease or other agreement or instrument that is described or referred to in the
Registration Statement or the Prospectus or filed or incorporated by reference
as an exhibit to the Registration Statement.
(xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than (i) under the 1933 Act and
the 1933 Act Regulations, which have been obtained, or (ii) as may be required
under the securities or blue sky laws of the various states or the rules and
regulations of the NASD, as to which we express no opinion) is necessary or
required in connection with the due authorization, execution and delivery of the
Purchase Agreement or for the offering, issuance or sale of the Securities.
(xix) The execution, delivery and performance of the Purchase
Agreement and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement (including the issuance and sale of
the Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectus under the caption "Use Of Proceeds") and compliance
by the Company with its obligations under the Purchase Agreement do not and will
not, whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined in Section 1(a)(x) of the Purchase Agreement) under or result in the
A-3
<PAGE>
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any Significant Subsidiary pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any
other agreement or instrument, known to us, to which the Company or any
Significant Subsidiary is a party or by which it or any of them may be bound, or
to which any of the property or assets of the Company or any Significant
Subsidiary is subject (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not have a Material Adverse Effect), nor will
such action result in any violation of the provisions of the charter or by-laws
of the Company or any Significant Subsidiary, or any applicable law, statute,
rule, regulation, judgment, order, writ or decree, known to us, of any
government, government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any Significant Subsidiary or any of their
respective properties, assets or operations.
(xx) To the best of our knowledge, there is no owner of any securities
of the Company who has any rights, not effectively satisfied or waived, to
require registration of any shares of capital stock of the Company in connection
with the filing of the Registration Statement.
(xxi) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
1940 Act.
(xxii) The Rights under the Company's Shareholder Rights Plan to which
holders of the Securities will be entitled have been duly authorized and validly
issued.
(xxiii) The execution and delivery of the Merger Agreement, effecting
the reincorporation of the California Corporation under the laws of the State of
Delaware, was duly authorized by all necessary corporate action on the part of
each of the California Corporation and the Company.
(xxiv) Each of the California Corporation and the Company has all
corporate power and authority necessary to execute and deliver the Merger
Agreement, to file the Merger Agreement with the Secretary of State of
California and the Secretary of State of Delaware and to consummate the
reincorporation contemplated by the Merger Agreement, and the Merger Agreement
at the time of execution and filing constituted a valid and binding obligation
of each of the California Corporation and the Company, and the reincorporation
of the California Corporation under the laws of the State of Delaware has been
duly consummated.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such Registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time the Prospectus
was issued, at the time any such amended or
A-4
<PAGE>
supplemented prospectus was issued or at the Closing Time, included or includes
an untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
A-5
<PAGE>
EXHIBIT B
FORM OF OPINION OF INTELLECTUAL PROPERTY COUNSEL
(1) As of the date the Registration Statement became effective and as of
the date of the Prospectus, the information contained in the Prospectus under
the captions "Risk Factors -- Dependence on Proprietary Technology" and
"Business -- Intellectual Property," insofar as it relates to intellectual
property matters (the "Intellectual Property Portion") does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(2) To the best of our knowledge, there is no valid United States or
foreign patent that is or would be infringed by the manufacture, use or sale of
products currently being commercialized by the Company, and the Company owns or
possesses sufficient licenses or other rights to use all patents, trademarks,
trade names, trade secrets, technology and know-how believed by it to be
necessary in the conduct of the business now being conducted by the Company, as
described in the Prospectus.
<PAGE>
EXHIBIT C
Form of Opinion of Mary Jordan
(1) At the time the Registration Statement became effective and as of the
date of the Prospectus, the information contained in the Prospectus under the
captions "Risk Factors -- Dependence on Proprietary Technology" and "Business --
Intellectual Property," insofar as it relates to trademark, trade name, trade
secret, technology and know-how matters does not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(2) The Company owns or possesses sufficient licenses or other rights to
use all trademarks, trade names, trade secrets, technology and know-how believed
by it to be necessary in the conduct of the business now being conducted by the
Company, as described in the Prospectus.
<PAGE>
EXHIBIT D
Form of Opinion of Counsel for the Selling Shareholders
to be Delivered Pursuant to Section 5(c)
(i) No filing with, or consent, approval, authorization, order,
registration, qualification or decree of , any court or governmental authority
or agency, domestic or foreign, (other than (i) the issuance of the order of the
Commission declaring the Registration Statement effective and (ii) such
authorizations, approvals or consents as may be necessary under state securities
laws or the rules and regulations of the NASD, as to which we need express no
opinion) is necessary or required to be obtained by the Selling Shareholders for
the performance by each Selling Shareholder of its obligations under the
Purchase Agreement or in the Power of Attorney and Custody Agreement, or in
connection with the offer, sale or delivery of the Securities.
(ii) Each Power of Attorney and Custody Agreement has been duly
executed and delivered by the respective Selling Shareholders named therein and
constitutes the valid and binding agreement of such Selling Shareholder in
accordance with its terms.
(iii) The Purchase Agreement has been duly authorized, executed and
delivered by or on behalf of each Selling Shareholder.
(iv) The sale of the Securities by the Selling Shareholders is not
subject to preemptive or similar rights of any security holder of the Company.
(v) Each Attorney-in-Fact has been duly authorized by the Selling
Shareholders to deliver the Securities on behalf of the Selling Shareholders in
accordance with the terms of the Purchase Agreement.
(vi) The execution, delivery and performance of the Purchase Agreement
and the Power of Attorney and Custody Agreement and the sale and delivery of the
Securities and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement and compliance by the Selling
Shareholders with its obligations under the Purchase Agreement have been duly
authorized by all necessary action on the part of the Selling Shareholders and
do not and will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default or Repayment
Event under or result in the creation or imposition of any tax, lien, charge or
encumbrance upon the Securities or any property or assets of the Selling
Shareholders pursuant to, any contract, indenture, mortgage, deed of trust, loan
or credit agreement, note, license, lease or other instrument or agreement to
which any Selling Shareholder is a party or by which they may be bound, or to
which any of the property or assets of the Selling Shareholders may be subject
nor will such action result in any violation of the provisions of the charter or
by-laws of the Selling Shareholders, if applicable, or any law, administrative
regulation, judgement or order of any governmental agency or body or any
administrative or court decree having jurisdiction over such Selling Shareholder
or any of its properties.
<PAGE>
(vii) Each Selling Shareholder is, and immediately prior to Closing
Time will be, the sole registered owner of the Securities to be sold by such
Selling Shareholder; upon consummation of the sale of the Securities pursuant to
the Purchase Agreement, each of the Underwriters will be the registered owner of
the Securities purchased by it from such Selling Shareholder and, assuming the
Underwriters purchased the Securities for value in good faith and without notice
of any adverse claim, the Underwriters will have acquired all rights of such
Selling Shareholder in the Securities free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity, and the owner of the
Securities, if other than such Selling Shareholder, is precluded from asserting
against the Underwriters the ineffectiveness of any unauthorized endorsement;
and such Selling Shareholder has the full right, power and authority (A) to
enter into the Purchase Agreement and the Power of Attorney and Custody
Agreement and (B) to sell, transfer and delivery the Securities to be sold by
such Selling Shareholder under the Purchase Agreement.
D-2
<PAGE>
EXHIBIT E
[Form of lock-up from directors, officers or other stockholders pursuant to
Section 5(k)]
, 1996
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
MONTGOMERY SECURITIES
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering, By USCS International, Inc.
-----------------------------------------------------
Dear Sirs:
The undersigned, a stockholder, optionee, officer and/or director of USCS
International, Inc., a Delaware corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Montgomery Securities propose to enter into a Purchase
Agreement (the "Purchase Agreement") with the Company and the Selling
Shareholders providing for the public offering of shares (the "Securities") of
the Company's common stock, par value $.05 per share (the "Common Stock"). In
recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder, optionee, officer and/or director of the Company,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the undersigned agrees with each underwriter to
be named in the Purchase Agreement that, during a period of 180 days from the
date of the Purchase Agreement, the undersigned will not, without the prior
written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of,
or otherwise dispose of or transfer, directly or indirectly, any shares of the
Company's Common Stock or any securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, or file any registration statement under the
Securities Act of 1933, as amended, with respect to any of the foregoing or
(ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part,
<PAGE>
directly or indirectly, the economic consequence of ownership of the Common
Stock, whether any such swap or transaction is to be settled by delivery of
Common Stock or other securities, in cash or otherwise. The foregoing shall not
apply to the sale of any shares of Common Stock to the underwriters pursuant to
the Purchase Agreement. In addition, the undersigned agrees that, without the
prior written consent of Merrill Lynch on behalf of the underwriters, he, she or
it will not, during the period commencing on the date hereof and ending one
hundred eighty (180) days after the date of the Prospectus, make any demand for
or exercise any right with respect to, the registration of any shares of Common
Stock.
Very truly yours,
Signature:
-----------------------------
Print Name:
----------------------------
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<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 4, 1996, except for
Note 13 which is as of June 20, 1996, relating to the financial statements of
USCS International, Inc., which appears in such Prospectus. We also consent to
the references to us under the headings "Experts" and "Selected Consolidated
Financial Data" in such Prospectus. However, it should be noted that Price
Waterhouse LLP has not prepared or certified such "Selected Consolidated
Financial Data."
PRICE WATERHOUSE LLP
/s/ Price Waterhouse LLP
Sacramento, California
June 20, 1996
