<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 0-28268
USCS INTERNATIONAL, INC.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-1727009
- ------------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification)
2969 PROSPECT PARK DRIVE,
RANCHO CORDOVA, CALIFORNIA 95670-6148
- ------------------------------------------------ ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 636-4500
- -------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
----------------------------- ---------------------------------
Common Stock, $.05 par value 23,286,188 shares
1
<PAGE>
USCS INTERNATIONAL, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements 3
Consolidated Condensed Balance Sheets
June 30, 1998 (Unaudited) and December 31, 1997 4
Consolidated Condensed Statements of Operations (Unaudited)
Three months and six months ended June 30, 1998 and 1997 5
Consolidated Condensed Statements of Comprehensive Income
(Unaudited) Three months and six months ended June 30, 1998
and 1997 6
Consolidated Condensed Statements of Cash Flows (Unaudited)
Six months ended June 30, 1998 and 1997 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition, Results of Operations, and Certain Factors
That May Affect Future Results. 9 - 18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 19
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19 - 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
</TABLE>
2
<PAGE>
USCS INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated condensed financial statements, except for the
balance sheet as of December 31, 1997, have been prepared by USCS International,
Inc. (the "Company") without audit by independent public accountants, but in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") and, in the opinion of the Company, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair statement
of results for each period shown. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
SEC rules and regulations. The Company believes that the disclosures made are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report to Stockholders and the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. The
results of operations for the quarter and six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1998.
3
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 13,165 $ 2,787
Accounts receivable, net 70,602 71,970
Postage receivable 24,470 25,684
Current portion of net investment in leases 4,930 5,892
Paper products and other inventory 4,734 4,573
Other 8,821 9,853
----------- -----------
Total current assets 126,722 120,759
Property and equipment, net 100,394 101,631
Net investment in leases, net of current portion 5,413 4,686
Other 17,665 11,543
----------- -----------
Total assets $ 250,194 $ 238,619
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 55,601 $ 62,656
Current portion of long-term debt 5,622 3,865
Deferred revenue 6,101 4,529
----------- -----------
Total current liabilities 67,324 71,050
Long-term debt, net of current portion 3,454 5,453
Customer deposits 18,592 18,170
Other liabilities 12,435 12,585
----------- -----------
Total liabilities 101,805 107,258
----------- -----------
Stockholders' Equity:
Preferred Stock, $.05 par value, 10,000,000 shares authorized;
no shares issued and outstanding - -
Common Stock, $.05 par value,
40,000,000 shares authorized; 23,427,582 shares issued and
23,330,099 shares outstanding at June 30, 1998 (unaudited) and
23,427,582 shares issued and 22,947,233 shares outstanding
at December 31, 1997 1,171 1,171
Additional paid-in capital 53,329 56,504
Retained earnings 95,957 82,897
Treasury stock (1,895) (9,047)
Foreign currency translation adjustment (173) (164)
----------- -----------
Total stockholders' equity 148,389 131,361
----------- -----------
Total liabilities and stockholders' equity $ 250,194 $ 238,619
----------- -----------
----------- -----------
</TABLE>
4
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- ------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management $ 41,890 $ 37,655 $ 81,569 $ 75,434
Bill processing 36,360 29,521 68,673 57,919
--------- --------- --------- ---------
Total 78,250 67,176 150,242 133,353
Equipment sales and services 7,284 5,522 13,820 10,315
--------- --------- --------- ---------
Total revenue 85,534 72,698 164,062 143,668
--------- --------- --------- ---------
Cost of revenue:
Software and services:
Customer management 19,943 17,383 38,580 35,911
Bill processing 25,805 21,064 49,464 41,924
--------- --------- --------- ---------
Total 45,748 38,447 88,044 77,835
Equipment sales and services 4,893 2,728 9,174 5,526
--------- --------- --------- ---------
Total cost of revenue 50,641 41,175 97,218 83,361
--------- --------- --------- ---------
Gross profit 34,893 31,523 66,844 60,307
--------- --------- --------- ---------
Operating expenses:
Research and development 8,532 7,860 16,657 14,731
Selling, general and administrative 15,092 14,197 28,488 27,462
--------- --------- --------- ---------
Total operating expenses 23,624 22,057 45,145 42,193
--------- --------- --------- ---------
Operating income 11,269 9,466 21,699 18,114
Interest expense, net 136 186 289 355
--------- --------- --------- ---------
Income before income taxes 11,133 9,280 21,410 17,759
Income tax provision 4,342 3,678 8,350 7,104
--------- --------- --------- ---------
Net income $ 6,791 $ 5,602 $ 13,060 $ 10,655
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share:
Basic $ 0.29 $ 0.24 $ 0.56 $ 0.46
Diluted $ 0.28 $ 0.23 $ 0.55 $ 0.44
Weighted average common shares
and equivalents:
Basic 23,356 23,152 23,195 23,124
Diluted 24,099 24,285 23,930 24,209
</TABLE>
5
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ --------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income $ 6,791 $ 5,602 $ 13,060 $ 10,655
Other comprehensive income:
Foreign currency translation
adjustment (21) 48 (9) (19)
------- ------- -------- -------
Comprehensive income $ 6,770 $ 5,650 $ 13,051 $ 10,636
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
6
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,060 $ 10,655
Depreciation and amortization 13,496 11,558
Net change in operating assets and liabilities 1,668 (5,239)
--------- ---------
Net cash provided by operating activities 28,224 16,974
--------- ---------
Cash flows from investing activities:
Capital expenditures, net (12,098) (11,990)
Other (2,950) (3,020)
--------- ---------
Net cash used in investing activities (15,048) (15,010)
--------- ---------
Cash flows from financing activities:
Net paydown under revolving credit agreement (4,000) -
Payments on long-term debt (3,669) (3,394)
Proceeds from issuance of long-term debt 7,427 -
Proceeds from issuance of common stock - 1,619
Purchases of treasury stock net of issuances (2,556) -
--------- ---------
Net cash used in financing activities (2,798) (1,775)
--------- ---------
Net increase in cash 10,378 189
Cash at January 1 2,787 8,452
--------- ---------
Cash at June 30 $ 13,165 $ 8,641
--------- ---------
--------- ---------
Supplemental Schedule of Noncash Financing Activities:
Contribution of Company shares to 401(k) $ 6,533 $ -
--------- ---------
--------- ---------
</TABLE>
7
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Long-term Debt
The Company has a five-year unsecured revolving credit line, expiring
September 2001, with two banks in the amount of $50 million.
Borrowings under the agreement bear interest at the Company's choice
of LIBOR (plus a margin ranging from .55% to 1.25%), the bank's base
rate or a quoted rate. Under the borrowing agreement, the Company is
required to maintain certain financial ratios and meet a net worth
test.
2. Treasury Stock
The Company, from time to time, at the authorization of the Board of
Directors, repurchases shares of the Company's common stock to be held
as treasury stock with reservation of such treasury stock for future
issuance under various employee stock purchase and incentive stock
option plans and for distributions to the Company's 401(k) Retirement
Plan.
In March 1998, the Company contributed approximately 312,000 shares of
treasury stock to the Company's 401(k) Retirement Plan. The fair
market value on the date of contribution was $6,533,000.
3. Earnings per Share
The Company has presented earnings per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). All previously reported amounts have been
restated to conform to SFAS 128. Under SFAS 128, basic earnings per
share are computed using the weighted average number of outstanding
registered shares. Diluted earnings per share are computed using
weighted average registered shares and common stock equivalents,
including the net shares issuable upon exercise of stock options when
dilutive.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition, Results
of Operations, and Certain Factors that May Affect Future Results
This Quarterly Report contains forward-looking statements that involve
risks and uncertainties. The 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 are subject to risks and
uncertainties including, but not limited to, the risks and uncertainties set
forth under the caption "Certain Factors That May Affect Future Results." The
Company's future results may differ significantly from the results and
forward-looking statements discussed in this Report.
Founded in 1969, the Company is a leading global provider of customer
management software and services to the communications and other service
industries. The Company's revenues are derived primarily from providing
software to cable television and multi-service providers worldwide, as well as
bill processing services to cable television, telecommunications, financial
services, utilities and other service industries. Software and bill processing
services are generally offered to North American cable television providers
under bundled service arrangements. Outside of North America, software is
generally sold exclusive of the bill processing. Most of the Company's revenue
is 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 produced under
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 sells computer
hardware and provides associated maintenance. Leasing is provided as an
alternative to equipment purchases for clients.
The Company sells its software and services to cable television and
multi-service providers in North America and the U.K. primarily through a direct
sales force. Outside of North America and the U.K., the Company markets its
software primarily through strategic alliances with companies specializing in
system integration or computer hardware manufacturing that are capable of
providing 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 diversification of its customer base, focusing primarily on
international, multi-service, telecommunications and other high-volume markets
because it believes these represent opportunities to grow at rates greater than,
and decrease its dependence upon, the U.S. cable television marketplace.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
consolidated condensed statements of operations and the percentage of revenue
represented by each line item (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------------------- --------------------------------------------
1998 1997 1998 1997
--------------------- -------------------- -------------------- -------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management $ 41,890 49.0% $ 37,655 51.8% $ 81,569 49.7% $ 75,434 52.5%
Bill processing 36,360 42.5 29,521 40.6 68,673 41.9 57,919 40.3
-------- ----- -------- ----- -------- ----- -------- -----
Total 78,250 91.5 67,176 92.4 150,242 91.6 133,353 92.8
Equipment sales and services 7,284 8.5 5,522 7.6 13,820 8.4 10,315 7.2
-------- ----- -------- ----- -------- ----- -------- -----
Total revenue 85,534 100.0 72,698 100.0 164,062 100.0 143,668 100.0
-------- ----- -------- ----- -------- ----- -------- -----
Cost of revenue:
Software and services:
Customer management 19,943 23.3 17,383 23.9 38,580 23.5 35,911 25.0
Bill processing 25,805 30.2 21,064 29.0 49,464 30.2 41,924 29.2
-------- ----- -------- ----- -------- ----- -------- -----
Total 45,748 53.5 38,447 52.9 88,044 53.7 77,835 54.2
Equipment sales and services 4,893 5.7 2,728 3.7 9,174 5.6 5,526 3.8
-------- ----- -------- ----- -------- ----- -------- -----
Total cost of revenue 50,641 59.2 41,175 56.6 97,218 59.3 83,361 58.0
-------- ----- -------- ----- -------- ----- -------- -----
Gross profit 34,893 40.8 31,523 43.4 66,844 40.7 60,307 42.0
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
Research and development 8,532 10.0 7,860 10.8 16,657 10.1 14,731 10.3
Selling, general and administrative 15,092 17.6 14,197 19.5 28,488 17.4 27,462 19.1
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 23,624 27.6 22,057 30.3 45,145 27.5 42,193 29.4
-------- ----- -------- ----- -------- ----- -------- -----
Operating income 11,269 13.2 9,466 13.1 21,699 13.2 18,114 12.6
Interest expense 136 .2 186 .3 289 .2 355 .2
-------- ----- -------- ----- -------- ----- -------- -----
Income before income taxes 11,133 13.0 9,280 12.8 21,410 13.0 17,759 12.4
Income tax provision 4,342 5.1 3,678 5.1 8,350 5.0 7,104 5.0
-------- ----- -------- ----- -------- ----- -------- -----
Net income $ 6,791 7.9% $ 5,602 7.7% $ 13,060 8.0% $ 10,655 7.4%
-------- ----- -------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- ----- -------- -----
</TABLE>
10
<PAGE>
The following table sets forth revenue and percentage of revenue by line item
exclusive of a discontinued customer, revenue of a discontinued customer and
total revenue (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------------------- --------------------------------------------
1998 1997 1998 1997
--------------------- -------------------- -------------------- -------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management $ 32,372 37.8% $ 26,911 37.0% $ 61,816 37.7% $ 53,700 37.4%
Bill processing 34,906 40.8 28,957 39.9 66,472 40.5 57,101 39.7
Equipment sales and services 5,880 6.9 3,223 4.4 10,804 6.6 5,993 4.2
-------- ----- -------- ----- -------- ----- -------- -----
Total 73,158 85.5 59,091 81.3 139,092 84.8 116,794 81.3
Discontinued customer 12,376 14.5 13,607 18.7 24,970 15.2 26,874 18.7
-------- ----- -------- ----- -------- ----- -------- -----
Total $ 85,534 100.0% $ 72,698 100.0% $164,062 100.0% $143,668 100.0%
-------- ----- -------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- ----- -------- -----
</TABLE>
11
<PAGE>
REVENUE
Revenue is derived primarily from providing customer management
software and services to cable television and multi-service providers in more
than 20 countries and from providing bill processing services primarily to
telecommunications companies in the U.S. Software and bill processing services
to cable television and multi-service providers are provided generally under
bundled service arrangements. In addition, the Company sells computer hardware
and associated maintenance and leasing services to cable television service
providers in connection with licensing the Company's software and provides
design, printing and graphics services in connection with its bill processing
services. Most of the software and services revenue is 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 processing services revenue (collectively referred to as
"software and services revenue") as services are performed. Certain of the
Company's software licenses provide for fixed or minimum fees. Fixed fees and
the present value of minimum fees under software licenses are recognized as
revenue upon installation. Such amounts have not been material. Most contracts
include provisions for inflation-based adjustments, including changes in paper
costs.
Total revenue increased by 18% to $85.5 million in the second quarter
of 1998 from $72.7 million in the comparable quarter in 1997. The increase in
the 1998 second quarter over the same period in 1997 was attributable to growth
in revenue from customer management software and services of $4.2 million or
11%, growth in bill processing of $6.8 million or 23%, and an increase in
equipment sales and services of $1.8 million or 32%.
Total revenue increased by 14% to $164.1 million for the six months
ended June 30, 1998 from $143.7 million in the comparable period in 1997. The
increase in the first six months of 1998 over the same period in 1997 was
attributable to growth in revenue from customer management software and services
of $6.1 million or 8%, growth in bill processing of $10.8 million or 19%, and an
increase in equipment sales and services of $3.5 million or 34%.
Telecommunications, Inc. ("TCI") represented approximately 15% of the
Company's revenue in the second quarter and six months ended June 30, 1998 and
19% in the same periods in 1997. Several years ago, TCI announced and began
development of an in-house system to replace the Company's customer management
software. On August 11, 1997, TCI informed the Company that it had agreed to
sell its partially developed in-house system to a competitor and was going to
enter into an exclusive long-term contract for customer management software with
that competitor. Under the contract between TCI and the Company, which expires
on December 31, 1999, TCI may remove subscribers after giving ninety days'
notice without significant economic penalty. Although TCI has not provided the
Company with a definitive schedule for conversion of the TCI subscribers to the
competitor's software, the conversions have begun and it is believed that TCI
and the competitor wish to complete the transfer by the end of 1998.
Additionally, the Company believes that TCI's contract with the competitor
provides financial incentives to TCI for converting subscribers of certain TCI
affiliates, some of whom are currently clients of the Company, to the
competitor's software. Revenue from TCI has declined in absolute dollars from
$13.6 million in the second quarter 1997 to $12.4 million in the second quarter
1998 or 9% and from $26.9 million for the six months ended June 30, 1997 to
$25.0 million in the same period in 1998. The decrease was primarily from a
reduction in the number of subscribers serviced by TCI and services purchased by
TCI. The number of total TCI subscribers on the Company's software declined by
approximately 3.7 million or 34% as of June 30, 1998, compared to December 31,
1997. The actual rate of decline in the number of TCI subscribers served and
revenue derived from TCI cannot be definitively estimated on a quarter by
quarter basis. However, the Company believes the decline in revenue from TCI
will increase throughout the year. The Company is mitigating the impact of this
by aggressively pursuing other domestic and international opportunities and
allocating the Company's resources to other existing or new customers. If these
efforts are not fully successful in mitigating the loss of TCI business, the
Company believes that it has sufficient financial resources and borrowing
ability to meet its obligations and fulfill its customer commitments during and
after the conversion period. To the extent the Company is not successful in
generating additional revenue to offset the expected decline in revenue from
TCI, such decline in revenue could have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
12
<PAGE>
Customer management software and services revenue, exclusive of
revenue from TCI, increased by 20% to $32.4 million in the second quarter of
1998 from $26.9 million in the comparable 1997 quarter. Bill processing revenue
as a stand-alone service increased by 21% to $34.9 million in the second quarter
of 1998 from $29.0 million in the comparable quarter of the prior year.
Equipment sales and services revenue increased to $5.9 million in the second
quarter of 1998 from $3.2 in the second quarter of 1997.
Customer management software and services revenue, exclusive of
revenue from TCI, increased by 15% to $61.8 million for the six months ended
June 30, 1998 from $53.7 million for the same period in 1997. Bill processing
revenue increased by 16% to $66.5 million for the six months ended June 30, 1998
from $57.1 million for the same period in 1997. Equipment sales and services
revenue increased to $10.8 million for the six months ended June 30, 1998 from
$6.0 million for the same period in 1997.
Growth in customer management software and services revenue for the
second quarter and six months ending June 30, 1998 compared to the same periods
in 1997, exclusive of revenue from TCI, came primarily from increases in the
number of subscribers of existing and new clients in the U.S. and international
markets, increases in prices allowed by existing contracts, and migration of
clients to higher-priced services. Growth in bill processing revenue was
derived from an increase in the volume of statements and images produced because
of the internal growth of existing customers and the acquisition of new
customers, primarily in telecommunications and other high-volume markets. The
increase in equipment sales and services revenue was primarily the result of
large equipment sales in the first and second quarters of 1998 and increased
leasing revenues related to new leasing transactions which occurred in the
latter part of 1997. Equipment sales volumes experienced in prior quarters
should not be considered indicative of future equipment sales volumes.
Three significant clients, including TCI, accounted for $31.4 million
and $30.0 million or 37% and 41% of total revenue in the second quarter of 1998
and 1997, respectively, and $61.5 million and $59.7 million or 37% and 42% of
total revenue for the six months ended June 30,1998 and 1997, respectively. See
"Certain Factors That May Affect Future Results" regarding these clients and
other factors that may impact future revenue.
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 41% in the second
quarter of 1998 was lower than the second quarter 1997 gross margin of
approximately 43%. The gross profit margin for the six months ending June 30,
1998 was 41% compared to 42% for the same period in 1997. The software and
services gross profit margin slightly declined to approximately 42% in the
second quarter of 1998 from approximately 43% for the same period in 1997. The
software and services gross profit margin for the six months ending June 30,
1998 was approximately 41% compared to 42% for the same period in 1997. The
customer management software and services gross profit margin was 52% in the
second quarter of 1998 compared to 54% in the second quarter of 1997. The gross
profit margin for customer management software and services for the six months
ending June 30, 1998 was 53% compared to 52% for the same period in 1997. The
bill processing services gross profit margin of 29% in the second quarter of
1998 equaled the 1997 second quarter gross margin. The bill processing gross
profit margin of 28% for the first six months ending June 30, 1998 equaled the
gross profit margin for the same period in 1997. The gross profit margin on
equipment-related revenue decreased to 33% and 34% in the second quarter and six
months ending June 30, 1998 from 51% and 46% for the same periods in 1997,
respectively.
The gross profit margin decrease in customer management software and
services in the second quarter of 1998, as well as the relatively static gross
profit margin for the six months ended June 30, 1998, compared to the same
periods in 1997, was attributed to temporary inefficiencies associated with
transitioning new customers on to the Company's products and services while
transitioning TCI off. The decline in the software and services gross profit
margin, consisting of customer management and bill processing, was due to the
inefficiency cited above as well as a shift in revenue mix consisting of an
increased percentage of the gross profit contribution flowing from the lower
margin bill processing business. Gross margins on equipment sales and services
typically vary based on the mix of equipment sales and services and underlying
demand. The
13
<PAGE>
decline in the second quarter and six months ended June 30, 1998 equipment sales
and services gross profit margin, in comparison to the same period in the prior
year, was attributable to discounting on equipment sales and increased
depreciation expense on leased equipment.
RESEARCH AND DEVELOPMENT
Research and development costs relate primarily to ongoing 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.
Research and development expense was $8.5 million or 10% of revenue in
the second quarter of 1998 compared to $7.9 million, or 11% of revenue, for the
same period in 1997. For the six months ended June 30, 1998, research and
development expense was $16.7 million or 10% of revenue compared to $14.7
million, also approximately 10% of revenue, for the same period in 1997. The
increased expenditures are attributable to the Company's commitment to the
development of new products and enhancements to existing products.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance.
The Company has identified, assessed and remedied some known "Year
2000" date issues and is continuing to identify, assess and evaluate the full
scope of this issue as it relates to its software products,
infrastructure-related hardware and software, and third-party products. While
identification and assessment are an ongoing process, the Company believes,
based on current known information, that it can effectively mitigate any "Year
2000" date issues, dependent upon cooperation from third parties. However, such
modification of software products, infrastructure-related hardware and software
and third-party products is subject to all the risks of development. If the
Company's efforts and/or third parties are not successful in the timely
mitigation of "Year 2000" issues, the impact on the Company will be significant.
The cost of remediating the Company's "Year 2000" issues has not been
determined; however, management believes that the cost of this effort will not
have a material adverse effect on the Company's results of operations. There
can be no assurance that the software or systems of other companies, on which
certain of the Company's software and systems rely, will be timely converted, or
that a failure to convert by another company will not have a material adverse
effect on the Company.
SELLING, GENERAL AND ADMINISTRATIVE
Selling expenses consist of compensation for sales and marketing
personnel including commissions and related bonuses, travel, trade shows and
promotional expenses. General and administrative expenses consist of
compensation for administration, finance and general management personnel, as
well as legal and accounting fees.
Total selling, general and administrative expenses increased by
approximately 6% and 4% in the second quarter and six months ended June 30, 1998
in comparison to the same periods in 1997. Selling and marketing expenditures
increased by 8% in the second quarter of 1998 compared to the second quarter of
1997. As a percentage of revenue, selling and marketing expenditures decreased
by less than 1% in the second quarter and first six months of 1998 compared to
the same periods in 1997. General and administrative expenses for the second
quarter and six months ended June 30, 1998 increased approximately 5% and 2%
compared to the same periods in 1997. As a percentage of revenue, general and
administrative expense in the second quarter and first six months of 1998
declined by approximately 1% compared to the same periods in 1997. The decline
in selling, general and administrative expense as a percentage of revenue in the
second quarter and six months ended June 30, 1998 when compared to the same
periods in 1997 was due to increased revenue coupled with cost containment
efforts.
14
<PAGE>
INTEREST EXPENSE
Interest expense consists of interest on borrowings under revolving
credit agreements, revenue bonds pertaining to certain of the Company's
facilities and notes and credit agreements related to the Company's leasing
subsidiary. Interest expense for the three and six months ended June 30, 1998
was unchanged in comparison to the same periods in 1997.
INCOME TAXES
The Company's provision for income taxes represents estimated federal,
state and foreign income taxes. The income tax rate for the three and six
months ended June 30, 1998 was 39%, approximately one percentage point lower
than the 1997 comparable periods. The rate decline is attributable to the mix
of foreign and domestic income and the application of tax reduction strategies.
NET INCOME
Net income increased by $1.2 million or 21% and by $2.4 million or 23%
in the second quarter and six months ended June 30, 1998 compared to the same
periods in 1997, respectively. Diluted earnings per share for the quarter were
$0.28 per share in 1998 compared to $0.23 per share in 1997, and were $0.55 for
the first six months of 1998 compared to $0.44 in 1997. This represents a 22%
increase for the quarter and a 25% year-to-date increase over the same periods
in 1997. Diluted shares used in the calculation decreased by approximately 1%
in 1998 compared to the same periods in 1997. The increase in net income for
the second quarter and first six months of 1998 compared to 1997 is attributable
to the factors cited above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition and liquidity remained strong
through the second quarter of 1998. Total long-term debt, including the current
portion, was $9.1 million as of June 30, 1998 compared to $9.3 million at
December 31, 1997. Of the debt outstanding at June 30, 1998, $8.6 million
pertains to the Company's leasing subsidiary and is collateralized, without
recourse, by rents receivable. At June 30, 1998, the Company had an available
$50 million line of credit. There were no borrowings outstanding at June 30,
1998. Total capital expenditures through the second quarter of 1998 were $12.1
million compared to $12.0 million in the same period in 1997. The Company, in
1998, has expended approximately $2.6 million, net of issuances, for the
repurchase of stock. In addition, the Company has issued approximately 312,000
shares of treasury stock to fund its $6.5 million obligation to the 401(k)
Retirement Plan.
The Company collects from its clients and remits to the U.S. Postal
Service a significant amount of postage. Substantially all contracts allow the
Company to pre-bill and/or require deposits from its clients to mitigate the
effect on cash flow. As of June 30, 1998, accounts receivable were
$95.1 million, including $24.5 million in amounts due from clients for postage.
The Company continues to make significant investments in capital
equipment, facilities, and research and development as well as to expand into
new domestic and international markets. The Company believes that net cash from
operations and the Company's borrowing availability will be sufficient to
support operations through the next twelve months.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, changes in the global
communications market, concentration in the cable television market, the
Company's ability to retain existing customers and attract new customers in the
global communications market as well as other high-volume service industries,
the Company's continuing ability to develop products that are responsive to the
evolving needs of its customers, increased competition, changes in operating
expenses, changes in government regulation of the Company's customers and
general economic factors in the U.S. as well as the international marketplace.
15
<PAGE>
CHANGING COMMUNICATIONS MARKET AND DEVELOPMENT OF SOFTWARE AND SERVICES
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 grows or converges
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.
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. The failure of such development projects could have a
material adverse effect on the financial condition and results of operations of
the Company.
DEPENDENCE ON THE CABLE TELEVISION MARKET
Although the Company's current strategy is to address the needs of the
global communications market and other high volume service providers, the
Company is highly dependent on the cable television market. For the three and
six months ended June 30, 1998, more than 55% of the Company's revenue was
derived from sales to cable television service providers. Although the cable
television industry outside of North America is generally expanding, the number
of providers of cable television service in the U.S. has been declining, due to
industry consolidation, 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, a decrease in the number of cable subscribers or 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.
CONCENTRATION OF CLIENT BASE
Aggregate revenue from the Company's ten largest clients accounted for
approximately 65% of total revenue for the three and six months ended June 30,
1998. Loss of all or a significant part of the business of any of these clients
or a decrease in their respective customer bases would have a material adverse
effect on the financial condition and results of operations of the Company.
Three of the Company's clients, including TCI, represented approximately 37% and
41% of total revenue in the second quarter of 1998 and 1997 and 37% and 42% of
total revenue for the six months ended June 30, 1998 and 1997, respectively.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly and annual operating results may fluctuate
from quarter to quarter and year to year 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 effect of acquisitions, the
evolving and unpredictable nature of the markets in which the Company's
products and services are sold and general economic conditions.
YEAR 2000 COMPLIANCE
The cost of remediating the Company's "Year 2000" issues has not been
determined; however, management believes that the cost of this effort will not
have a material adverse effect on the Company's results of operations. There
can be no assurance that the software or systems of other companies, on which
certain of the Company's software and systems rely, will be timely converted, or
that a failure to convert by another company will not have a material adverse
effect on the Company. See "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations - Year 2000 Compliance."
16
<PAGE>
NEW PRODUCTS, RAPID TECHNOLOGICAL CHANGES AND COMPETITION
The market for the Company's products and services is highly
competitive, and competition is increasing as additional market opportunities
arise. The Company believes its most significant competitors for customer
management software and services are independent providers of such software and
services and in-house systems.
In addition, competitive factors could influence or alter the
Company's overall revenue mix between customer management software, services,
including bill processing 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.
ELECTRONIC BILL PRESENTMENT
The Company's bill processing business is dependent on its ability to
design, handle, print and distribute via first class mail paper-based statements
and related materials. A number of companies, many with resources greater than
the Company, are developing and introducing electronic bill presentment services
that could reduce, if not eliminate, the need for paper statements.
The Company has introduced products, begun customer applications and
pilots, and has formed alliances with other companies for the introduction,
marketing and deployment of electronic bill presentment and other electronic
services. The maintenance of the Company's paper statement expertise,
successful development and marketing of electronic services and rate of customer
acceptance of such services are all subject to the technological, competitive
and market condition risks discussed in various sections of "Certain Factors
That May Affect Future Results."
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
does not have the unilateral option to extend the terms of such contracts upon
their expiration. In addition, certain of the Company's contracts do not
require clients to make any minimum purchase. Others require minimum purchases
that are substantially below the current level of business under such contracts,
and all such 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 - Revenue."
INTERNATIONAL BUSINESS ACTIVITIES
The Company's strategy to diversify its customer base includes the
selling of its products in a variety of international markets. To date, the
Company's primary customer management software has been installed in more than
20 countries. Generally, the Company operates in U.S. dollars, which reduces
but does not eliminate exposure to the adverse impact of currency fluctuations.
Currently, less than 10% of the Company's customer management software and
services revenue comes from international sources, and the Company is expanding
its international presence, primarily through third party marketing and
distribution alliances. The Company's current and proposed international
business activities are subject to certain inherent risks, including, but not
limited to, specific country, regional or global economic conditions, exchange
rate fluctuation and its impact on liquidity, changes in the national priorities
of any given country and cultural differences. There can be no assurance that
such risks 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.
17
<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.
The Company has been advised by a cable customer that a third party
has orally 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. To
the best of the Company's knowledge, no legal proceedings with regard to this
matter have been instituted against the customer or the Company as of the date
of this Report. The Company believes that it has a substantial defense against
the 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. There can be no
assurance, however, that such claims, if brought, would not have a material
adverse effect on the Company.
MANAGEMENT OF GROWTH AND ATTRACTION AND RETENTION OF KEY PERSONNEL
Management of the Company's growth, which may occur both internally
and through acquisitions, 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.
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.
GOVERNMENT REGULATION
The Company's existing and potential clients are subject to extensive
regulation, and certain of the Company's revenue opportunities may depend on
continued deregulation in the world-wide 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.
VOLATILITY OF STOCK PRICE
Although the Company believes that it has the product offerings and
resources needed for continuing success, future revenue and margin trends cannot
be reliably predicted and may cause the Company to adjust its operations. The
Company's stock price, like that of other technology companies, is subject to
significant volatility. The announcement of new products, services or
technologies by the Company or its competitors, quarterly variations in the
Company's results of operations, changes in revenue or earnings estimates by the
investment community and speculation in the press or investment community are
among the factors affecting the Company's stock price. In addition, the stock
price may be affected by general market conditions and domestic and
international macroeconomic factors unrelated to the Company's performance.
Because of the foregoing reasons, recent trends should not be considered
reliable indicators of future stock prices or financial results.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The 1997 annual meeting (the "Annual Meeting") of stockholders of
USCS International, Inc. was held on May 20, 1998, and 19,367,217
(82.6%) shares were present in person or by proxy.
(b) The following persons were elected as Class II directors at the
Annual Meeting:
Class II (term expiring in 2001)
-------------------------------------
James L. Hesburgh
Thomas A. Page
Larry W. Wangberg
The following directors terms of office continued after the Annual
Meeting.
Class I (term expiring in 2000)
---------------------------------------
James C. Castle
John W. Clark
Charles D. Martin
Class III (term expiring in 1999)
---------------------------------------
George L. Argyros, Sr.
Daniel R. Hesse
Michael F. McGrail
19
<PAGE>
(c) (i) Votes were cast or withheld in the election of Class II
directors at the Annual Meeting as follows:
Class II Director For Withheld Against
----------------- ---------- -------- -------
James L. Hesburgh 19,079,263 287,954 0
Thomas A. Page 19,100,224 266,993 0
Larry W. Wangberg 18,386,958 980,259 0
(ii) Votes were cast at the Annual Meeting with respect to
ratification of Price Waterhouse LLP as the Company's
independent accountants for 1998:
For: 19,199,240
Against: 149,184
Abstain: 18,793
This matter received sufficient votes to pass.
(iii) During the meeting there were no broker non-votes.
Item 5. Other information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 10 Addendum to the Statement Production Services Agreement
dated as of August 20, 1993 between International Billing
Services and Ameritech Corporation.
Exhibit 10.1 Second Amendment to Amended, Consolidated and Restated
Credit Agreement dated as of September 30, 1996 among
USCS International, Inc. and NationsBank, N.A.
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
20
<PAGE>
USCS INTERNATIONAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USCS INTERNATIONAL, INC.
(Registrant)
Dated: August 7, 1998 By: /s/ DOUGLAS L. SHURTLEFF
-------------------------
Douglas L. Shurtleff
Senior Vice-President of Finance and
Chief Financial Officer
(Principal Financial Officer)
21
<PAGE>
IDEAL BILL ADDENDUM 1
TO STATEMENT PRODUCTION SERVICES AGREEMENT
This Addendum is to the Statement Production Services Agreement dated as of
August 20, 1993 (the "Agreement") between INTERNATIONAL BILLING SERVICES, INC.
(formerly U.S. Computer Services dba International Billing Services) ("IBS") and
AMERITECH CORPORATION ("Ameritech").
WHEREAS, Ameritech desires to introduce a new format for its statements,
hereinafter referred to as the "Ideal Bill," consisting of an [****] first page
and [****] subsequent pages; and
WHEREAS, Ameritech has requested that IBS provide a new option under the
Agreement for production of the Ideal Bill format; and
WHEREAS, IBS is willing to acquire certain new hardware and provide such
services as may be necessary to meet Ameritech's requirements for a new service
option to accommodate the Ideal Bill, at the prices and upon the terms and
conditions set forth in this Addendum to the Agreement;
NOW THEREFORE, the parties agree as follows:
1. SCOPE OF ADDENDUM
Ameritech agrees to convert all of its ACIS on-line accounts, including
on-line statements and bill reprints, to the new Ideal Bill Service Option,
as more fully described below, in accordance with the conversion schedule
and the cutoff schedule as defined in Attachment D1. This Addendum will
apply to all statements that are converted to the new Service Option; those
statements that remain on an existing Service Option will be subject to
Sections 5, 7, 8 10, 12 and Attachments E1 and F1 of this Addendum.
In addition, it is agreed that the term of the Agreement with regard to
Service Option 3 shall be extended so that the Agreement will expire
effective with [****]. For each month after [****] in which full
production is delayed for reasons primarily attributable to Ameritech, the
Addendum expiration date shall be extended one additional month. If full
production is delayed three months (consecutive or non-consecutive) after
[****] for reasons primarily attributable to Ameritech, then the Addendum
expiration date shall extend [****] months after the last day of the first
month of full production. Months in which delays are primarily
attributable to IBS shall not count toward determination of any extension
of the Agreement. In no event shall the conversion of the last state take
place later than [****].
Ameritech's obligation with respect to all other Service Options shall
expire on the original expiration date set forth in the Agreement.
2. NEW SERVICE OPTION 3
Paragraph 2.2 of the Agreement is amended to provide that IBS shall offer
to Ameritech a new service option designated as Service Option 3 (Ideal
Bill) consisting of an [****] first sheet with one or more [****]
subsequent sheets. The agreed-upon formats and specifications for Service
Option 3 are set forth in Attachment A1 to this Addendum. The rate card
for Service Option 3 is set forth in Attachment B1. Any additional changes
or options under the Agreement shall require a new Addendum.
Ameritech may convert any of its billing statements to Service Option 3
(Ideal Bill), but such statements may not thereafter be converted back to
any previous Service Option offered under the Agreement.
Page 1
<PAGE>
After the start of Conversion, there will be two types of CARS reprints:
old format (pre Ideal Bill) and Ideal Bill, as further defined below.
Old Format: For statements that are in the old format (pre Ideal Bill),
IBS will print these statements under the terms of Service Option 1 (6 5/8
x 9 1/3). This option will be available for the remaining term of the
Agreement.
Ideal Bill Format
For statements that are in the Ideal Bill format ([****] - Summary, [****]
- Detail), IBS will print these statements under the terms of Service
Option 3.
3. TESTING
No later than [****] days before the first scheduled live production,
Ameritech will provide to IBS its test requirements (Ameritech Test
Requirements) for Ideal Bill production. No later than [****] days before
the first scheduled live production run, IBS will provide to Ameritech a
factory end to end plan ("Test Plan"). Within [****] business days of IBS'
receipt of the Ameritech Test Requirements, IBS will respond in writing by
either accepting or rejecting the Ameritech Test Requirements. IBS'
failure to respond within such period shall constitute acceptance of the
Ameritech Test Requirements. IBS will make every effort to incorporate the
Ameritech Test Requirements into the IBS Test Plan. IBS will be
responsible for the cost of the IBS Test Plan. Should Ameritech require
testing that goes beyond what IBS has determined is necessary for the IBS
Test Plan, then IBS shall inform Ameritech in writing what portion of the
Ameritech testing requirements will be billable to Ameritech. IBS will
obtain prior written approval for such charges. Testing of the systems
necessary to provide the Services in Attachment A will occur as provided in
the Test Plan. At a minimum, the Plan shall include exercising all aspects
of the services package provided for in this Addendum.
4. CONVERSION
A conversion schedule for Service Option 3 (Ideal Bill) is attached as
Attachment C1.
5. TURNAROUND/SHEET COUNT
a. The average tray turnaround time during conversion to the Ideal Bill
shall be as follows for all statements being produced under Service
Option 3
<TABLE>
<CAPTION>
Average Sheet Count Range Turnaround Time (tray average)
------------------------- ------------------------------
<S> <C>
not to exceed [****] [****] hours
[****] to [****] [****] hours
[****] to [****] [****]hours
</TABLE>
If the average sheet count during the conversion period consistently
exceeds [****] sheets per statement, then Ameritech may request that IBS
implement such changes as may be necessary to reduce the turnaround time to
a [****]-hour tray average. IBS shall have [****] days after conversion of
the last state or [****] days from the request, whichever is later, to
implement additional hardware required to implement this request.
Ameritech and IBS agree to work in good faith to provide each other with
notice, as each may become aware of unusual changes in sheet count volume
or other circumstances that could impact turnaround time. Turnaround times
shall also be subject to the terms and conditions of Attachment F1, when
agreed upon, and will provide for a [****] hour average tray turnaround.
6. PRICES
a. The prices for products and services provided by IBS under this
Addendum are set forth in Attachment B1 to this Addendum. All prices
in such attachment, other than those for Customized Stock, will remain
fixed for the remainder of the original term of the Agreement. The
base date for paper prices for Service Option 3 (Ideal Bill) is
[****].
Page 2
<PAGE>
b. One-time charges, as described in Attachment B1, shall be payable on
the following schedule:
[****] upon execution of this Addendum;
Other one-time charges upon conversion of the first state hereafter
but no later than [****] unless a conversion delay is caused by IBS.
7. DISASTER RECOVERY
IBS has provided a disaster recovery plan to Ameritech under the Agreement,
which plan has been mutually agreed upon by the parties. IBS agrees under
this Addendum to provide Ameritech with a draft modified disaster recovery
plan ("MDR Plan") for the Ideal Bill, by [****], and a final modified
disaster recovery plan ("MDR") by [****], which MDR Plan will be attached
hereto as Attachment E1. The MDR Plan must be documented, tested and
capable of being implemented no later than the first day after full
conversion to Service Option 3 (Ideal Bill). Upon receipt of the MDR Plan,
Ameritech will have [****] days to review and provide written approval or
rejection of the MDR Plan. Within [****] days of its receipt of the MDR
Plan, Ameritech shall respond in writing by either accepting or rejecting
the MDR Plan. In addition to the other key requirements outlined in Section
6 of the Agreement, the MDR Plan for the Ideal Bill will provide for [****]
to be used for all Ameritech statements covered by this Addendum during the
disaster period.
8. WARRANTY
IBS warrants that all services provided in connection with Service Option 3
(Ideal Bill) under this Addendum will conform to the standards and
specifications set forth in this Addendum, including the Attachments
hereto.
[****]
9. TERMINATION
Paragraph 13.1, Breach, of the Agreement is modified to replace item (2)
with the following: "the failure by IBS to develop by the date set forth in
Paragraph 7 of this Addendum a disaster recovery plan that is documented,
tested, and capable of immediate implementation."
10. INFRINGEMENT
Paragraph 14.8, infringement, of the Agreement is amended by the addition
of the following wording:
"In the event of any infringement, or claim of infringement of any patent,
trademark, copyright, trade secret or other proprietary interest based on
the services provided by IBS, IBS shall indemnify and hold harmless
Ameritech for any loss, damage, expense, or liability that may result by
reason of any such infringement or alleged infringement. IBS shall defend
or settle, at IBS' expense, any action or suit for which IBS is responsible
hereunder. Ameritech shall notify IBS promptly of any claim of infringement
for which IBS is responsible, and shall cooperate with IBS in every
reasonable way to facilitate the defense of any such claim."
11. NOTICE OF PURCHASE/LEASE
IBS will give Ameritech not less than [****] days' prior written notice
before entering into any purchase or lease obligations for the primary
capital equipment required to meet the specifications for Service Option 3.
12. MISCELLANEOUS
a. Paragraph 14.13, Notices, of the Agreement is modified to read as follows:
Page 3
<PAGE>
If to IBS: International Billing Services, Inc.
ATTENTION: President
5220 Robert J. Mathews Parkway
El Dorado Hills, CA 95762-5712
Fax: 916/939-4998
with a copy to: General Counsel
USCS International, Inc.
2969 Prospect Park Drive
Rancho Cordova, CA 95670
Fax: 916/636-4561
If to Ameritech: Ameritech Corporation
ATTENTION: Vice President, Billing Services
2000 West Ameritech Center Drive
Hoffman Estates, IL 60196
Fax: 847/248-6370
with a copy to: General Counsel
Ameritech Corporation
30 South Wacker Drive
Chicago, IL 60606
Fax: 312/207-1359
b. Attachment F to the Agreement is superseded and replaced by new Attachment
F1, attached hereto.
c. All defined terms used herein shall have the meanings that have been
assigned to them in the Agreement.
d. The terms of the Agreement are incorporated in full herein except to the
extent of any inconsistency between the terms of the Agreement and the
terms of this Addendum. In the event of such inconsistency, the terms of
this Addendum shall supersede the terms of the Agreement.
e. All other terms and conditions of the Agreement shall remain in full force
and effect unchanged.
ATTACHMENTS
The following are attached to and by this reference made a part of this
Addendum:
Attachment A1 - Description of Services
Attachment B1 - Rate Card
Attachment C1 - Conversion Schedule
Attachment D1 - Cutoff Schedule
Attachment E1 - Disaster Recovery (to be added)
Attachment F1 -- Turnaround Time Provisions (to be added)
AMERITECH CORPORATION INTERNATIONAL BILLING SERVICES,
INC.
By: By:
----------------------------- -----------------------------
Name: Name:
--------------------------- ---------------------------
Title: Title:
-------------------------- --------------------------
Page 4
<PAGE>
Date: Date:
--------------------------- ---------------------------
Page 5
<PAGE>
ATTACHMENT A1
I. STATEMENT PRODUCTION SERVICES
These items are individually charged on Attachment B1 and are described in the
following pages.
STATEMENT PRODUCTION
[****]
II. DETAIL OF PRODUCTS AND SPECIFICATIONS FOR ATTACHMENT "B1"
1. COMPUTER PROCESSING:
Computer Processing is a per image charge for processing statement data
and includes the following:
- CASS Certification for automated mail discounts
- Postal sorting
- Postal calculation
- Manifest line generation
- Pre-processing
- Job scheduling and control
- Confirmation of statement, image, and page counts
IBS will optimize each inserting plan for maximum postal discount; the
level of postal discount is dependent upon mailing piece physical
characteristics and customer provided accuracy of ZIP and ZIP+4
information, address accuracy and density. Computer images are defined
as a logical statement page. In duplex mode there will be a maximum of
(2) computer images per physical sheet of paper.
2. IMAGE PRINTING:
The image printing fee includes printing the image and where
appropriate, collating summary forms with detail forms, folding the
statement and inserting the finished statement into the appropriate
sending envelope. Image Printing (Duplex) is defined as (2) print images
per physical sheet of paper (whether or not data is printed on both
sides).
3. INSERTING:
Inserting is charged per piece inserted. Inserting does not include the
printing of the piece. The charge covers the normal receiving, setup,
and placement of each insert into the sending envelope. Return envelopes
are considered an insert; statement forms are not considered an insert.
All inserts must meet requirements in the IBS Insert Order Guide.
4. TECHNICAL SUPPORT:
Technical Support is a per statement charge for 24 hour, 7 day a week
customer support services consisting of:
- Telephone Customer Support
- Monitoring of process controls
Page 6
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- Quality Control
- Software Support
- Factory System Support
- Direct Access
Quality checkpoints are included during all phases of the process. This
process is dedicated to ensuring the quality of the customer's statement
production run. There are many points in the process where quality
exceptions can be located and dealt with immediately. The customer
services group monitors and controls the job while it is in-house and
after its completion to ensure a quality customer experience.
INITIAL SETUP.
Every production run at IBS is scheduled in advance by the customer. When
notification of schedule is received by customer services, the setup process
begins. The IBS factory system is prepared for the arrival of data from the
customer. Form stock, envelopes, and custom inserts are reviewed to ensure
that they are correct for the production run. Customer services prepares the
job control folder for the run and places customer specific run information
in the folder in preparation for the arrival of data. The job is placed on
the IBS StatementsPLUS production schedule and all support departments are
informed of expected due in date.
NOTIFICATION OF DATA ARRIVAL
When IBS computer operations notifies the customer services group that a
transmission is being received, the monitor and control process for that job
is initiated. The Factory Control System is updated to notify support
departments that the run is in process. The job control folder documentation
of process checkpoints begins and the folder is sent to computer operations.
During pre-print processing in the computer room, operators verify that the
steps on the control form are completed in sequence and take ownership for
their accuracy. While processing, control reports are printed and verified
to validate the number of statements, images, and records received against
the file trailer record. If a discrepancy is found, customer services is
notified and an electronic hold is placed on the run.
RELEASE TO PRINT
When the files are ready for production processing, the customer services
group utilizes the customer supplied "Release to Print Form" to do a final
verification of the statement and image count as well as verify that the
correct customer specific inserts, envelopes, and forms stock are set up. If
the information is verified as correct, the files are electronically
released to the manufacturing floor to begin statement production. The job
control folder is updated and delivered to the production department.
PRINT QUALITY VERIFICATION
At the beginning of the production process, before any statements have been
mailed, a customer service technician examines sample statements. This
employee checks that the print quality and registration are correct and
satisfy the specification of placement on the form. Envelope, form stock,
and insert combinations are also confirmed for the sample statement. This
information is recorded on a checklist, attached to the sample, and placed
in the job control folder for retention. Once the statement sampling is
complete to the satisfaction of the production and customer services groups,
the remaining electronic hold is released and trays of mail that are
completed are free to mail throughout the production run. During the
printing of the file, trays of mail are quality sampled by the production
department to ensure consistent quality. Also, at the end of the process,
before mailing, trays are randomly sampled by a customer service technician
to provide feedback to the production team and validate their quality
efforts. At any time during the run, if quality does not meet the
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specification during random sampling, the technician can re-establish the
electronic hold and stop any further trays from mailing until the problem
can be corrected.
JOB CONTROL FOLDER CLOSE OUT
After the production run is completed, the job control folder is returned to
the customer cervices group for close out and retention. During the close
out process, the number of statements and images is re-verified and
reporting of statistics is completed. If any discrepancy is found during
this process, a recovery plan is initiated immediately to determine the
problem and take corrective action. The job control folder is then
archived..
SUMMARY
The process is dedicated to ensuring the quality of the customer's
statement production run. There are many points in the process where quality
exceptions can be located and dealt with immediately. The customer services
group monitors and controls the job while it is in house and after its
completion to ensure a quality customer experience.
DIRECT ACCESS
Direct Access is a client server program that provides on-line access to
the IBS statement production process. This is a dial-up system that will
run on a desk top PC.
PAPER PRODUCTS
Includes ongoing purchasing, handling and custom printing of forms and
envelopes. A form is a sheet of paper pre-printed on one or both sides.
All forms will include any marks required for printing, forms
verification, and production equipment alignment purposes.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
5. CUSTOM FORM - SUMMARY
Description: [****] Finished Size: [****] Paper: [****]
Colors - Front: [****] Colors - Back [****] Perforation: [****]
Tolerance [****]
6. CUSTOM FORM - DETAIL
Description: [****] Finished Size: [****] Paper: [****]
Colors - Front: [****] Colors - Back [****] Perforation: [****]
Tolerance [****]
7. SEND ENVELOPE - CUSTOM
Description: [****] Size: [****] Paper: [****] Window Type: [****]
Colors - Outside: [****] Inside Tint: [****] Tolerance: [****]
Facing Mark: [****]
8. RETURN ENVELOPE - CUSTOM
Envelope Type: [****] Size: [****] Paper: [****] Window Type: [****]
Colors - Outside: [****] Inside Tint: [****] Tolerance: [****]
Facing Mark: [****]
9. FLAT ENVELOPE - UP TO 11 OUNCES:
Description: [****] Size: [****] Paper: [****] Window Type: [****]
Colors - Outside: [****]
Inside Tint: [****] Tolerance: [****] Facing Mark: [****]
</TABLE>
Page 8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
10 FLAT ENVELOPE - OVER 11 OUNCES
Description: [****]
Size: [****] Paper: [****]
Window Type: [****]
Colors - Outside: [****]
Inside Tint: [****] Tolerance:[****] Facing Mark: [****]
</TABLE>
11. INVENTORY MANAGEMENT
Per form and envelope. Receiving, warehousing, control, management and
warehouse staging of forms and envelopes. Fees for Inventory Management
will be charged upon use of the item.
12. MINIMUM AND SET UP FEES
Any statement run whose total charges for Rate Card Items (1-11) fall below
the stated minimum, customer will be charged the Statement Run Minimum
Charge set forth in Attachment B1. A Statement run is statements received
as a cycle cutoff in a single file transmission. Each statement run will
have its own unique identification number.
13. PLAN SETUP
This charge applies to all statement plans within each cutoff. A "plan" is
a group of statements that have a similar processing characteristic (e.g.,
flat or folded) and a maximum of eleven (11) inserts ( including remit
envelope)
The [****] normally used plans are defined below:
[****]
SPECIAL SERVICES
Special Services are charges for items not otherwise included in this contract
(see Attachment B1 for rates) and include, but are not limited to, the
following:
14. PROGRAMMING
Programming charges will apply if Ameritech requests changes that require
programming.
15. FORMS CREATION PRE-PRINTED
Forms creation is a design service that will take existing forms and create
artwork and/or create a new form(s) including artwork.
16. CREATIVE DESIGN SERVICES
Creative design for forms, envelopes, and inserts.
17. CUSTOM REPORTS
Custom reports are created to suit Ameritech's specific requirements. These
will be charged on a per report basis, based on a mutually agreed to format
and price.
18. HOLD
A Hold may be called by Ameritech when a statement run in still in the
Computer Processing mode and has not left the computer room for processing
on the Production Floor. There is no charge for this hold.
19. HALT/RESTART/ABORT
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HALT;
A halt is charged when Ameritech requests a halt to the processing of any
specific statement run in process. Upon such a request, IBS would issue a
stop order to all stations. All work in process is then retrieved and
caged. In a halt situation, a best effort will be made by IBS to minimize
mail processing; however no guarantee is made that mail will not have been
entered into the postal system. Following a halt, the customer can issue a
Restart or an Abort. IBS will provide Ameritech with a list, by account
number, of all mail pieces delivered into the postal system in the event
that some mail was entered into the postal system before a halt was
effected.
RESTART: After a Halt is canceled by Ameritech, the statement run is
restarted using original data.
ABORT: An Abort signifies that the statement run is unusable and that
Ameritech will re-transmit the statement print file. Ameritech is liable,
at standard rates, for all processing charges, stock used, and any postage
incurred before the Abort was effected.
INSERT HANDLING
20. INSERT HANDLING
Charges will apply if IBS is required to perform special handling of
inserts as required by individual situations, such as hand inserting,
re-sorting inserts, identifying unlabeled inserts, or deinserting inserts
from statements. Please reference the IBS Insert Order Guide.
21. INSERT STORAGE
Insert Storage fees will be charged for inserts stored:
- earlier than [****]days before first usage,
- longer than [****] days from last usage, or
- more than [****] days from date of receipt.
Insert storage fees do not apply to return envelopes. When IBS is printing
the inserts, insert storage fees will not apply unless Ameritech has
directed IBS to store inserts under the storage fee charge situations
listed above.
STATEMENT SPECIAL HANDLING
Statement Special Handling is defined as the following services:
22. INVALID ZIP CODE
Any statement that is rejected by the IBS postal processor for not having a
valid address or zip code as defined by the U.S. Postal Service national
zip directory will be charged the Invalid Zip Code fee. This fee is charged
on a per statement basis. Packaging charges may also apply. IBS
understands that Ameritech requires that all invalid zip statements shall
be manifested as residual full price mail and therefore not subject to an
invalid zip code charge. This charge will only apply upon request by
Ameritech to pull these statements and handle separately.
23. PULLED STATEMENT
After processing and before mailing, any statement manually identified by
Ameritech by account number that needs to be located before mailing and
shipped to an address other than the sending address of the statement is
considered a pulled statement and will be charged the Pulled Statement Fee.
This fee is a per statement fee. Packaging charges may also apply.
24. MULTICOPY STATEMENT
A Multicopy Statement is defined as any statement that is electronically
flagged by Ameritech, during processing, that is to have an additional
number of statement copies for the same customer mailed in the same
envelope. A fee will be charged on a per statement copy basis. Packaging
charges may also apply.
25. HELD STATEMENT
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A Held Statement is any statement that is electronically flagged by
Ameritech, during processing, that is to be located and shipped to an
address other than the sending address of the statement. A fee will be
charged on a per statement basis. Packaging charges may also apply.
26. OVER 11 OZ STATEMENT
Any statement over 11 oz will require special handling and will be
charged the Over 11 oz. Statement Fee. Packaging charges may also apply.
27. PACKAGING
A Packaging charge will apply to all statements or predetermined groups of
statements that are unable to be mailed through the normal IBS manifest
mail system and require packaging.
Page 11
<PAGE>
ATTACHMENT B1
RATE SHEET
[****]
IDEAL BILL [****]
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
RATE CARD CHARGE UNIT CHARGE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROCESSING
1 Comp Processing Computer Image [****]
- -----------------------------------------------------------------------------------------------------------------------------
2 Image Printing Print Image [****]
- -----------------------------------------------------------------------------------------------------------------------------
3 Inserting Insert [****]
- -----------------------------------------------------------------------------------------------------------------------------
4 Technical Support Statement [****]
- -----------------------------------------------------------------------------------------------------------------------------
PAPER PRODUCTS
5 Summary Page Per Form [****]
- -----------------------------------------------------------------------------------------------------------------------------
6 Detail Page Per Form [****]
- -----------------------------------------------------------------------------------------------------------------------------
7 Send Envelope Per Envelope [****]
- -----------------------------------------------------------------------------------------------------------------------------
8 Remit Envelope Per Envelope [****]
- -----------------------------------------------------------------------------------------------------------------------------
11 Inventory Mgmt Each Form & Envelope [****]
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
12 STATEMENT RUN MINIMUM [****]
- -----------------------------------------------------------------------------------------------------------------------------
13 PLAN SET UP FEE [****]
- -----------------------------------------------------------------------------------------------------------------------------
ONE TIME CHARGES
-------------------------------------------------------------------------------------------------------------------
[****] [****]
-------------------------------------------------------------------------------------------------------------------
[****] [****] (1)
-------------------------------------------------------------------------------------------------------------------
[****] [****]
-------------------------------------------------------------------------------------------------------------------
(1) less credit for amounts
already invoiced
Credits include:
[****] [****]
[****] [****]
[****] [****]
[****] [****]
[****] [****]
-------------------------------------------------------------------------------------------------------------------
TOTAL CREDIT [****]
</TABLE>
Page 12
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ADDENDUM 1 - ATTACHMENT B1 - SPECIAL SERVICES
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
ITEM SPECIAL SERVICES CHARGE UNIT CHARGE PER PER EVENT EVENT
UNIT MINIMUM
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
14 PROGRAMMING
Program Management Per Hour [****]
Development - small jobs < 50 hours Per Hour [****] 1 Hour Request
Development - large jobs -fixed bid Per Hour [****] 1 Hour Request
Documentation Per Hour [****]
15 Forms Creation Pre- Per Hour [****] 1 Hour Request
printed
16 Creative Design Per Hour [****] 1 Hour Request
Services
17 Per Report [****] Request
PROCESSING
INTERRUPTIONS
---------------------------------------------------------------------------------------------------------------------------
18 Hold Per Cut-Off [****] [****] Request
19 Halt / Restart / Abort Per Cut-Off [****] [****] Request
INSERT HANDLING
---------------------------------------------------------------------------------------------------------------------------
20 Insert Handling Per Hour [****] [****] Request
21 Storage Per Month [****] [****] Request
STATEMENT SPECIAL
HANDLING
---------------------------------------------------------------------------------------------------------------------------
22 Invalid Zip Code Per Statement [****] [****] Request
23 Pulled Statement Per Statement [****] [****] Request
24 Multicopy Statement Per Statement [****] [****] Request
25 Held Statement Per Statement [****] [****] Request
26 Over 11 oz. Mail Per Statement [****] [****] Request
27 Packaging Per Box [****] [****] Request
</TABLE>
Page 13
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ATTACHMENT C1 - CONVERSION SCHEDULE
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERSION MONTH CONVERSION STATE STATEMENT COUNT (APPROXIMATE)
[****] [****] [****]
[****] [****] [****]
[****] [****] [****]
[****] [****] [****]
[****] [****] [****]
TOTAL [****]
* [****] - First Full Month of Production after conversion
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 14
<PAGE>
<TABLE>
<CAPTION>
ATTACHMENT D1 CUT OFF SCHEDULE
BASED ON FEBRUARY 1998 ACTUALS
ACIS ACIS (CONTINUED)
GEO AREA CORP-ID RUN STATEMENTS IMAGES GEO AREA CORP-ID RUN MONTH STATEMENTS IMAGES
MONTH
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
[****] [****] [****] [****] [****] [****] [****] [****] [****] [****]
</TABLE>
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<PAGE>
IDEAL BILL ADDENDUM 1
TO STATEMENT PRODUCTION SERVICES AGREEMENT
ATTACHMENT F-1
1998 TURNAROUND PROVISIONS- PRE-DYNAMIC DUE DATE
This Attachment F-1 supersedes and replaces Attachment F of the Agreement in its
entirety.
1. DEFINITIONS
As used in this Attachment F-1, the following terms have the following
meanings:
(a) A "CUTOFF" is defined as IBS' complete receipt of usable statement data
file and subsequent Customer release facsimile for production.
(b) The term "MAILING" is defined as the entry of statements into the U.S.
Postal Service ("USPS").
(c) The elapsed time of a statement run is called "TRAY TURNAROUND TIME," which
is defined as the elapsed time between cutoff and mailing of each USPS tray
of statements.
(d) "TARGET MAIL DATE" means the standard day each month three days after the
ACIS Pull/Run date that a particular Ameritech customer's telephone bill is
scheduled to be mailed and which is provided by Ameritech in the header of
each file.
(e) "SPECIAL CIRCUMSTANCES" are conditions outside of IBS' reasonable control,
including events of force majeure and acts or omissions of Ameritech (such
as failure to conform to peak load requirements), for which IBS may be
excused from meeting its turnaround commitment under this Attachment.
2. TURNAROUND
IBS agrees to a monthly Tray Turnaround time of [****] hours, provided that
Ameritech does not send files within a 24-hour period greater than [****]
of total prior month's image volume. Should Ameritech send files within a
24-hour period that equal greater than [****] of Ameritech's prior month's
image volume, those excess statements shall carry over to the next day's
turnaround commitment and IBS shall make commercially reasonable efforts to
minimize turnaround time for those statements.
3. ECONOMIC INCENTIVES AND DISINCENTIVES
The monthly incentive and disincentive process will be comprised of two
parts:
1) Average Tray Turnaround -- overall for all files
2) Statement Timeliness - for each of the three file types
These calculations will be done monthly.
a) AVERAGE TRAY TURNAROUND - ON-LINES
[****]
b) STATEMENT TIMELINESS
[****]
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<PAGE>
4. ESCALATION PROCEDURE
It is the intent of the parties that any turnaround issues be dealt with
immediately. In order to facilitate this process, the following procedure
has been agreed upon.
a) WRITTEN EXPLANATION AND PLAN: In the event that there are more than [****]
of Ameritech statements for which IBS has missed the target mail date for
any reason in one month, then Ameritech may require a written explanation
from IBS regarding the reason or reasons for such quantity of missed
turnaround and a plan for remedying the situation.
b) TOP EXECUTIVES MEET: In the event there are more than [****] of Ameritech
statements for which IBS has missed the target mail date in any [****]
successive months or in a [****] or [****]month in any [****] month period
for any reason other than Special Circumstances, then Ameritech may require
senior executives of Ameritech and IBS to promptly meet in a location of
Ameritech's choice to confer in an effort to define and resolve or form a
strategy for resolving the performance problems causing the missed
turnaround. Any mutual decisions of the executives will be final and
binding on the parties. In the event IBS refuses or otherwise does not
meet, then [****] days from the second of two alternative meeting dates set
by Ameritech if Ameritech is ready and able to meet on such dates and IBS
refuses or otherwise does not meet, Ameritech may put IBS on notice of
termination for breach for not meeting in accordance with this provision
and IBS shall have [****] days from receipt of such notice to cure such
breach.
c) TERMINATION: In the event that there are more than [****] of Ameritech
statements for which IBS has missed the target mail date, and Special
Circumstances have been deemed not to apply, in [****] succeeding months or
in [****] months in any [****] month period, then Ameritech may for a
period of [****] days from the date of the aforementioned event, give IBS
notice of termination of this Agreement. In the event of such notice of
termination, Ameritech shall have up to [****] months from the date of the
termination notice to transition the Services performed hereunder to
another source, and, throughout such transition time, IBS shall cooperate
in good faith with Ameritech in the transition and this Agreement shall be
in full force and effect.
4. SPECIAL CIRCUMSTANCES
The parties recognize that there may be circumstances for which it would be
unfair to assess IBS for purposes either of termination (paragraph 4c of the
Attachment F1) or economic disincentives (paragraph 3 of this attachment F1).
The following have been determined to be circumstances under which the
provisions of paragraphs 4c and 3 (including 3a and 3b) will not be assessed in
accordance with the rules and guidelines in paragraphs 4c and 3 (including 3a
and 3b). All statement timeliness assessments will be adjusted as set forth
below to compensate for special circumstances set forth below:
a) LOAD FACTOR: The parties have anticipated a maximum daily load of [****]
of total prior month's image volume. Daily load consists of images
transmitted on a single day, plus any carryover images due to unanticipated
events as set forth in the paragraph 5. IBS shall be responsible for
producing statements from this maximum daily load I accordance with the
rules and guidelines set forth in paragraphs 2 and 3. The statements in
excess of the maximum daily load shall, for the purposes of this
Attachment, be treated as if transmitted on the next successive day
following the Actual Transmit Date.
Page 17
<PAGE>
b) MIX FACTOR: The parties have anticipated that a portion of the daily load
will consist of late transmissions (defined as transmissions whose Actual
Transmit Date is less than [****]days prior to the Target Mail Date). With
respect to late transmission volume received by IBS after [****], IBS shall
perform all such work under the rules and guidelines set forth in
paragraphs 2 and 3, to the extent that the late transmission volume
received by IBS after [****] does not exceed [****] of the average daily
image volume. The statements in excess of the 15% threshold shall, for the
purposes of this Attachment, be treated as if transmitted on the next
successive day following the Actual Transmit Date. As user herein "AVERAGE
DAILY IMAGE VOLUME" means [****] of the prior month's total image volume.
c) HOLDS AND TRANSMISSIONS ON OR AFTER TARGET MAIL DATE: Statements for which
a Hold by Ameritech delayed processing time to an extend that Target Mail
Date was missed or for which Actual Transmit Date was on or after the
Target Mail Date, shall, for the purposes of this attachment, be treated as
if transmitted on the next successive day following the Actual Transmit
Date.
d) FORCE MAJEURE: Statements for which an act of God, act of civil
insurrection or war, labor disturbance or other similar cause beyond IBS'
control resulted in Actual Mail Date being after the Target Mail Date
shall, for the purposes of this Attachment, be treated as set forth in the
Disaster Recovery Plan agreed to by the parties pursuant to section 7 of
Ideal Bill Addendum 1.
This Attachment F-1 may be changed at any time upon the mutual agreement of both
Ameritech and IBS. All other terms and conditions of the Agreement shall remain
in full force and effect unchanged.
Page 18
<PAGE>
IDEAL BILL ADDENDUM 1
TO STATEMENT PRODUCTION SERVICES AGREEMENT
ATTACHMENT F-1
TURNAROUND PROVISIONS -- POST DYNAMIC DUE DATE
This Attachment F-1 supersedes and replaces Attachment F of the Agreement in its
entirety.
1. DEFINITIONS
As used in this Attachment F-1, the following terms have the following
meanings:
(a) A "CUTOFF" is defined as IBS' complete receipt of usable statement data
file and subsequent Customer release facsimile for production.
(b) The term "MAILING" is defined as the entry of statements into the U.S.
Postal Service ("USPS").
(c) The elapsed time of a statement run is called "TRAY TURNAROUND TIME," which
is defined as the elapsed time between cutoff and mailing of each USPS tray
of statements.
(d) "SPECIAL CIRCUMSTANCES" are conditions outside of IBS' reasonable control,
including events of force majeure and acts or omissions of Ameritech (such
as failure to conform to peak load requirements), for which IBS may be
excused from meeting its turnaround commitment under this Attachment.
2. TURNAROUND
IBS agrees to a monthly average Tray Turnaround time of [****] hour for
On-Lines and Miscellaneous and absolute turnaround times as follows:
a) On-lines and Miscellaneous [****] hours
b) Treatments:
By [****] if received prior to [****]
By [****] if received prior to [****]
The above is applicable, provided that Ameritech does not send files within
a 24-hour period greater than [****] of total prior months image volume.
Should Ameritech send files within a 24-hour period that equal greater than
[****] of Ameritech's prior month's image volume, those excess statements
shall carry over to the next day's turnaround commitment and IBS shall make
commercially reasonable efforts to minimize turnaround time for those
statements.
3. ECONOMIC DISINCENTIVES AND INCENTIVES
The monthly disincentives and incentive process will be comprised of two
parts:
1) Average Tray Turnaround - for On-line files only
2) Statement Timeliness -- for each of the three file types
These calculations will be done monthly.
a) AVERAGE TRAY TURNAROUND - ON-LINES
Page 19
<PAGE>
[****]
b) STATEMENT TIMELINESS (ABSOLUTE TURNAROUND)
[****]
4. ESCALATION PROCEDURE
It is the intent of the parties that any turnaround issues be dealt with
immediately. In order to facilitate this process, the following procedure
has been agreed upon.
a) WRITTEN EXPLANATION AND PLAN: In the event that there are more than [****]
of Ameritech statements for which IBS has missed an absolute turnaround of
[****] hours for any reason in one month, then Ameritech may require a
written explanation from IBS regarding the reason or reasons for such
quantity of missed turnaround and a plan for remedying the situation.
b) TOP EXECUTIVES MEET: In the event there are more than [****] of Ameritech
statements for which IBS has missed an absolute turnaround of [****] hours
in any [****] successive months or in a [****] or [****]month in any [****]
month period for any reason other than Special Circumstances, then
Ameritech may require senior executives of Ameritech and IBS to promptly
meet in a location of Ameritech's choice to confer in an effort to define
and resolve or form a strategy for resolving the performance problems
causing the missed turnaround. Any mutual decisions of the executives will
be final and binding on the parties. In the event IBS refuses or otherwise
does not meet, then [****] days from the second of two alternative meeting
dates set by Ameritech if Ameritech is ready and able to meet on such dates
and IBS refuses or otherwise does not meet, Ameritech may put IBS on notice
of termination for breach for not meeting in accordance with this provision
and IBS shall have [****] days from receipt of such notice to cure such
breach.
c) TERMINATION: In the event that there are more than [****] of Ameritech
statements for which IBS has missed an absolute turnaround of [****] hours,
and Special Circumstances have been deemed not to apply, in [****]
succeeding months or in [****] months in any [****] month period, then
Ameritech may for a period of [****] days from the date of the
aforementioned event, give IBS notice of termination of this Agreement. In
the event of such notice of termination, Ameritech shall have up to [****]
months from the date of the termination notice to transition the Services
performed hereunder to another source, and, throughout such transition
time, IBS shall cooperate in good faith with Ameritech in the transition
and this Agreement shall be in full force and effect.
5. SPECIAL CIRCUMSTANCES
The parties recognize that there may be circumstances for which it would be
unfair to assess IBS for purposes either of termination (paragraph 4c of the
Attachment F1) or economic disincentives (paragraph 3 of this attachment F1).
The following have been determined to be circumstances under which the
provisions of paragraphs 4c and 3 (including 3a and 3b) will not be assessed in
accordance with the rules and guidelines in paragraphs 4c and 3 (including 3a
and 3b). All statement timeliness assessments will be adjusted as set forth
below to compensate for special circumstances set forth below:
a) FORCE MAJEURE: Statements for which an act of God, act of civil
insurrection or war, labor disturbance or other similar cause beyond IBS'
control resulted in Actual Mail Date being
Page 20
<PAGE>
after the Target Mail Date shall, for the purposes of this Attachment, be
treated as set forth in the Disaster Recovery Plan agreed to by the parties
pursuant to section 7 of Ideal Bill Addendum 1.
This Attachment F-1 may be changed at any time upon the mutual agreement of both
Ameritech and IBS. All other terms and conditions of the Agreement shall remain
in full force and effect unchanged.
Page 21
<PAGE>
SECOND AMENDMENT TO AMENDED,
CONSOLIDATED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED, CONSOLIDATED AND RESTATED CREDIT
AGREEMENT (this "Second Amendment") is entered into as of June 30, 1998 among
USCS International, Inc. (the "Borrower"), the lenders listed on the signature
pages hereto (the "Lenders") and NationsBank, N.A. (f/k/a NationsBank of Texas,
N.A.), as administrative agent (the "Agent") for the Lenders. Capitalized terms
used herein and not otherwise defined herein shall have the respective meanings
given to them in the Agreement.
RECITALS
WHEREAS, the Borrower, the Agent and the Lenders are parties to that
certain Amended, Consolidated and Restated Credit Agreement dated as of
September 30, 1996 (as amended by that certain First Amendment to Amended,
Consolidated and Restated Credit Agreement dated as of December 9, 1997 and as
further amended, modified, supplemented or restated from time to time, the
"Agreement");
WHEREAS, the Borrower has requested that the Agent and the Lenders agree to
amend the terms of the Agreement as set forth below; and
WHEREAS, the Agent and the Lenders have agreed to such amendment of the
Agreement on the terms and subject to the conditions contained in this Second
Amendment.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
I. AMENDMENTS
1.1 Section 6.2(f)(iv) of the Agreement is hereby amended and restated in
its entirety to read as follows:
(iv) INVESTMENTS BY THE BORROWER TO ANY OF ITS SUBSIDIARIES
(OTHER THAN ANY LOAN PARTY) IN THE ORDINARY COURSE OF BUSINESS WHICH DO NOT
EXCEED $3,000,000, IN THE AGGREGATE, AT ANY TIME OUTSTANDING, EXCLUDING,
HOWEVER, FROM SUCH $3,000,000 LIMIT ANY INVESTMENT IN RPA IN CONNECTION
WITH THE EXPANSION OF THE IBS BILLING FACILITY, SUCH INVESTMENT NOT TO
EXCEED, IN THE AGGREGATE, $8,400,000;
1.2 Section 6.2(e) of the Agreement is hereby amended and restated in its
entirety to read as follows:
(e) SALES, ETC. OF ASSETS. SELL, LEASE, TRANSFER OR OTHERWISE DISPOSE OF,
OR PERMIT ANY OF ITS SUBSIDIARIES TO SELL, LEASE, TRANSFER OR OTHERWISE DISPOSE
OF, OR GRANT ANY OPTION OR OTHER RIGHT TO PURCHASE, LEASE OR OTHERWISE ACQUIRE
ANY PROPERTY OF THE BORROWER OR ITS SUBSIDIARIES EXCEPT (i) SALES OF INVENTORY
IN THE ORDINARY COURSE OF ITS BUSINESS, (ii) SALES OF OBSOLETE, WORN OUT OR
<PAGE>
MATERIALLY DAMAGED OR REPLACED PROPERTY, (iii) SALES, LEASES, TRANSFERS OR OTHER
DISPOSITIONS OF ASSETS OF CABLELEASE AND RPA IN THE ORDINARY COURSE OF BUSINESS,
(iv) SALES OR TRANSFERS OF ASSETS TO RPA NOT TO EXCEED $8,400,000 IN THE
AGGREGATE AFTER THE CLOSING DATE AND (V) SALES OF OTHER ASSETS IN AN AGGREGATE
AMOUNT NOT TO EXCEED $2,000,000 IN ANY FISCAL YEAR AND NOT TO EXCEED $10,000,000
IN THE AGGREGATE AFTER THE CLOSING DATE.
1.3 All references in the Agreement and the other Loan Documents to
NationsBank of Texas, N.A. shall hereafter refer to NationsBank, N.A.
II. CONDITIONS PRECEDENT
2.1 This Second Amendment shall be effective upon receipt by the Agent of
copies of this Second Amendment duly executed by the Borrower, the Agent and the
Lenders.
III. MISCELLANEOUS
3.1 The term "Agreement" as used in each of the Loan Documents shall
hereafter mean the Agreement as amended by this Second Amendment. Except as
herein specifically agreed, the Agreement is hereby ratified and confirmed and
shall remain in full force and effect according to its terms.
3.2 Each of the Borrower, the Agent and the Lenders represents and
warrants as follows:
(a) It has taken all necessary action to authorize the execution,
delivery and performance of this Second Amendment.
(b) This Second Amendment has been duly executed and delivered by the
undersigned and constitutes the undersigned's legal, valid and binding
obligations, enforceable in accordance with its terms, except as such
enforceability may be subject to (i) bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium or similar
laws affecting creditors' rights generally and (ii) general principles of
equity (regardless of whether such enforceability is considered in a
proceeding at law or in equity).
(c) No consent, approval, authorization or order of, or filing,
registration or qualification with, any court or governmental authority or
third party is required in connection with the execution, delivery or
performance by the undersigned of this Second Amendment.
3.3 The Borrower represents and warrants to the Lenders that (a) the
representations and warranties of the Borrower set forth in Article V of the
Agreement are true and correct as of the date hereof and (b) no event has
occurred and is continuing which constitutes a Default or an Event of Default.
2
<PAGE>
3.4 This Second Amendment may be executed in any number of counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall constitute one and the same instrument.
3.5 THIS SECOND AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA.
3
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Second Amendment to be duly executed and delivered by their proper and duly
authorized officer as of the day and year first above written.
BORROWER:
USCS INTERNATIONAL, INC.,
a Delaware corporation
By: /s/ Arthur O. Hawkins
--------------------------------
Name: Arthur O. Hawkins
------------------------------
Title: Vice-President, Treasurer
------------------------------
LENDERS:
NATIONSBANK, N.A.
(f/k/a NationsBank of Texas, N.A.),
individually in its capacity as a Lender
and in its capacity as Agent
By: /s/ Chas McDonell
--------------------------------
Name: Chas McDonell
------------------------------
Title: Vice-President
------------------------------
MELLON BANK, N.A.
By: /s/ Abdi Rais
--------------------------------
Name: Abdi Rais
------------------------------
Title: First Vice-President
------------------------------
<PAGE>
The undersigned acknowledge and consent to the terms of this Second Amendment
and agree that the execution and delivery of this Second Amendment does not
modify, reduce or discharge its obligations under the terms of that certain
Subsidiary Guaranty, dated as of September 30, 1996, executed by the undersigned
in favor of the Agent and the Lender Parties.
INTERNATIONAL BILLING SERVICES, INC.
By: /s/ Arthur O. Hawkins
--------------------------------
Name: Arthur O. Hawkins
------------------------------
Title: Vice-President, Treasurer
------------------------------
CABLEDATA, INC.
By: /s/ Arthur O. Hawkins
--------------------------------
Name: Arthur O. Hawkins
------------------------------
Title: Vice-President, Treasurer
------------------------------
<PAGE>
Exhibit 11
USCS INTERNATIONAL, INC.
COMPUTATION OF PER SHARE EARNINGS
(In thousands except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- ------------------
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Weighted average number of
common shares outstanding
during the period 23,356 23,152 23,195 23,124
Common stock equivalents
considered to be outstanding
for the periods presented 743 1,133 735 1,085
-------- ------- -------- -------
24,099 24,285 23,930 24,209
Net income $ 6,791 $ 5,602 $ 13,060 $ 10,655
Earnings per share
Basic $0.29 $0.24 $0.56 $0.46
Diluted $0.28 $0.23 $0.55 $0.44
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF USCS INTERNATIONAL, INC. AS OF
JUNE 30, 1998 FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 13165
<SECURITIES> 0
<RECEIVABLES> 95072
<ALLOWANCES> 0
<INVENTORY> 4734
<CURRENT-ASSETS> 126722
<PP&E> 202204
<DEPRECIATION> 101810
<TOTAL-ASSETS> 250194
<CURRENT-LIABILITIES> 67324
<BONDS> 3454<F1>
0
0
<COMMON> 1171
<OTHER-SE> 147218<F2>
<TOTAL-LIABILITY-AND-EQUITY> 250194
<SALES> 0
<TOTAL-REVENUES> 164062
<CGS> 0
<TOTAL-COSTS> 97218
<OTHER-EXPENSES> 45145<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 289
<INCOME-PRETAX> 21410
<INCOME-TAX> 8350
<INCOME-CONTINUING> 13060
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13060
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
<FN>
<F1>Consists of Notes Payable and Bonds Payable
<F2>Consists of Additional Paid-in Capital, Retained Earnings, Treasury Stock and
Foreign Currency Translation Adjustments
<F3>Consists of Research and Development and Selling, General and Administrative
Expenses
</FN>
</TABLE>
