<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 MAY 29, 1996
PROSPECTUS FILED PURSUANT TO RULE 424(a).
REGISTRATION NUMBER 333-3842.
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, 2,756,865 shares are being offered by USCS International, Inc.
("USCS" or the "Company") and 2,043,135 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.
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 to be effected in June
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................................... 2,756,865 Shares
The Selling Stockholders...................... 2,043,135 Shares
Common Stock to be outstanding after this 22,228,584 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 $ 7,452
Working capital....................................................................... 28,343 29,865
Total assets.......................................................................... 182,824 184,346
Long-term debt less current portion (5)............................................... 53,090 15,090
Stockholders' equity.................................................................. 49,087 88,609
</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 2,756,865 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. The contracts between the Company and TCI are scheduled to expire in
June and October 1996. 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."
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
7
<PAGE>
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 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.
8
<PAGE>
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."
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
809,000 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
9
<PAGE>
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 172,000
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 16,297,000 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 45.8% 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, PROPOSED
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 currently contemplates adopting a Stockholders' Rights Plan, which, if
adopted, would under certain circumstances 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 Proposed Stockholders' Rights Plan."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,756,865 shares of
Common Stock offered by the Company hereby are estimated to be $39.5 million
(approximately $50.2 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 2,756,865 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
21,791,451 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.............................................................. -- 39,384
Retained earnings....................................................................... 48,487 48,487
Foreign currency translation adjustment................................................. (352) (352)
---------- ----------
Total stockholders' equity............................................................ 49,087 88,609
---------- ----------
Total capitalization................................................................ $ 102,177 $ 103,699
---------- ----------
---------- ----------
</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 2,756,865 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 $85,647,000 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............................ 2,756,865 12.7 44,110,000 96.5 16.00
------------ ----- ------------- ----- -----------
Total................................ 21,791,451 100.0% $ 45,721,000 100.0% $ 2.10
------------ ----- ------------- ----- -----------
------------ ----- ------------- ----- -----------
</TABLE>
- ------------------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 16,991,451, 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)........................................
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>
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. 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 sells its 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. 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 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 services
revenue increased by 13% to $32.5 million in the first quarter of 1996 from
$28.8 million in the
16
<PAGE>
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 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. TCI contracts are scheduled to expire in June and October 1996.
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 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.
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.
17
<PAGE>
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. 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. 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 1996
-------------------------------------- -------------------------------------- --------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <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 $ 54,451 $55,421
Equipment sales and services.......... 8,004 11,140 5,234 9,180 6,528 10,022 6,459 8,972 4,834
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total............................... 40,692 49,917 45,586 52,610 53,012 56,151 56,677 63,423 60,255
Cost of revenue:
Software and services................. 22,024 24,972 26,455 29,595 29,813 31,102 32,509 34,278 35,228
Equipment sales and services.......... 5,031 6,560 2,830 5,055 3,701 5,996 4,124 5,717 2,933
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total............................... 27,055 31,532 29,285 34,650 33,514 37,098 36,633 39,995 38,161
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............................ 13,637 18,385 16,301 17,960 19,498 19,053 20,044 23,428 22,094
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development.............. 4,072 4,052 4,570 4,006 4,504 3,917 4,295 5,099 5,642
Selling, general and administrative... 7,537 8,427 7,530 10,302 10,057 10,120 9,784 12,141 11,009
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total............................... 11,609 12,479 12,100 14,308 14,561 14,037 14,079 17,240 16,651
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income........................ 2,028 5,906 4,201 3,652 4,937 5,016 5,965 6,188 5,443
Interest expense........................ 1,034 985 1,116 1,149 1,168 1,236 1,346 1,216 1,206
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes.............. 994 4,921 3,085 2,503 3,769 3,780 4,619 4,972 4,237
Income tax provision.................... 463 2,283 1,431 1,157 1,488 1,493 1,825 1,964 1,674
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income.............................. $ 531 $ 2,638 $ 1,654 $ 1,346 $ 2,281 $ 2,287 $ 2,794 $ 3,008 $ 2,563
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income per share.................... $ 0.02 $ 0.12 $ 0.08 $ 0.06 $ 0.11 $ 0.11 $ 0.13 $ 0.14 $ 0.12
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
Shares used in per share calculation.... 21,995 21,963 21,864 21,707 21,494 21,186 21,078 20,796 20,659
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
1994 1995 1996
-------------------------------------- -------------------------------------- --------
MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31 JUN. 30 SEP. 30 DEC. 31 MAR. 31
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <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% 85.9% 92.0 %
Equipment sales and services.......... 19.7 22.3 11.5 17.4 12.3 17.8 11.4 14.1 8.0
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total............................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Software and services................. 54.1 50.1 58.0 56.3 56.2 55.4 57.3 54.1 58.4
Equipment sales and services.......... 12.4 13.1 6.2 9.6 7.0 10.7 7.3 9.0 4.9
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total............................... 66.5 63.2 64.2 65.9 63.2 66.1 64.6 63.1 63.3
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............................ 33.5 36.8 35.8 34.1 36.8 33.9 35.4 36.9 36.7
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development.............. 10.0 8.1 10.1 7.6 8.5 7.0 7.6 8.0 9.4
Selling, general and administrative... 18.5 16.9 16.5 19.6 19.0 18.0 17.3 19.1 18.3
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total............................... 28.5 25.0 26.6 27.2 27.5 25.0 24.9 27.1 27.7
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income........................ 5.0 11.8 9.2 6.9 9.3 8.9 10.5 9.8 9.0
Interest expense........................ 2.6 1.9 2.4 2.1 2.2 2.2 2.4 2.0 1.9
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes.............. 2.4 9.9 6.8 4.8 7.1 6.7 8.1 7.8 7.1
Income tax provision.................... 1.1 4.6 3.2 2.2 2.8 2.6 3.2 3.1 2.8
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income.............................. 1.3 % 5.3% 3.6% 2.6% 4.3 % 4.1% 4.9% 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.
22
<PAGE>
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.
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.
23
<PAGE>
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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<PAGE>
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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<PAGE>
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, 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.
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<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.
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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)(2) 50 Director
Charles D. Martin (1)(2) 59 Director
Larry W. Wangberg 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
Martin, 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, Crandell and
Martin, 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.
George M. Crandell, a Director of the Company, is a limited partner of Westar
Capital Associates. Messrs. Argyros, Crandell 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.
37
<PAGE>
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
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 $21.01
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
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<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.
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<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.
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<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)
P.O. Box 65929
Tuscon, AZ 85728......................... 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)............................... 10,239,899 52.2 % -- 10,239,899 45.8 %
Other Selling Shareholders (each
beneficially owning less than 1% of the
Company's Common Stock)
(16 persons)(14)......................... 197,596 1.0 69,393 128,203 *
----------
Total.............................................................. 2,043,135
----------
----------
</TABLE>
- ------------------------
* Less than 1%.
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<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
22,228,584 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."
(14) Includes 882 shares issuable pursuant to stock options within 60 days of
May 20, 1996.
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<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, 22,228,584 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 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. At present, there are no shares of Preferred Stock outstanding and the
Company has no plans to issue any of the Preferred Stock.
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
47
<PAGE>
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 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 currently contemplates entering into a Stockholders' Rights Plan
(the "Rights Plan") by and between the Company and a rights agent selected by
the Company prior to the completion of the Offering with the following terms.
Under the Rights Plan as proposed to be entered into, the Board would declare
and distribute a dividend of one right ("Right") for each outstanding share of
the Common Stock to the stockholders of record as of the Company as of the date
selected by the Board. Shares of Common Stock issued in the Offering (assuming
no triggering event) would automatically receive these Rights. The Rights would
not be 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 a designated percentage 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 a designated
percentage of such outstanding shares of the Common Stock, unless the Board sets
a later date in either event. The Board would have the option to redeem the
Rights at a nominal cost or prevent the Rights from
48
<PAGE>
being triggered by designating certain offers for all the outstanding Common
Stock as a permitted offer. Prior to the Distribution Date, the Company would be
able to amend or supplement the Rights Plan without the consent of any of the
holders of the Rights. Following the Distribution Date, the Rights Plan could 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 would 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 a specified fraction 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.
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 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
Chemical Mellon Shareholder Services has been appointed as the transfer
agent and registrar for the Company's Common Stock.
49
<PAGE>
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 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 22,228,584 shares of
Common Stock. In addition to the 4,800,000 shares to be sold in this offering,
approximately 809,000 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
172,000 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
50
<PAGE>
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 16,297,000
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 (222,286 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 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.
51
<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..............................................
Montgomery Securities...............................................
----------
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 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 16,297,000 shares of Common Stock.
52
<PAGE>
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.
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,
53
<PAGE>
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.
54
<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)
The stock split as described in Note 13 to the consolidated financial
statements has not been consummated at May 29, 1996. When the stock split has
been consummated, we will be in a position to furnish the following report:
"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 , 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 provides 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.
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 generally 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 recognized as revenue over the
life of the license based on usage. Revenue from equipment sales generally 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 product development costs incurred prior to
the achievement of technological feasibility. The Company capitalizes product
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 life of the product. No amortization has been recorded to date. 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 not subject to repayment is first
offset
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)
against the related capitalized software and then against the related research
and development expenses. Funding subject to repayment is deferred until the
related repayment obligations lapse. The cost of custom development that is
required by a specific customer is charged to cost of revenue.
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.
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>
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 (CONTINUED)
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.
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
</TABLE>
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)
5. LONG-TERM DEBT (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
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
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.
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)
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.
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.
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 (CONTINUED)
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 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.
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)
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>
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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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<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................ 50
Underwriting................................... 52
Legal Matters.................................. 53
Experts........................................ 53
Additional Information......................... 53
Index to Consolidated Financial Statements..... F-1
</TABLE>
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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
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PROSPECTUS
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MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
, 1996
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