<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
Billing Information Concepts Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
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<PAGE> 2
BILLING INFORMATION CONCEPTS CORP.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Billing Information Concepts Corp. (the "Company") will be held on Thursday,
February 26, 1998, at 10:00 a.m., C.S.T., at the Omni San Antonio Hotel, 9821
Colonnade Blvd., San Antonio, Texas, for the following purposes:
(1) A proposal to elect one (1) director to serve until
the 2001 Annual Meeting of Stockholders;
(2) To consider and act upon a proposal to amend the
Company's Amended and Restated Certificate of
Incorporation to change the name of the Company to
"Billing Concepts Corp.";
(3) To consider and act upon a proposal to amend the
Company's Amended and Restated Certificate of
Incorporation to increase the number of authorized
shares of the Company's Common Stock from 60,000,000
to 75,000,000;
(4) A proposal to ratify the appointment of Arthur
Andersen LLP as independent public accountants of the
Company for the fiscal year ending September 30,
1998; and
(5) To consider and act upon any other matter which may
properly come before the meeting or any adjournment
thereof. The Board of Directors of the Company is
presently unaware of any other business to be
presented to a vote of the stockholders at the Annual
Meeting.
Information with respect to the above matters is set forth in the
Proxy Statement that accompanies this Notice.
The Board of Directors of the Company has fixed the close of business
on January 8, 1998, as the record date for determining stockholders entitled to
notice of and to vote at the meeting. A complete list of the stockholders
entitled to vote at the meeting will be maintained at the Company's principal
executive offices during ordinary business hours for a period of ten (10) days
prior to the meeting. The list will be open to the examination of any
stockholder for any purpose germane to the meeting during this time. The list
will also be produced at the time and place of the meeting and will be open
during the whole time thereof.
By Order of the Board of Directors,
KELLY E. SIMMONS
Corporate Secretary
San Antonio, Texas
January 28, 1998
---------------------------
IMPORTANT
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN PERSON.
EVEN IF YOU PLAN TO BE PRESENT, PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED
PROXY AT YOUR EARLIEST CONVENIENCE IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE MEETING, YOU MAY
VOTE EITHER IN PERSON OR BY YOUR PROXY.
<PAGE> 3
BILLING INFORMATION CONCEPTS CORP.
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 26, 1998
GENERAL INFORMATION
This Proxy Statement and the accompanying proxy are furnished to the
stockholders of Billing Information Concepts Corp., a Delaware corporation (the
"Company" or "Billing"), in connection with the solicitation by the Board of
Directors of proxies for use at the Annual Meeting of Stockholders (the "Annual
Meeting" or "Meeting") to be held on Thursday, February 26, 1998, at 10:00
a.m., C.S.T., at the Omni San Antonio Hotel, 9821 Colonnade Blvd., San Antonio,
Texas, and at any adjournment or postponement thereof, for the purposes set
forth in the foregoing Notice of Annual Meeting of Stockholders. Properly
executed proxies received in time for the Meeting will be voted.
The securities of the Company entitled to vote at the Annual Meeting
consist of shares of common stock, $0.01 par value (the "Common Stock"). At
the close of business on January 8, 1998 (the "Record Date"), there were
outstanding and entitled to vote 16,375,338 shares of Common Stock. The
holders of record of Common Stock on the Record Date will be entitled to one
vote per share. The Company's Amended and Restated Certificate of
Incorporation (the "Certificate") does not permit cumulative voting in the
election of directors.
The Summary Annual Report to Stockholders for the year ended September
30, 1997 has been or is being furnished with this Proxy Statement, which is
being mailed on or about January 28, 1997, to the holders of record of Common
Stock on the Record Date. The Summary Annual Report to Stockholders and the
Appendix hereto does not constitute a part of the proxy materials.
VOTING AND PROXY PROCEDURES
Properly executed proxies received in time for the Meeting will be
voted. Stockholders are urged to specify their choices on the proxy, but if no
choice is specified, eligible shares will be voted for the election of the
nominee for director named herein, to change the name of the Company to
"Billing Concepts Corp.", to increase the number of authorized shares of Common
Stock to 75,000,000 and for ratification of the appointment of Arthur Andersen
LLP as the Company's independent public accountants for the fiscal year ending
September 30, 1998. At the date of this Proxy Statement, management of the
Company knows of no other matters which are likely to be brought before the
Annual Meeting. However, if any other matters should properly come before the
Annual Meeting, the persons named in the enclosed proxy will have discretionary
authority to vote such proxy in accordance with their best judgment on such
matters.
If the enclosed form of proxy is executed and returned, it may
nevertheless be revoked by a later-dated proxy or by written notice filed with
the Secretary at the Company's executive offices at any time before the
enclosed proxy is exercised. Stockholders attending the Annual Meeting may
revoke their proxies and vote in person. The Company's executive offices are
located at 7411 John Smith, Suite 200, San Antonio, Texas 78229.
The holders of a majority of the total shares of Common Stock issued
and outstanding at the close of business on the Record Date, whether present in
person or represented by proxy, will constitute a quorum for the transaction of
business at the Annual Meeting. The affirmative vote of a plurality of the
total shares of Common Stock present in person or represented by proxy and
entitled to vote at the Annual Meeting is required for the election of the
director; the affirmative vote of a majority of the total shares of Common
Stock entitled to vote at the Annual Meeting is required to change the name of
the Company to "Billing Concepts Corp." and to increase the number of
authorized shares of Common Stock to 75,000,000; and the affirmative vote of a
majority of the total shares of Common Stock present in person or represented
by proxy and entitled to vote at the Annual Meeting is
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required for the ratification of the appointment of Arthur Andersen LLP as the
Company's independent public accountants and any other matters as may properly
come before the Annual Meeting or any adjournment thereof.
Abstentions are counted toward the calculation of a quorum, but are
not treated as either a vote for or against a proposal. An abstention has the
same effect as a vote against the proposal. Any unvoted position in a
brokerage account will be considered as not voted and will not be counted
toward fulfillment of quorum requirements.
The cost of solicitation of proxies will be paid by the Company. In
addition to solicitation by mail, proxies may be solicited by the directors,
officers and employees of the Company, without additional compensation (other
than reimbursement of out-of-pocket expenses), by personal interview,
telephone, telegram or otherwise. Arrangements will also be made with
brokerage firms and other custodians, nominees and fiduciaries who hold the
voting securities of record for the forwarding of solicitation materials to the
beneficial owners thereof. The Company will reimburse such brokers,
custodians, nominees and fiduciaries for reasonable out-of-pocket expenses
incurred by them in connection therewith. The Company has elected to retain
the services of D. F. King & Co. for the purpose of soliciting proxies to be
voted at the Annual Meeting at an estimated cost of $4,500, plus out-of-pocket
expenses.
SPIN-OFF FROM USLD
The Company began operating as an independent publicly-held company on
August 2, 1996, as a result of its spin- off (the "Spin-Off") from U.S. Long
Distance Corp. ("USLD"). Prior to the Spin-Off, the Company operated as a
wholly- owned subsidiary of USLD. As part of the Spin-Off, shares of Common
Stock were distributed to record holders of USLD common stock as of the close
of business on August 2, 1996.
For information regarding certain transactions and agreements with
USLD, see "Certain Transactions."
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<PAGE> 5
OWNERSHIP OF COMMON STOCK
PRINCIPAL STOCKHOLDERS
The following table sets forth as of December 31, 1997, certain
information with respect to the Common Stock beneficially owned by persons who
are known to the Company to be the beneficial owners of more than five percent
(5%) of the Common Stock. For purposes of this Proxy Statement, beneficial
ownership is defined in accordance with the rules of the Securities and
Exchange Commission (the "Commission") to mean generally the power to vote or
dispose of shares, regardless of any economic interest therein. The persons
listed have sole voting power and sole dispositive power with respect to all
shares set forth in the table unless otherwise specified in the footnotes to
the table.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
NAME AND ADDRESS OWNERSHIP(1) PERCENT(2)
---------------- ----------------- ----------
<S> <C> <C>
AIM Management Group, Inc. . . . . . . . . . . . . . . . . . . 1,396,700 8.67%
11 Greenway Plaza, Suite 1919
Houston, TX 77046
Montgomery Asset Management, L.P. . . . . . . . . . . . . . . . 1,281,000 7.95%
101 California
San Francisco, CA 94111
Edgemont Asset Management Corp. . . . . . . . . . . . . . . . . 950,000 5.90%
140 E. 45th Street, 43rd Floor
New York, NY 10017
</TABLE>
_______________________
(1) Based on record ownership as of December 31, 1997, to the Company's
knowledge.
(2) Based on a total of 16,335,074 shares of Common Stock issued and
outstanding on December 31, 1997.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of December 31, 1997, certain
information with respect to the Company's Common Stock beneficially owned by
each of its directors and nominees for director, each executive officer named
in the Summary Compensation Table and by all its directors and executive
officers as a group. Such persons have sole voting power and sole dispositive
power with respect to all shares set forth in the table unless otherwise
specified in the footnotes to the table.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
NAME OWNERSHIP(1) PERCENT OF CLASS(2)
---- ----------------- -------------------
<S> <C> <C>
Parris H. Holmes, Jr. . . . . . . . . . . . . . . . . . . 237,795 (3) 1.4%
Alan W. Saltzman . . . . . . . . . . . . . . . . . . . . . 111,073 (4) *
Kelly E. Simmons . . . . . . . . . . . . . . . . . . . . . 83,014 (5) *
Paul L. Gehri . . . . . . . . . . . . . . . . . . . . . . 12,498 (6) *
Lee Cooke . . . . . . . . . . . . . . . . . . . . . . . . 20,000 (7) *
James E. Sowell . . . . . . . . . . . . . . . . . . . . . 10,000 (8) *
Thomas G. Loeffler . . . . . . . . . . . . . . . . . . . . 30,000 (9) *
All executive officers and directors as a group
(nine persons, including the executive officers
and directors listed above) . . . . . . . . . . . . . . 829,408 (10) 5.0%
</TABLE>
__________________
[footnotes on following page]
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<PAGE> 6
* Represents less than 1% of the issued and outstanding shares of Common
Stock.
(1) Information with respect to beneficial ownership is based upon
information furnished by each director or officer of the Company or
contained in filings made with the Commission. With the exception of
shares which may be acquired by employees pursuant to the Employee
Stock Purchase Plan and/or the Billing 401(k) Retirement Plan, the
amount of beneficial ownership includes shares subject to acquisition
within 60 days by such person or group.
(2) Based on a total of 16,335,074 shares of Common Stock issued and
outstanding on December 31, 1997.
(3) Includes 100,000 shares that Mr. Holmes has the right to acquire upon
the exercise of stock options, 228 shares that Mr. Holmes holds in his
Billing 401(k) Retirement Plan account and 2,567 shares that Mr.
Holmes holds in his Employee Stock Purchase Plan account at December
31, 1997.
(4) Includes 100,833 shares that Mr. Saltzman has the right to acquire
upon the exercise of stock options, an aggregate of 700 shares held in
individual retirement accounts for Mr. Saltzman and his wife, 3,973
shares that Mr. Saltzman holds in his Billing 401(k) Retirement Plan
account and 2,567 shares that Mr. Saltzman holds in his Employee Stock
Purchase Plan account at December 31, 1997.
(5) Includes 65,667 shares that Mr. Simmons has the right to acquire upon
exercise of stock options and 1,347 shares that Mr. Simmons holds in
his Employee Stock Purchase Plan account at December 31, 1997.
(6) Represents 10,000 shares that Mr. Gehri has the right to acquire upon
exercise of stock options and 2,498 shares that Mr. Gehri holds in his
Employee Stock Purchase Plan account at December 31, 1997.
(7) Represents 20,000 shares that Mr. Cooke has the right to acquire upon
the exercise of stock options.
(8) Represents 10,000 shares that Mr. Sowell has the right to acquire upon
the exercise of stock options.
(9) Represents 30,000 shares that Mr. Loeffler has the right to acquire
upon the exercise of stock options.
(10) Includes 316,500 shares that the nine directors and executive officers
have the right to acquire upon exercise of stock options, 700 shares
held in individual retirement accounts, 4,229 shares that such
executive officers held in their respective Billing 401(k) Retirement
Plan accounts and 8,979 shares that such executive officers held in
their respective Employee Stock Purchase Plan accounts at December 31,
1997.
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MATTERS TO COME BEFORE THE ANNUAL MEETING
PROPOSAL 1: ELECTION OF ONE DIRECTOR
The Company's Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws provide that the Board of Directors will consist of
not less than three persons, the exact number to be fixed from time to time by
the Board of Directors. The Board of Directors has fixed the authorized number
of directors at five. Directors are divided into three classes, of which two
have two members each and one has one member. Each class is elected for a term
of three years, so that the term of office of one class of directors expires at
every annual meeting.
The Board of Directors has nominated one person for election as
director in the class whose term of office will expire at the Company's 2001
Annual Meeting of Stockholders or until his respective successor is elected and
qualified. The nominee is Lee Cooke. The respective terms of the directors
expire on the dates set forth below.
<TABLE>
<CAPTION>
DIRECTOR WHOSE TERM EXPIRES
AT THE 1998 ANNUAL MEETING AND NOMINEE
FOR ELECTION FOR TERM EXPIRING POSITION AND OFFICES
AT THE 2001 ANNUAL MEETING WITH THE COMPANY AGE DIRECTOR SINCE
------------------------------------------ ----------------------- ------- -------------------
<S> <C> <C> <C>
Lee Cooke Director 53 May 13, 1996
DIRECTORS WHOSE TERMS EXPIRE POSITION AND OFFICES
AT THE 1999 ANNUAL MEETING WITH THE COMPANY AGE DIRECTOR SINCE
------------------------------------------ ---------------------- ------- -------------------
Parris H. Holmes, Jr. Chairman of the Board 54 May 13, 1996
and Chief Executive
Officer
Alan W. Saltzman Director, President 50 May 13, 1996
and Chief Operating
Officer
DIRECTORS WHOSE TERMS EXPIRE POSITION AND OFFICES
AT THE 2000 ANNUAL MEETING WITH THE COMPANY AGE DIRECTOR SINCE
------------------------------------------ ----------------------- ------- -------------------
James E. Sowell Director 49 June 21, 1996
Thomas G. Loeffler Director 51 August 21, 1996
</TABLE>
Biographical information on these directors is set forth below under
"Further Information -- Board of Directors and Executive Officers."
It is the intention of the persons named in the enclosed proxy to vote
such proxy for the election of the nominee. Management of the Company does not
contemplate that the nominee will become unavailable for any reason, but if
that should occur before the meeting, proxies that do not withhold authority to
vote for a director will be voted for another nominee in accordance with the
best judgment of the person or persons appointed to vote the proxy.
The enclosed form of proxy provides a means for the holders of Common
Stock to vote for the nominee listed therein or to withhold authority to vote
for such nominee. Each properly executed proxy received in time for the
Meeting will be voted as specified therein, or if a stockholder does not
specify in his or her executed proxy how the shares represented by his or her
proxy are to be voted, such shares shall be voted for the nominee listed
therein or for other nominees as provided above. The director nominee
receiving a plurality of the votes cast at
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the Annual Meeting will be elected as a director. Abstentions and broker
non-votes will not be treated as a vote for or against the director nominee and
will not affect the outcome of the election.
The Company's Amended and Restated Bylaws establish an advance notice
procedure with regard to the nomination of candidates for election as directors
other than by or at the direction of the Company's Board of Directors (the
"Nomination Procedure"). The Nomination Procedure provides that only persons
who are nominated by or at the direction of the Company's Board of Directors,
or by a stockholder who has given timely prior written notice to the Secretary
of the Company prior to the meeting at which directors are to be elected, will
be eligible for election as directors. To be timely, notice must be received
by the Company (i) in the case of an annual meeting, not less than 90 days
prior to the annual meeting, or (ii) in the case of a special meeting, not
later than the seventh day following the day on which notice of such meeting is
first given to stockholders.
Under the Nomination Procedure, notice to the Company from a
stockholder who proposes to nominate a person at a meeting for election as a
director must contain certain information about that person, including business
and residence addresses, a representation that the stockholder is a holder of
record of stock of the Company entitled to vote at such meeting and intends to
appear in person or by proxy to nominate the person, a description of all
arrangements or understandings between the stockholder and each nominee and any
other person pursuant to which the nomination is to be made, such other
information regarding each nominee as would be required pursuant to the proxy
rules of the Commission had the nominee been nominated by the Company's Board
of Directors, the consent of such nominee to be nominated and such other
information as would be required to be included in a proxy statement soliciting
proxies for the election of the proposed nominee, and certain information about
the stockholder proposing to nominate that person. If the Chairman or other
officer presiding at a meeting determines that a person was not nominated in
accordance with the Nomination Procedure, such person will not be eligible for
election as a director. Nothing in the Nomination Procedure will preclude
discussion by any stockholder of any nomination properly made or brought
before an annual or special meeting in accordance with the above-mentioned
procedures.
COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Company is managed under the direction of its
Board of Directors. The Company's Board of Directors has established three
standing committees: Audit, Compensation and Nominating.
The Audit Committee is comprised of certain directors who are not
employees of the Company or any of its subsidiaries. Messrs. Cooke, Sowell and
Loeffler are the current members of the Audit Committee. The Audit Committee
meets with the independent auditors and management representatives; recommends
to the Board of Directors appointment of independent auditors; approves the
scope of audits and other services to be performed by the independent auditors;
considers whether the performance of any professional services by the auditors
other than services provided in connection with the audit function could impair
the independence of the auditors; and reviews the results of audits and the
accounting principles applied in financial reporting and financial and
operational controls. The independent auditors have unrestricted access to the
Audit Committee and vice versa.
The Compensation Committee is comprised of certain directors who are
not employees of the Company or any of its subsidiaries. Messrs. Cooke, Sowell
and Loeffler are the current members of the Compensation Committee. The
Compensation Committee's functions include recommendations on policies and
procedures relating to compensation and various employee stock and other
benefit plans and approval of individual salary adjustments and stock awards in
those areas.
The Nominating Committee is comprised of certain directors who are not
employees of the Company or any of its subsidiaries. Messrs. Cooke, Sowell and
Loeffler are the current members of the Nominating Committee. The Nominating
Committee considers candidates for election as directors and is responsible for
keeping abreast of and making recommendations with regard to corporate
governance in general. In addition, the Nominating Committee fulfills an
advisory function with respect to a range of matters affecting the Board of
Directors and its committees, including the making of recommendations with
respect to qualifications of director candidates, compensation of directors,
the selection of committee chairmen, committee assignments and related matters
affecting the functioning of the Board of Directors. The Nominating Committee
considers nominees to the Board of Directors
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<PAGE> 9
recommended by stockholders of the Company where such recommendations are made
pursuant to the procedures which are described in the Company's Amended and
Restated Certificate of Incorporation and Bylaws.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended September 30, 1997, the Board of
Directors met four (4) times and took action on six (6) occasions by unanimous
written consent, the Compensation Committee met one (1) time and took action on
three (3) occasions by unanimous written consent, the Nominating Committee did
not meet and the Audit Committee met one (1) time. Each of the directors of
the Company attended at least 75% of the aggregate of the meetings of the Board
of Directors and committees of which he was a member.
COMPENSATION OF DIRECTORS
Fees. For fiscal 1997, each non-employee Director received a meeting
fee of $500 for each meeting of the Board of Directors attended. Additionally,
each member of the Compensation Committee, Audit Committee or Nominating
Committee received $500 for each committee meeting attended during the fiscal
year. In each case, the members of the Board of Directors are reimbursed for
their travel expenses to and from the meetings. The members of the Board of
Directors do not receive a fee for telephonic meetings. Commencing in fiscal
1998, the Company has discontinued cash compensation of directors and has
adopted a policy of compensating non-employee directors for each meeting
attended solely through stock option grants.
Stock Options. A total of 400,000 shares of Common Stock are subject
to the Company's 1996 Non-Employee Director Plan (the "Director Plan").
Pursuant to the terms of the Director Plan, upon election and re-election to
the Board of Directors of the Company, each eligible director is granted an
option to purchase 30,000 shares of Common Stock effective as of the date of
such election or re-election with vesting over a three year period. In
addition, the Company has the ability to make additional discretionary grants
under the Director Plan. For fiscal 1998, the Company has granted each
non-employee director an option to purchase 6,000 shares of Common Stock which
vests one year from the date of grant; however, for each meeting of the Board
of Directors a non-employee director fails to attend, such director forfeits
the rights to purchase 1,500 of the shares subject to such option.
Director Compensation Deferral Plan. The Company has adopted the
Billing Information Concepts Corp. Director Compensation Deferral Plan (the
"Director Deferral Plan"), which generally allows outside directors to make
voluntary deferral contributions, on a pre-tax basis, of the fees paid by the
Company for services rendered as a director. From time to time the Company
credits each participant's plan with interest at the rate declared by the
Company in accordance with the Director Deferral Plan. The Company has
eliminated the ability of directors to make deferral contributions under the
Director Deferral Plan. The Director Deferral Plan remains in effect solely to
maintain contributions that were transferred to the Director Deferral Plan
pursuant to the Spin-Off by former USLD directors who are now directors of the
Company and who held such deferred amounts under the corresponding USLD
deferral plan prior to the Spin-Off. Benefits generally are payable to a
director upon retirement, disability, termination of service or death, in each
case as provided in the Director Deferral Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION
OF THE INDIVIDUAL NOMINATED FOR ELECTION AS A DIRECTOR
PROPOSAL NO. 2: PROPOSAL TO AMEND THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO CHANGE THE NAME OF THE COMPANY TO BILLING CONCEPTS CORP.
The Board of Directors has unanimously adopted a resolution declaring
it advisable to amend the Company's Amended and Restated Certificate of
Incorporation to change the name of the Company from Billing Information
Concepts Corp. to Billing Concepts Corp. (the "Name Change Amendment"). The
Board of Directors further directed that the Name Change Amendment be submitted
for consideration by stockholders at the Company's Annual Meeting. In the
event the Name Change Amendment is approved by stockholders, the Company will
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<PAGE> 10
thereafter amend its Amended and Restated Certificate of Incorporation with the
Delaware State Secretary of State with a filing reflecting such Name Change
Amendment, which will become effective at the close of business on the date
such filing is accepted by the Secretary of State.
Beginning in 1997, the Company began using the name Billing Concepts
and has utilized this name in connection with its operations and the operations
of its various subsidiaries, including two subsidiaries named Billing Concepts
Systems, Inc. and Billing Concepts, Inc., respectively. Since that time, the
name Billing Concepts has become synonymous with Billing Information Concepts
Corp. and is in fact more recognizable to the market than the name Billing
Information Concepts Corp. In recognition of the Company's continued use of
the name Billing Concepts, the Company is proposing to change its name to
Billing Concepts Corp.
The change of the Company's name will be effected through an amendment
to Article I of the Company's Amended and Restated Certificate of
Incorporation. As amended, such Article I would read in its entirety as
follows:
"Article I - Name. The name of the corporation (the "corporation") is
Billing Concepts Corp."
Under the Delaware General Corporation Law, the affirmative vote of
the holders of a majority of the shares of Common Stock entitled to vote at the
Annual Meeting is required to adopt this Proposal No. 2. With respect to the
proposal to amend the Company's Amended and Restated Certificate of
Incorporation to change the name of the Company to Billing Concepts Corp., all
such shares will be voted FOR or AGAINST, or not voted, as specified on each
proxy. If no choice is indicated, a proxy will be voted FOR the proposal to
amend the Company's Amended and Restated Certificate of Incorporation to change
the name of the Company to Billing Concepts Corp.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL
TO AMEND THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY TO BILLING CONCEPTS CORP.
PROPOSAL NO. 3: PROPOSAL TO AMEND THE COMPANY'S AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF THE
COMPANY'S COMMON STOCK FROM 60,000,000 SHARES TO 75,000,000 SHARES
The Board of Directors has unanimously adopted a resolution declaring
it advisable to amend the Company's Amended and Restated Certificate of
Incorporation to increase the number of shares of Common Stock that the Company
has the authority to issue from 60,000,000 shares to 75,000,000 shares (the
"Common Stock Amendment"). The Board of Directors further directed that the
Common Stock Amendment be submitted for consideration by stockholders at the
Company's Annual Meeting. In the event the Common Stock Amendment is approved
by stockholders, the Company will thereafter amend its Amended and Restated
Certificate of Incorporation with the Delaware State Secretary of State with a
filing reflecting such Common Stock Amendment, which will become effective at
the close of business on the date such filing is accepted by the Secretary of
State.
In the event stockholders approve the Common Stock Amendment, the
Company will be authorized to amend Article 4.1 of the Company's Amended and
Restated Certificate of Incorporation to increase the number of shares of
Common Stock which the Company is authorized to issue from 60,000,000 to
75,000,000.
As amended, the text of Article 4.1 of the Amended and Restated
Certificate of Incorporation would read in its entirety as follows:
"4.1 Total Number of Shares of Stock. The total number of shares
of all classes of stock which the corporation shall have authority to
issue is eighty-five million (85,000,000). Of such shares, (i)
seventy-five million (75,000,000) shall be common stock, par value
$0.01 per share
8
<PAGE> 11
("Common Stock"), and (ii) ten million (10,000,000) shall be preferred
stock, par value $0.01 per share ("Preferred Stock")."
As of December 31, 1997, there were 16,335,074 shares of issued and
outstanding Common Stock. Of the 43,664,926 authorized but unissued shares, a
total of 4,975,000 shares were reserved for issuance under Company option and
other benefit plans for employees and directors or pursuant to warrants to
purchase Common Stock granted by the Company. The remaining 38,689,926 shares
were unreserved. In addition, on January 9, 1998, the Company declared a stock
dividend of one share of Common Stock for each share of Common Stock
outstanding, payable to stockholders of record on January 20, 1998, which
resulted in the issuance of approximately an additional 16,431,895 shares of
Common Stock. Holders of Common Stock do not have preemptive rights to
subscribe to additional securities that may be issued by the Company, which
means that current stockholders do not have a prior right to purchase any new
issue of Common Stock of the Company in order to maintain their proportionate
ownership interest.
The Board believes that it is in the Company's best interests to
increase the number of authorized but unissued shares of Common Stock in order
to have additional shares available for issuance to meet the Company's future
business needs as they arise. The Company's management has no present
arrangements, agreements, understandings or plans for the issuance or use of
the additional shares proposed to be authorized by the Amendment. The Board
believes the availability of such additional shares will provide the Company
with the flexibility to issue Common Stock for a variety of other proper
corporate purposes as the Board may deem advisable without further action by
the Company's stockholders, except as may be required by law, regulation or the
rules of any national securities exchange or quotation system on which the
shares of the Company's Common Stock are then listed. These purposes could
include, among other things, the sale of stock to obtain additional capital
funds, the purchase of property, the acquisition or merger into the Company of
other companies, the use of additional shares for various equity compensation
and other employee benefit plans, the declaration of stock dividends or
distributions, effecting a stock split and other bona fide corporate purposes.
Were these situations to arise, the issuance of additional shares of Common
Stock could have a dilutive effect on earnings per share, and, for a person who
does not purchase additional shares to maintain his or her pro rata interest,
on a stockholder's percentage voting power in the Company.
Although an increase in the authorized shares of Common Stock could,
under certain circumstances, also be construed as having an anti-takeover
effect (for example, by diluting the stock ownership of a person seeking to
effect a change in the composition of the Board of Directors or contemplating a
tender offer or other transaction for the combination of the Company with
another company), the current proposal to amend the Certificate to increase the
number of authorized shares of Common Stock is not in response to any effort to
accumulate the Company's stock or to obtain control of the Company by means of
a merger, tender offer, solicitation in opposition to management or otherwise.
In addition, the proposal is not part of any plan by management to recommend a
series of similar amendments to the Board of Directors and the stockholders.
Under the Delaware General Corporation Law, the affirmative vote of
the holders of a majority of the shares of Common Stock entitled to vote at the
Annual Meeting is required to adopt this Proposal No. 3. With respect to the
proposal to amend the Company's Amended and Restated Certificate of
Incorporation to increase the number of authorized shares of the Company's
Common Stock from 60,000,000 to 75,000,000 shares, all such shares will be
voted FOR or AGAINST, or not voted, as specified on each proxy. If no choice
is indicated, a proxy will be voted FOR the proposal to amend the Company's
Amended and Restated Certificate of Incorporation to increase the number of
authorized shares of the Company's Common Stock from 60,000,000 to 75,000,000
shares.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE PROPOSAL TO AMEND THE COMPANY'S AMENDED
AND RESTATED CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK FROM 60,000,000 TO 75,000,000
9
<PAGE> 12
PROPOSAL NO. 4: RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon recommendation of its Audit Committee,
has appointed the firm of Arthur Andersen LLP to serve as independent public
accountants of the Company for the fiscal year ending September 30, 1998.
Although stockholder ratification is not required, the Board of Directors has
directed that such appointment be submitted to the stockholders of the Company
for ratification at the Annual Meeting. Arthur Andersen LLP has served as
independent public accountants of the Company with respect to the Company's
consolidated financial statements for the fiscal years ending September 30,
1997 and 1996, and is considered by management of the Company to be well
qualified. If the stockholders do not ratify the appointment of Arthur
Andersen LLP, the Board of Directors may reconsider the appointment.
Representatives of Arthur Andersen LLP will be present at the Annual
Meeting. They will have an opportunity to make a statement if they desire to
do so and will be available to respond to appropriate questions from
stockholders.
Assuming the presence of a quorum, ratification of the appointment of
Arthur Andersen LLP requires the affirmative vote of a majority of the votes
cast by the holders of shares of Common Stock entitled to vote in person or by
proxy at the Annual Meeting. Abstentions and broker non-votes will not be
considered as a vote for or against the proposal and therefore will have no
effect on the outcome of the proposal. Proxies will be voted for or against
such approval in accordance with specifications marked thereon, and if no
specification is made, the proxies will be voted for such approval.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO
RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC
ACCOUNTANTS OF THE COMPANY FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 1998
FURTHER INFORMATION
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information with respect to each director and
executive officer of the Company as of December 31, 1997. The executive
officers are elected by the Board of Directors and serve at the discretion of
the Board. There are no family relationships between any two directors or
executive officers.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Parris H. Holmes, Jr. . . . . . . . . . . 54 Chairman of the Board and Chief Executive Officer
Alan W. Saltzman . . . . . . . . . . . . 50 President, Chief Operating Officer and Director
Kelly E. Simmons . . . . . . . . . . . . 42 Senior Vice President, Chief Financial Officer,
Treasurer and Corporate Secretary
Paul L. Gehri . . . . . . . . . . . . . . 44 Senior Vice President of Sales; Vice President of
Sales and Marketing of Billing Concepts, Inc. and
Enhanced Services Billing, Inc.
Michael A. Harrelson . . . . . . . . . . 42 Senior Vice President and Chief Information Officer;
President of Billing Concepts Systems, Inc.
Michael W. Hancock . . . . . . . . . . . 53 Vice President; Senior Vice President and Chief
Operating Officer of Billing Concepts Systems, Inc.
Lee Cooke . . . . . . . . . . . . . . . . 53 Director(1)(2)(3)
</TABLE>
10
<PAGE> 13
<TABLE>
<S> <C> <C>
James E. Sowell . . . . . . . . . . . . . 49 Director(1)(2)(3)
Thomas G. Loeffler . . . . . . . . . . . 51 Director(1)(2)(3)
-------------------------
</TABLE>
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating Committee.
Parris H. Holmes, Jr. has served as Chairman of the Board and Chief
Executive Officer of the Company since May 1996. Mr. Holmes served as both
Chairman of the Board and Chief Executive Officer of U.S. Long Distance Corp.
("USLD") from September 1986 until August 1996, and served as Chairman of the
Board of USLD until June 2, 1997. Prior to March 1993, Mr. Holmes also served
as President of USLD. Mr. Holmes is also Vice Chairman and a member of the
Board of Directors of Tanisys Technology, Inc., a developer, manufacturer and
marketer of computer peripheral equipment. Mr. Holmes is also a director of
Recompute! Corporation, a nationwide direct remanufacturer of newly-used and
pre-owned commercial-grade Intel 486 and Pentium personal computer systems from
top-tier manufacturers. He also serves as a director of Sharps Compliance,
Inc., a provider of mail sharps disposal services for certain types of medical
sharps (needles, syringes and razors) products. On December 18, 1996, the
Securities and Exchange Commission filed a civil injunctive action in the
United States District Court for the District of Columbia alleging that Mr.
Holmes failed to file timely twelve reports regarding certain 1991 and 1992
transactions in the stock of USLD as required by Section 16(a) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Section
16(a) requires officers and directors of such companies to file reports with
the Commission regarding their personal transactions in the securities of their
company. Mr. Holmes settled this action on December 18, 1996, without
admitting or denying the allegations of the complaint, by consenting to the
entry of an injunction with respect to these requirements and paying a civil
penalty of $50,000. The Commission Staff also has notified Mr. Holmes of its
decision to terminate its investigation of trading in the securities of USLD
and the securities of Value-Added Communications, Inc. (In the Matter of
Trading in the Securities of Value-Added Communications, Inc. (HO-2765)).
Alan W. Saltzman has been President, Chief Operating Officer and
Director of the Company since May 1996, and served as Executive Vice President
- -- Operations, Billing and Information Management of USLD from May 1993 until
August 1996. Mr. Saltzman had been Chief Operating Officer of Billing
Concepts, Inc. ("BCI"), a wholly-owned subsidiary of the Company formerly known
as Zero Plus Dialing, Inc., a subsidiary of USLD ("ZPDI"), prior to the
Spin-Off, since February 1991. In August 1994, Mr. Saltzman was elected
President of ZPDI. Mr. Saltzman has served as an adviser to the Board of
Directors of USLD from February 1994 to August 1996. Mr. Saltzman joined ZPDI
in 1989 as Vice President -- Management Information Systems. Mr. Saltzman is
an advisory director of Tanisys Technology, Inc.
Kelly E. Simmons has served as Senior Vice President, Chief Financial
Officer, Treasurer and Corporate Secretary of the Company since May 1996. From
1988 until August 1996, Mr. Simmons held various executive positions with USLD,
including Vice President -- Finance and Corporate Treasurer, Vice President --
Administration and Senior Vice President of Business Development.
Paul L. Gehri has served as Senior Vice President of Sales of the
Company since September 1997. He has served as Vice President of Sales and
Marketing for BCI and Enhanced Services Billing, Inc. ("ESBI"), a wholly-owned
subsidiary of the Company, since August 1996, and had served in the same
position with ZPDI since May 1992. Mr. Gehri was Vice President of Sales of
U.S. Long Distance, Inc. from July 1991 to May 1992 and was Director of Sales
and a principal of National Telephone Exchange, Inc., a company acquired by
USLD, from 1988 to July 1991.
Michael A. Harrelson has served as Senior Vice President and Chief
Information Officer of the Company and President of Billing Concepts Systems,
Inc., a wholly-owned subsidiary of the Company ("BCS"), since June 1, 1997.
Mr. Harrelson joined the Company through the acquisition of Computer Resources
Management, Inc., which Mr. Harrelson founded in 1986 and had served as its
President from its inception until it was acquired by the Company in June 1997.
See "Certain Transactions."
11
<PAGE> 14
Michael W. Hancock has served as Vice President of the Company and as
Senior Vice President and Chief Operating Officer of BCS since August 1997.
From December 1988 to August 1997, Mr. Hancock held various positions with
Affiliated Computer Services, Inc., including Vice President and Regional
Business Unit Operations Manager.
Lee Cooke has served as a director of the Company since May 1996, and
was a director of USLD from 1991 until July 1996. Since May 1992, he has been
Chairman of the Board and Chief Executive Officer of U. S. Medical Systems,
Inc. Mr. Cooke is also an advisory director of Tanisys Technology, Inc. From
1988 through 1991, Mr. Cooke served in the elected position of Mayor of Austin,
Texas.
James E. Sowell has served as a director of the Company since June
1996 and is the founder of Jim Sowell Construction Co., Inc., which began in
1972 primarily for single-family home construction. Since 1972, the company
has expanded its scope of operations and ownership to include land development,
income property development, financial institutions, country club and golf
course operations and ownership, hotel and restaurant ownership and operations,
as well as interests in major corporations. Mr. Sowell was Chairman of the
Board of Arlington Golf Club, Inc. ("AGC") and Sable Homes, Inc. ("SHI") and a
general partner of Fleetwood Retail Associates, Ltd ("FRA"). All of these
entities filed petitions for relief under the U. S. Bankruptcy Code, AGC in
April 1992 (dismissed in January 1993), SHI in September 1993 (dismissed in
1995), and FRA in October 1997 (pending). Mr. Sowell served as a director of
Tanisys Technology, Inc. from May 1995 to November 1997.
Thomas G. Loeffler has served as a director of the Company since
August 1996, and has been an attorney with the law firm of Arter & Hadden since
June 1993. Prior to that time, Mr. Loeffler acted as a practicing attorney and
consultant. From 1979 to 1986, Mr. Loeffler served as an elected
representative to the United States House of Representatives. Mr. Loeffler
serves as a director of Introgen Therapeutics, Inc. and the University of Texas
Investment Management Company.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General
The Compensation Committee of the Board of Directors (the
"Compensation Committee") has furnished the following report on the Company's
executive compensation policies. This report describes the Compensation
Committee's compensation policies applicable to the Company's executive
officers and provides specific information regarding the compensation of the
Company's Chief Executive Officer. (The information contained in this
"Compensation Committee Report on Executive Compensation" shall not be deemed
to be "soliciting material" or to be "filed" with the Commission, nor shall
such information be incorporated by reference into any future filings under the
Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act,
except to the extent that the Company specifically incorporates it by reference
into such filing.)
The Compensation Committee is comprised of three outside directors,
Messrs. Sowell, Cooke and Loeffler, and administers and oversees all aspects of
the Company's executive compensation policy and reports its determinations to
the Board of Directors. The Compensation Committee's overall goal is to
develop executive compensation policies that are consistent with, and linked
to, strategic business objectives and Company values. The Compensation
Committee approves the design of, assesses the effectiveness of, and
administers executive compensation programs in support of, the Company's
compensation policies. The Compensation Committee also reviews and approves
all salary arrangements and other remuneration for executives, evaluates
executive performance and considers related matters.
Compensation Philosophy
The Company's executive compensation policies have four primary
objectives: to attract and retain highly competent executives to manage the
Company's business, to offer executives appropriate incentives for
12
<PAGE> 15
accomplishment of the Company's business objectives and strategy, to encourage
stock ownership by executives to enhance mutuality of interest with
stockholders and to maximize long-term stockholder value. The Compensation
Committee believes the compensation policies should operate in support of these
objectives and should emphasize the following: a long-term and at-risk focus, a
pay-for-performance culture, an equity orientation and management development.
Elements of Compensation
Each element of compensation considers median compensation levels paid
within the competitive market. Competitive market data compares the Company's
compensation practices to a group of comparator companies that tend to have
similar sales volumes, market capitalizations, employment levels and lines of
business. The Compensation Committee reviews and approves the selection of
companies used for compensation comparison purposes.
The key elements of the Company's executive compensation are base
salary, annual incentive and long-term incentive. These key elements are
addressed separately below. In determining compensation, the Compensation
Committee considers all elements of an executive's total compensation package.
Base Salaries. Base salaries for executives are initially determined
by evaluating executives' levels of responsibility, prior experience, breadth
of knowledge, internal equity issues and external pay practices. Base salaries
are below the size-adjusted medians of the competitive market.
Increases to base salaries are driven primarily by individual
performance. Individual performance is evaluated based on sustained levels of
individual contribution to the Company. When evaluating individual
performance, the Compensation Committee considers the executive's efforts in
promoting Company values, continuing educational and management training,
improving product quality, developing relationships with customers, vendors and
employees, and demonstrating leadership abilities among co-workers. Mr. Holmes
received a base salary of $300,000 from the Company in fiscal 1997.
Annual Incentive. Each year, the Compensation Committee evaluates the
performance of the Company as a whole, as well as the performance of each
individual executive. Factors considered include revenue growth, net
profitability and cost control. The Compensation Committee does not utilize
formalized mathematical formulae, nor does it assign weightings to these
factors. The Compensation Committee, in its sole discretion, determines the
amount, if any, of incentive payments to each executive. The Compensation
Committee believes that the Company's growth in revenue and profitability
requires subjectivity on the part of the Committee when determining incentive
payments. The Compensation Committee believes that specific formulae restrict
flexibility and are too rigid at this stage of the Company's development. Mr.
Holmes did not receive an incentive payment from the Company in fiscal 1997.
Long-Term Incentive. The Company's long-term compensation philosophy
provides that long-term incentives should relate to improvement in stockholder
value, thereby creating a mutuality of interests between executives and
stockholders. Additionally, the Compensation Committee believes that the
long-term security of executives is critical for the perpetuation of the
Company. Long-term incentives are provided to executives through the Company's
1996 Employee Comprehensive Stock Plan, in the form of stock options and
restricted stock awards, and through the Company's Executive Compensation
Deferral Plan.
In keeping with the Company's commitment to provide a total
compensation package that favors at-risk components to pay, long-term
incentives comprise an appreciable portion of an executive's total compensation
package. When awarding long-term incentives, the Compensation Committee
considers executives' respective levels of responsibility, prior experience,
historical award data, various performance criteria and compensation practices
at comparator companies. Again, the Compensation Committee does not utilize
formal mathematical formulae when determining the number of options/shares
granted to executives.
13
<PAGE> 16
Restricted Stock
Officers and certain key employees of the Company, including directors
who are also full-time employees, are eligible for awards of restricted stock
under the Billing Employee Stock Plan (as hereinafter defined). The number of
shares of Common Stock to be awarded to an employee and other terms of the
award are determined by the Compensation Committee, which administers the
Billing Employee Stock Plan. Each award is evidenced by an agreement that sets
forth the terms and conditions of the restricted stock granted, including the
vesting schedule. The Billing Employee Stock Plan provides for certain vesting
upon death, permanent disability, retirement, termination for good reason by
the employee and upon a change of control. The restricted stock may not be
sold, assigned, transferred, pledged or otherwise encumbered for a period of
not less than one year but not greater than two years. The employee, as owner
of the restricted stock, has all rights of a stockholder including voting
rights and the right to receive cash dividends, if any. Mr. Holmes did not
receive a restricted stock award from the Company in fiscal 1997.
Stock Options
Stock options generally are granted at an option price not less than
the fair market value of the Common Stock on the date of grant. Accordingly,
stock options have value only if the price of the Common Stock appreciates
after the date the options are granted. This design focuses executives on the
creation of stockholder value over the long term and encourages equity
ownership in the Company.
In fiscal 1997, Mr. Holmes received an option to purchase 200,000
shares of Common Stock with an exercise price of $33.688 per share. One-fourth
(25%) of the shares subject to such option vest on each of August 25, 1997,
1998, 1999, and 2000. In determining the number of shares subject to the
option granted to Mr. Holmes, the Committee considered the level of total
stockholder return and numerous subjective factors indicative of Mr. Holmes'
dedication to the success of the Company. As of December 31, 1997, Mr. Holmes
owned 135,000 shares of the Company's Common Stock and, including the fiscal
1997 grant, held options to purchase a total of 350,000 shares. The
Compensation Committee believes that this equity interest provides an
appropriate link to the interests of stockholders.
Executive Compensation Deferral Plan
The Company offers to certain key employees the ability to defer a
portion of their respective salaries, on a pre-tax basis, up to 100% of base
compensation, with benefits generally payable upon retirement, disability,
termination of employment (other than for cause) or death. The Company may
make certain matching contributions to each participant's account under such
plan with vesting to occur over time; however, the Company has retained the
ability to limit its contributions thereunder at any time. The Committee
believes that this type of plan provides additional long- term incentive for
overall corporate success. The Company made an aggregate of approximately
$48,078 in matching contributions during fiscal 1997, $38,005 of which was made
on behalf of Mr. Holmes.
Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), currently imposes a $1.0 million limitation on the deductibility of
certain compensation paid to each of the Company's five highest paid
executives. Excluded from this limitation is compensation that is "performance
based." For compensation to be performance based it must meet certain
criteria, including being based on predetermined objective standards approved
by stockholders. In general, the Company believes that compensation relating
to options granted under the Billing Employee Stock Plan should be excluded
from the $1.0 million limitation calculation. The Compensation Committee
intends to take into account the potential application of Section 162(m) with
respect to incentive compensation awards and other compensation decisions made
by it in the future.
14
<PAGE> 17
Conclusion
The Compensation Committee believes these executive compensation
policies serve the interests of the stockholders and the Company effectively.
The Committee believes that the various pay vehicles offered are appropriately
balanced to provide increased motivation for executives to contribute to the
Company's overall future successes, thereby enhancing the value of the Company
for the stockholders' benefit.
COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
James E. Sowell
Lee Cooke
Thomas G. Loeffler
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain
information concerning compensation of the Company's Chief Executive Officer
and each of the Company's three other most highly compensated executive
officers for fiscal 1997. During the major part of fiscal 1996, the Company
was operating as a wholly-owned subsidiary of USLD and, accordingly, the
officers, who were then employed by USLD, were compensated in accordance with
USLD's plans and policies unless otherwise indicated. All references in the
following Summary Compensation Table to compensation, stock and stock options
for fiscal 1995 and 1996 relate to compensation paid by, and awards of stock
and stock options of, USLD, and some of the information included herein and
therein has been provided or derived from information provided by USLD. The
compensation paid and stock options granted by Billing to the named executive
officers during fiscal 1996 is footnoted in the Summary Compensation Table.
As a result of the Spin-Off, the exercise prices of shares of USLD
stock underlying outstanding USLD options were adjusted to reflect the
distribution of the Company's Common Stock in the Spin-Off (such adjustments
are referred to as the "Spin-Off Adjustments"). Employees of the Company who
held USLD options as of the time of the Spin-Off were given new Company options
under the Billing Employee Stock Plan to purchase one share of the Company's
Common Stock for every one share of USLD common stock subject to an outstanding
USLD option at the time of the Spin-Off. Except as otherwise indicated, all
references in the Summary Compensation Table to awards of stock and stock
options of USLD reflect the original terms of those awards prior to the
Spin-Off Adjustments.
The exercise prices and numbers of shares of common stock subject to
the USLD options were determined as of the time of the Spin-Off so as to
preserve the investment basis and intrinsic gain associated with the USLD
options. Generally, the terms of the Billing options received are similar to
the terms of the corresponding USLD options.
15
<PAGE> 18
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ----------------------
RESTRICTED SECURITIES ALL OTHER
NAME AND FISCAL OTHER ANNUAL STOCK UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION($) AWARDS ($) OPTIONS(#) ($)
------------------ ------- ---------- --------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Parris H. Holmes, Jr. . 1997 $300,000 0 $71,973(1) 0 200,000 $ 28,728(2)
Chairman of the Board 1996(3) $261,808(4) $805,000 $15,524 $602,800(5) 160,000(3) $1,339,979(6)
and Chief Executive 1995 $276,000 $750,000(7) $22,421(8) 0 100,000 $ 38,964(9)
Officer
Alan W. Saltzman . . . 1997 $200,000 0 $26,105(10) 0 130,000 $ 12,538(11)
President and Chief 1996(12) $138,462(4) $100,000 $17,962 $133,330(13) 25,000(12) $ 239,032(14)
Operating Officer 1995 $147,308 $100,000(7) 0 0 25,000 $ 8,792(15)
Kelly E. Simmons . . . 1997 $140,000 0 $ 1,603 0 80,000 $ 1,777(16)
Senior Vice President 1996(17) $ 88,154(4) $ 33,000 $ 1,565 0 10,000(17) $ 63,489(18)
and Chief Financial 1995 $ 96,000 $ 33,000(7) 0 0 0 $ 2,863(19)
Officer
Paul L. Gehri . . . . . 1997 $122,000(20) 0 $ 3,271 0 20,000 $ 1,644(21)
Senior Vice President 1996(22) $ 75,962(4) $ 35,000 $28,000 0 10,000(22) $ 3,869(23)
of Sales; Vice 1995 $ 83,654 $10,000(7) 0 0 0 $ 3,333(24)
President of Sales and
Marketing of BCI and
ESBI
</TABLE>
__________________________
(1) Includes $28,163 reimbursed to Mr. Holmes during fiscal 1997 for the
payment of certain taxes.
(2) Represents $3,462 in Billing 401(k) Retirement Plan contributions and
$25,266 in life insurance premiums made or paid on behalf of Mr.
Holmes during fiscal 1997.
(3) During fiscal 1996, Mr. Holmes received from Billing a salary of
$46,539 and was granted an option to purchase 150,000 shares of
Billing Common Stock. Pursuant to the terms of the Spin-Off, Mr.
Holmes received options to purchase 185,000 shares of Billing Common
Stock to correspond to his outstanding USLD options.
(4) Represents salary paid through August 1, 1996 by USLD.
(5) Mr. Holmes was granted an option to purchase 55,000 shares of USLD
common stock on January 26, 1996 which, as amended, vested 100% on
July 2, 1996, and was granted an option to purchase 50,000 shares of
USLD common stock on July 16, 1996 which vested 100% on the date of
grant.
(6) Represents $3,256 in USLD 401(k) Retirement Plan contributions,
$15,143 in USLD deferred compensation contributions and $21,580 in
life insurance premiums made or paid on behalf of Mr. Holmes during
fiscal 1996 and a $1,300,000 severance payment by USLD in connection
with the Spin-Off.
(7) In 1995, represents bonuses earned in fiscal year 1994, but paid 50%
in January and 50% in April of fiscal year 1995. Payment of such
bonuses was conditioned upon USLD recognizing a profit in its first
and second fiscal quarters, respectively. These conditions, however,
were waived by USLD for those bonuses earned for fiscal 1994.
(8) Represents amounts reimbursed during fiscal 1995 for the payment of
certain taxes.
(9) Represents $1,871 in USLD 401(k) Retirement Plan contributions,
$15,686 in USLD deferred compensation contributions and $21,407 in
life insurance premiums made or paid on behalf of Mr. Holmes during
fiscal 1995.
(10) Includes $1,863 reimbursed to Mr. Saltzman during fiscal 1997 for the
payment of certain taxes.
(11) Represents $2,538 in Billing 401(k) Retirement Plan contributions and
$10,000 in life insurance premiums made or paid on behalf of Mr.
Saltzman during fiscal 1997.
(12) During fiscal 1996, Mr. Saltzman received from Billing a salary of
$30,423 and was granted an option to purchase 100,000 shares of
Billing Common Stock. Pursuant to the terms of the Spin-Off, Mr.
Saltzman received options to purchase 103,000 shares of Billing Common
Stock to correspond to his outstanding USLD options.
(13) Mr. Saltzman was granted an option to purchase 16,000 shares of USLD
common stock on March 8, 1996 which, as amended, vested 100% on July
2, 1996, and was granted an option to purchase 7,000 shares of USLD
common stock on July 16, 1996 which vested 100% on the date of grant.
(14) Represents $1,998 in USLD 401(k) Retirement Plan contributions, $5,636
in USLD deferred compensation contributions and $6,398 in life
insurance premiums made or paid on behalf of Mr. Saltzman and a
$225,000 severance payment by USLD in connection with the Spin-Off.
(15) Represents $2,391 in USLD 401(k) Retirement Plan contributions and
$6,401 in USLD deferred compensation contributions made on behalf of
Mr. Saltzman during fiscal 1995.
(16) Represents $1,777 in Billing 401(k) Retirement Plan contributions made
on behalf of Mr. Simmons during fiscal 1997.
(17) During fiscal 1996, Mr. Simmons received from Billing a salary of
$21,046 and was granted an option to purchase 50,000 shares of Billing
Common Stock. Pursuant to the terms of the Spin-Off, Mr. Simmons
received options to purchase 45,000 shares of Billing Common Stock to
correspond to his outstanding USLD options.
(18) Represents $1,258 in USLD 401(k) Retirement Plan contributions and
$2,231 in USLD deferred compensation contributions made on behalf of
Mr. Simmons during fiscal 1996, and a $60,000 severance payment in
connection with the Distribution.
(19) Represents $1,303 in USLD 401(k) Retirement Plan contributions and
$1,560 in USLD deferred compensation contributions made on behalf of
Mr. Simmons during fiscal 1995.
(20) Includes commissions paid to Mr. Gehri.
(21) Represents $1,644 in Billing 401(k) Retirement Plan contributions made
on behalf of Mr. Gehri during fiscal 1997.
16
<PAGE> 19
(22) During fiscal 1996, Mr. Gehri received from Billing a salary of
$15,923 and was granted an option to purchase 30,000 shares of
Billing
Common Stock. Pursuant to the terms of the Spin-Off, Mr. Gehri
received options to purchase 31,750 shares of Billing Common Stock to
correspond to his outstanding USLD options.
(23) Represents $1,559 in USLD 401(k) Retirement Plan contributions and
$2,310 in USLD deferred compensation contributions made on behalf
of Mr. Gehri.
(24) Represents $1,538 in USLD 401(k) Retirement Plan contributions and
$1,795 in USLD deferred compensation contributions made on behalf of
Mr. Gehri.
STOCK OPTION GRANTS IN FISCAL 1997
The following table provides certain information related to options
granted by Billing to the named executive officers during fiscal 1997 pursuant
to the Billing Employee Stock Plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
% OF TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OR OPTION TERM(1)
UNDERLYING OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED (#) FISCAL 1997 ($/SH) DATE 5% ($) 10% ($)
---- --------------- ----------- ----------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Parris H. Holmes, Jr. . 200,000 16.86% $33.688 8/25/2004 $2,742,880 $6,392,076
Alan W. Saltzman . . . 130,000 10.96% $33.688 8/25/2004 $1,782,872 $4,154,850
Kelly E. Simmons . . . 80,000 6.75% $33.688 8/25/2004 $1,097,152 $2,556,831
Paul L. Gehri . . . . . 20,000 1.69% $33.688 8/25/2004 $ 274,288 $ 639,208
</TABLE>
__________________________
(1) The potential realizable value is calculated based on the term of the
option and is calculated by assuming that the fair market value of
Common Stock on the date of the grant as determined by the Board
appreciates at the indicated annual rate compounded annually for the
entire term of the option and that the option is exercised and the
Common Stock received therefor is sold on the last day of the term of
the option for the appreciated price. The 5% and 10% rates of
appreciation are derived from the rules of the Commission and do not
reflect the Company's estimate of future stock price appreciation.
The actual value realized may be greater than or less than the
potential realizable values set forth in the table.
17
<PAGE> 20
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to options of Billing
exercised by the named executive officers of the Company during fiscal 1997 and
the number and value of Billing options held at September 30, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
OPTIONS AT FY-END (#) FY-END($)(1)
--------------------------- ----------------------------
SHARES ACQUIRED
UPON OPTION VALUE
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Parris H. Holmes, 125,000 $3,209,165 100,000 250,000 $1,010,000 $3,868,000
Jr. . . . . . . . .
Alan W. Saltzman . 48,000 $1,213,340 120,833 164,167 $2,169,127 $1,387,373
Kelly E. Simmons . 16,000 $319,680 65,667 93,333 $1,134,593 $708,527
Paul L. Gehri . . . 22,750 $647,255 15,667 43,333 $339,882 $492,858
</TABLE>
- ---------------------------
(1) Represents the product of (a) the number of shares underlying options
granted under the Billing Employee Stock Plan multiplied by (b) the
difference between (i) the fair market value of Common Stock on
September 30, 1997 ($35.00), and (ii) the exercise price of the
options.
EMPLOYEE BENEFIT PLANS
Billing Information Concepts Corp. 401(k) Retirement Plan
The Company maintains the Billing Information Concepts Corp. 401(k)
Retirement Plan (the "Billing Retirement Plan"). Participation in the Billing
Retirement Plan is offered to eligible employees of Billing or its subsidiaries
(collectively, the "Participants"). Generally, all employees of Billing or its
subsidiaries who are 21 years of age and who have completed one year of service
during which they worked at least 1,000 hours are eligible for participation in
the Billing Retirement Plan.
The Billing Retirement Plan is a 401(k) plan, a form of defined
contribution plan, which provides that Participants generally may make
voluntary salary deferral contributions, on a pre-tax basis, of between 1% and
15% of their base compensation in the form of voluntary payroll deductions up
to a maximum amount as indexed for cost-of-living adjustments ("Voluntary
Contributions"). The Company makes matching contributions equal to 50% of the
first 3% of a Participant's compensation contributed as salary deferral. The
Company may from time to time make additional discretionary contributions at
the sole discretion of the Company's Board of Directors. The discretionary
contributions, if any, are allocated to Participants' accounts based on a
discretionary percentage of the Participants' respective salary deferrals.
Participants gradually vest in all contributions made by the Company
over a period of five years of credited service, vesting 25% a year for each
full year of service beginning with the Participant's second anniversary, and
becoming 100% vested after five years of service or upon death, total and
permanent disability, retirement under the Retirement Plan or Retirement Plan
termination. Participants are always 100% vested in their Voluntary
Contributions. Service with USLD prior to the Spin-Off was credited under the
Billing Retirement Plan for purposes of vesting as well as eligibility to
participate.
1996 Employee Comprehensive Stock Plan
The Company has adopted the Billing Information Concepts Corp. 1996
Employee Comprehensive Stock Plan (the "Billing Employee Stock Plan"). The
Billing Employee Stock Plan provides for (i) the grant of incentive
18
<PAGE> 21
stock options ("ISOs") under Section 422 of the Internal Revenue Code, (ii) the
grant of non-qualified stock options that do not qualify under Section 422 of
the Code ("NQSOs") and (iii) the award of shares of restricted stock of the
Company. Under the terms of the Billing Employee Stock Plan, 3,500,000 shares
of Common Stock have been reserved for the granting of options and awards of
restricted stock. At December 31, 1997, options to purchase 3,356,014 shares
had been granted under the Billing Employee Stock Plan. If any option or award
granted under the Billing Employee Stock Plan terminates, expires or is
surrendered as to any shares, new options or awards may thereafter be made
covering such shares.
The Billing Employee Stock Plan is administered by the Compensation
Committee, which is comprised of three "disinterested persons" appointed by the
Board, currently Lee Cooke, James Sowell and Thomas Loeffler. The Billing
Employee Stock Plan grants broad authority to the Compensation Committee to
grant options or award restricted shares to full-time employees and officers of
the Company and its subsidiaries (estimated to total 433 eligible individuals
at December 31, 1997) selected by the Compensation Committee, to determine the
number of shares subject to options or awards and to provide for the
appropriate periods and methods of exercise and requirements regarding the
vesting of options and awards of restricted shares. The option price per share
with respect to each option shall be determined by the Compensation Committee,
but shall in no instance be less than the par value of the shares subject to
the option. In addition, the option price for ISOs may not be less than 100%
of the fair market value of the Common Stock on the date of grant. An ISO may
be granted to a participant only if such participant, at the time the option is
granted, does not own stock possessing more than 10% of the total combined
voting power of all classes of Common Stock of the Company or a subsidiary.
The preceding restriction shall not apply if at the time the option is granted
the option price is at least 110% of the fair market value of the Common Stock
subject to the option and such option by its terms is not exercisable after the
expiration of five years from the date of grant. The aggregate fair market
value (determined as of the time the option is granted) of the stock with
respect to which ISOs are exercisable for the first time by a participant in
any calendar year (under all plans of Billing and of any parent or subsidiary)
shall not exceed $100,000. There is no price requirement for NQSOs, other than
that the option price must exceed the par value of the Common Stock. The
Compensation Committee may permit the option purchase price to be payable by
transfer to Billing of Common Stock owned by the option holder with a fair
market value at the time of exercise equal to the option purchase price. No
participant shall receive any grant of options, whether ISOs or NQSOs, for more
than an aggregate of 150,00 shares of Common Stock during any one fiscal year.
The Billing Employee Stock Plan permits the Compensation Committee to
make awards of restricted shares of Common Stock that are subject to a
designated period during which such shares of Common Stock may not be sold,
assigned, transferred, pledged, or otherwise encumbered, which period shall not
be less than one (1) year nor more than two (2) years from the date of grant.
As a condition to any award, the Compensation Committee may require an employee
to pay to the Company the amount (such as the par value of such shares)
required to be received by Billing in order to assure compliance with
applicable state law. Any award for which such requirement is established
shall automatically expire if not purchased in accordance with the Compensation
Committee's requirements within 60 days after the date of grant. The
Compensation Committee may, at any time, reduce the restricted period with
respect to any outstanding shares of restricted stock and any retained
distributions with respect thereto awarded under the Billing Employee Stock
Plan. Shares of restricted stock awarded under the Billing Employee Stock Plan
shall constitute issued and outstanding shares of Common Stock for all
corporate purposes.
Each employee has the right to vote the restricted stock held by such
employee, to receive and retain all cash dividends and distributions thereon
and exercise all other rights, powers and privileges of a holder of Common
Stock with respect to such restricted stock, subject to certain exceptions.
Unless otherwise provided in the agreement relating to an award, upon the
occurrence of a change of control, as defined in the Billing Employee Stock
Plan, all restrictions imposed on the employee's restricted stock and any
retained distributions shall automatically terminate and lapse and the
restricted period shall terminate; provided, however, that if the change of
control occurs within six months of the date of grant the restrictions and the
restricted period shall terminate on the six-month anniversary of the date of
grant.
19
<PAGE> 22
1996 Employee Stock Purchase Plan
The Company has adopted the Billing Information Concepts Corp. 1996
Employee Stock Purchase Plan (the "Billing Purchase Plan"). The Billing
Purchase Plan allows employees of the Company and its subsidiaries to purchase
Common Stock at regular intervals by means of wage and salary deferrals on a
tax-favored basis.
The Billing Purchase Plan, which is intended to qualify under Section
423 of the Code, is administered by the Employee Stock Purchase Plan Committee,
which is appointed by the Board of Directors. The committee consists of at
least three (3) persons who need not be members of the Board of Directors. The
committee supervises the administration and enforcement of the Billing Purchase
Plan, and all questions of interpretation or application of the Billing
Purchase Plan are determined in the sole discretion of the committee. All
decisions made by the committee are final, conclusive and binding on all of the
participants of the Billing Purchase Plan and the Company.
Every employee of the Company and its subsidiaries is eligible to
participate in the Billing Purchase Plan on a voluntary basis with the
exception of (i) employees who have not completed at least six months of
continuous service with Billing as of the applicable enrollment date and (ii)
employees who would, immediately upon enrollment, own directly or indirectly,
or hold purchase rights, options or rights to acquire, an aggregate of 5% or
more of the total combined voting power or value of all outstanding shares of
all classes of the Company or any subsidiary. To participate in the Billing
Purchase Plan, eligible employees must enroll in the Billing Purchase Plan and
authorize payroll deductions pursuant to the Billing Purchase Plan.
Approximately 344 employees are eligible to participate under the Billing
Purchase Plan.
Enrollment in the Billing Purchase Plan constitutes a grant by the
Company to the participant of the right to purchase shares of Common Stock.
The aggregate number of shares that may be issued under the Billing Purchase
Plan may not exceed 1,000,000 shares of Billing Common Stock, subject to
adjustment as provided in the Billing Purchase Plan. The purchase price per
share is the lesser of (i) 85% of the fair market value of the Common Stock on
the first day of the applicable participation period or (ii) 85% of the fair
market value of the Common Stock on the last day of such participation period.
The number of shares purchased is determined by dividing the total amount of
payroll deductions withheld from a participant's paychecks during a
participation period by the purchase price. The aggregate of monthly payroll
deductions cannot exceed $10,625 in any six-month participation period. At the
end of each offering period, the applicable number of shares of Common Stock is
automatically purchased for the participant.
Executive Compensation Deferral Plan
The Company has adopted the Billing Information Concepts Corp.
Executive Compensation Deferral Plan (the "Billing Executive Deferral Plan").
Participation in the Billing Executive Deferral Plan is offered to certain key
employees occupying management positions and/or certain other highly
compensated employees of the Company who are determined by the Board, from time
to time, to be eligible to participate in the Billing Executive Deferral Plan
("Billing Executive Deferral Participants"). As of December 31, 1997, there
were 15 participants in the Billing Executive Deferral Plan.
The Billing Executive Deferral Plan is a deferred compensation plan
that provides that Billing Executive Deferral Participants generally may make
voluntary salary deferral contributions, on a pre-tax basis, in equal monthly
amounts of up to 100% of his or her base compensation ("Voluntary Deferral
Contribution"). In addition, the Company intends to make certain matching
contributions with respect to each Voluntary Deferral Contribution (the
"Deferral Contribution") equal to the lesser of (i) the Voluntary Deferral
Contribution or (ii) that amount together with the Voluntary Deferral
Contribution which actuarially determined would yield a 10-year annuity equal
to 50% of the Billing Executive Deferral Participant's compensation payable at
age 65, with a minimum contribution of $3,000. However, the Company reserves
the right, at any time, to decrease the Deferral Contribution or provide no
Deferral Contribution whatsoever for any plan year. From time to time the
Company shall credit each Billing Executive Deferral Participant's plan account
with interest at the rate declared by the Company in accordance with the
Billing Executive Deferral Plan. The Company made approximately $48,078 in
Company Deferral Contributions to this plan during fiscal 1997.
20
<PAGE> 23
Unless terminated for cause, Billing Executive Deferral Participants
are annually vested in 33% of any Deferral Contribution beginning with the
Billing Executive Deferral Participant's first anniversary of service and
becoming 100% vested after the third anniversary of service or upon a change in
control of the Company. Service with USLD is considered service for this
purpose. Benefits generally are payable to a Billing Executive Deferral
Participant (or his or her beneficiaries) upon retirement, disability,
termination of employment (other than for cause) or death, in each case as
provided in the Billing Executive Deferral Plan.
Executive Qualified Disability Plan
The Company has adopted the Billing Information Concepts Corp.
Executive Qualified Disability Plan (the "Billing Disability Plan"). The
Billing Disability Plan provides long-term disability benefits for certain key
employees occupying management positions and/or certain other highly
compensated employees of the Company who are determined by the Board, from time
to time, to be eligible to participate. Benefits under the Billing Disability
Plan are provided directly by the Company based on definitions, terms and
conditions contained in the Billing Disability Plan documents. Benefits under
the Billing Disability Plan supplement benefits provided under the Company's
insured long- term disability plan. No benefits were paid to any participant
under the Billing Disability Plan during fiscal 1997.
EMPLOYMENT AGREEMENTS AND CHANGE-OF-CONTROL ARRANGEMENTS
The Company entered into an employment agreement with Mr. Parris H.
Holmes, Jr. in August 1996. The agreement provides for a four-year term,
subject to automatic extension for an additional one year on each one-year
anniversary of the agreement unless terminated early as provided therein,
including termination by the Company for "cause" (as defined in the employment
agreement) or termination by Mr. Holmes for "good reason" (as defined in the
employment agreement). This employment agreement provides for an annual,
calendar year base salary of $300,000 and an incentive bonus at the discretion
of the Committee.
The Company entered into an employment agreement with Mr. Alan W.
Saltzman in August 1996. This agreement expires two years from its effective
date subject to extension for successive two-year terms unless the Company
elects not to extend the agreement. The employment agreement is subject to
early termination as provided therein, including termination by the Company for
"cause" (as defined in the employment agreement) or termination by Mr. Saltzman
for "good reason" (as defined in the employment agreement). The employment
agreement provides for an annual, calendar year base salary of $200,000. The
employment agreement also provides for incentive bonuses at the discretion of
the Compensation Committee.
The Company entered into an employment agreement with Mr. Kelly E.
Simmons in August 1996. This agreement provides for a one-year term, subject
to automatic extension unless and until terminated by either the Company or Mr.
Simmons upon not less than 120 days' prior written notice. The employment
agreement is subject to early termination as provided therein, including if Mr.
Simmons fails to perform his duties thereunder or to comply with any of the
provisions thereof or commits any act of misconduct, malfeasance, gross
negligence or disloyalty, upon written notice from the Company. The employment
agreement provides for an annual, calendar year base salary of $140,000. The
employment agreement also provides for an incentive bonus at the discretion of
the Compensation Committee.
The Company entered into an employment agreement with Mr. Michael
Harrelson in June 1997. This agreement provides for a three-year term unless
terminated early as provided therein, including termination by the Company for
"cause" (as defined in the employment agreement) or termination by Mr.
Harrelson for "good reason upon change of control" (as defined in the
employment agreement). The employment agreement provides for an initial,
annual base salary of $200,000, which increases in increments of $50,000 for
each of the second and third years of the agreement. The employment agreement
also provides for incentive bonuses at the discretion of the Company. The
employment agreement provides that if Mr. Harrelson is terminated without
"cause" (as defined in the employment agreement), he will be entitled to a
lump-sum payment in the amount equal to his base salary for the unexpired
portion of the three-year term of his agreement.
21
<PAGE> 24
The employment agreements of Messrs. Holmes, Saltzman and Simmons
provide that if the Company terminates their employment without cause
(including the Company's election to not extend the employment agreement at any
renewal date) or if they resign their employment for "good reason" (as "good
reason" is defined in their employment agreements), they will be entitled to
the following severance: Mr. Holmes -- at his election, either a lump-sum
payment in the amount equal to his base salary for the unexpired portion of the
four-year term of his agreement then in effect and without giving effect to any
further extension (a maximum of approximately $1,200,000) or continuation of
his base salary and benefits through the unexpired term of his agreement; Mr.
Saltzman -- a lump-sum payment in the amount equal to two times his then
effective annual base salary ($400,000); Mr. Simmons -- a lump-sum payment in
the amount equal to one times his then effective annual base salary ($140,000).
A change of control is deemed to have occurred if (i) more than 30% of
the combined voting power of the Company's then outstanding securities is
acquired, directly or indirectly, or (ii) at any time during the 24-month
period after a tender offer, merger, consolidation, sale of assets or contested
election, or any combination of such transactions, at least a majority of the
Company's Board of Directors shall cease to consist of "continuing directors"
(meaning directors of the Company who either were directors prior to such
transaction or who subsequently became directors and whose election, or
nomination for election by the Company's stockholders, was approved by a vote
of at least two thirds of the directors then still in office who were directors
prior to such transaction), or (iii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting securities of the
surviving entity) at least 60% of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (iv) the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
of sale or disposition by the Company of all or substantially all of the
Company's assets.
The employment agreements with Messrs. Holmes, Saltzman and Simmons
provide that if, at any time within twelve months of a change of control, they
cease to be an employee of the Company by reason of (i) termination by the
Company (or its successor) without "cause" (as defined in the employment
agreement) or (ii) voluntary termination by the employee for "good reason upon
change of control" (as defined in the employment agreement), they will be
entitled to the following benefits in addition to the severance stated above:
Mr. Holmes, Mr. Saltzman and Mr. Simmons -- all outstanding stock options held
by each shall become fully vested and exercisable and such individuals shall
receive an additional payment that, when added to all other payments received
in connection with a change of control, will result in the maximum amount
allowed to be paid to an employee without triggering an excess parachute
payment (as defined by the Internal Revenue Code); Mr. Holmes -- all benefits
(as defined by his employment agreement) shall continue throughout the
remainder of its term.
The employment agreement with Mr. Harrelson provides that if, at any
time within twelve months of a change of control, he ceases to be an employee
of the Company by reason of (i) termination by the Company (or its successor)
without "cause" (as defined in the employment agreement), he will be entitled
to a lump-sum payment in the amount equal to his base salary for the unexpired
portion of the three-year term of his agreement; or (ii) voluntary termination
by the employee for "good reason upon change of control" (as defined in the
employment agreement), he will be entitled to a lump sum payment equal to one
times his then effective salary.
Billing Concepts, Inc., a wholly-owned subsidiary of the Company
("BCI"), has an employment agreement with Mr. Paul L. Gehri. This agreement
continues until December 31, 1997, subject to automatic extension unless and
until terminated by either BCI or Mr. Gehri upon not less than 120 days' prior
written notice. The employment agreement is subject to early termination as
provided therein, including if Mr. Gehri fails to perform his duties thereunder
or to comply with any of the provisions thereof or commits any act of
misconduct, malfeasance, gross negligence or disloyalty, upon written notice
from BCI. The employment agreement provides for an annual, calendar year base
salary of $92,000, plus commissions earned if the quarterly and annual revenue
budgets for the third party billing component of BCI exceed certain amounts,
with the total value of the bonus plan for the fiscal year ended September 30,
1997, equal to $30,000. The employment agreement also provides for an
incentive bonus at the discretion of the Compensation Committee.
22
<PAGE> 25
The Company and Mr. Michael Hancock entered into an employment
agreement in October 1997. The agreement provides for a one-year term at a
base salary of $180,000 and an incentive bonus of up to $120,000. The
employment agreement also provides that if the Company terminates Mr. Hancock's
employment for any reason prior to the expiration of the agreement, the Company
will continue to pay Mr. Hancock's base salary for the remainder of the
agreement's term. Pursuant to the terms of the employment agreement, Mr.
Hancock was granted an option to purchase 75,000 shares of Common Stock of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
James E. Sowell, Lee Cooke and Thomas Loeffler, directors of the
Company, served on the Compensation Committee during the fiscal year ending
September 30, 1997. Mr. Cooke is the Chairman of the Board and Chief Executive
Officer of U.S. Medical Systems, Inc. Mr. Holmes formerly served on the Board
of Directors for U.S. Medical Systems, Inc. Mr. Holmes is Chairman of the
Board of Directors and Chief Executive Officer of the Company.
Mr. Holmes serves on the Board of Directors, Messrs. Cooke and
Saltzman serve as advisory directors, and Mr. Sowell formerly served as a
director of Tanisys Technology, Inc., a developer, manufacturer and marketer
of computer peripheral equipment. Mr. Holmes also serves on the Compensation
Committee of Tanisys Technology, Inc.
23
<PAGE> 26
PERFORMANCE GRAPH
The Company's Common Stock has been traded publicly since August 5,
1996. Prior to such date, there was no established market for its Common
Stock. The following Performance Graph compares the Company's cumulative total
stockholder return on its Common Stock from August 5, 1996 (the first day which
the Common Stock was publicly traded), through November 28, 1997, with the
cumulative total return of the S&P 500 Index and a peer group over the same
period. The peer group is comprised of five hundred forty-eight (548) data
processing and computer companies with similar standard industrial
classification codes as the Company, and whose stock is traded on the Nasdaq
market. The graph assumes that the value of the investment in the Company's
Common Stock and each index was $100 at August 5, 1996, and that all dividends
were reinvested.
[CHART]
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, S&P 500 INDEX AND PEER GROUP
<TABLE>
<CAPTION>
Index for: 07/30/96 09/30/96 03/31/97 09/30/97 11/28/97
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
The Company 100.0 104.7 112.9 164.7 209.4
S&P 500 Stocks 100.0 104.5 116.3 147.1 148.8
Nasdaq Computer and Data Processing 100.0 109.4 105.6 148.0 148.7
Stocks
</TABLE>
The foregoing graph is based on historical data and is not necessarily
indicative of future performance. This graph shall not be deemed to be
"soliciting material" or to be "filed" with the Commission or subject to
Regulations 14A and 14C under the Exchange Act or to the liabilities of Section
18 under the Exchange Act.
24
<PAGE> 27
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires that the Company's directors,
executive officers and persons who own more than 10 percent of a registered
class of the Company's equity securities file with the Commission initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. Directors, executive officers and
greater than 10 percent stockholders are required by Commission regulations to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
the Section 16(a) reports furnished to the Company and written representations
that no other reports were required, during the fiscal year ended September 30,
1997, all Section 16(a) filing requirements applicable to its directors,
executive officers and greater than 10 percent beneficial owners were complied
with.
CERTAIN TRANSACTIONS
AGREEMENTS WITH USLD
On August 2, 1996, USLD distributed to its stockholders all of the
outstanding shares of Common Stock of the Company (the "Distribution"), which
was a wholly-owned subsidiary of USLD. In connection with the Spin-Off, the
Company and USLD entered into several agreements for the purpose of giving
effect to the Spin-Off and defining their ongoing relationship. The following
is a summary of certain agreements, arrangements and transactions between
Billing and USLD.
Distribution Agreement
Billing and USLD entered into the Distribution Agreement, which
provided for (i) certain of the principal corporate transactions required to
effect the Spin-Off; (ii) the Distribution; (iii) the division between Billing
and USLD of certain assets and liabilities; (iv) the sharing of the obligations
under certain warrants previously issued by USLD; and (v) certain other
agreements governing the relationship between Billing and USLD following the
Distribution. The agreements executed in connection with the Distribution
Agreement set forth certain specific allocations of liabilities between Billing
and USLD.
At the time of the Distribution, USLD had outstanding warrants to
purchase an aggregate of 225,000 shares of USLD Common Stock. USLD and Billing
have agreed that, in connection with the Distribution, if so elected by USLD,
Billing will assume its proportionate share of obligations represented by such
warrants such that each warrant will be exercisable for one share of USLD
Common Stock and one share of Billing Common Stock. Billing will be entitled
to receive a pro rata portion of the exercise price of such warrants (such pro
rata portion to be established by allocating the exercise price of the warrants
between the Billing Common Stock and the USLD common stock issuable upon
exercise of the warrants in accordance with their average per share price for
each of the ten consecutive trading days beginning on and including the
Distribution Date).
To avoid adversely affecting the intended tax consequences of the
Distribution and related transactions, the Distribution Agreement provides
that, until August 2, 1998, Billing must obtain an opinion of counsel
reasonably satisfactory to USLD or a supplemental tax ruling from the Internal
Revenue Service ("IRS") before Billing may make certain material dispositions
of its assets, engage in certain repurchases of Billing capital stock or cease
the active conduct of its business independently, with its own employees and
without material changes. Billing does not expect these limitations to inhibit
significantly its operations, growth opportunities or its ability to respond to
unanticipated developments. USLD must also obtain an opinion of counsel
reasonably satisfactory to Billing or a supplemental tax ruling from the IRS
before USLD may engage in similar transactions during such period.
The Distribution Agreement also provides that each of Billing and USLD
will be granted access to certain records and information in the possession of
the other, generally consisting of pre-Distribution, nonproprietary, non-
customer, noncompetitive related information, and requires the retention by
each of Billing and USLD for a period
25
<PAGE> 28
of ten years following the Distribution of all such information in its
possession, and thereafter requires that each party give the other prior notice
of its intention to dispose of such information. In addition, the Distribution
Agreement provides for the allocation of shared privileges with respect to
certain information and requires each of Billing and USLD to obtain the consent
of the other prior to waiving any shared privilege.
Because the terms of certain waivers and consents under USLD's and/or
Billing's, or their respective subsidiaries, debt agreements require that,
after the Distribution, USLD or Billing, and/or their respective subsidiaries,
each remain liable as a guarantor and continue to pledge security with respect
to certain indebtedness that cannot be economically separated under existing
arrangements and allocated to only USLD or only Billing prior to the
Distribution Date, each of USLD and Billing has agreed to pay annually to each
other a credit support fee equal to 1% per annum of the average monthly balance
of indebtedness guaranteed by one on behalf of the other for as long as such
guarantees continue after the Distribution Date.
Transitional Services and Sublease Agreement
USLD and Billing entered into the Transitional Services and Sublease
Agreement pursuant to which (i) USLD agreed to provide to Billing for six
months after the Spin-Off certain services requested by Billing for the conduct
of Billing's business, (ii) USLD subleased to Billing certain office space on a
month-to-month basis and certain other office space through March 31, 1997,
with Billing to share equally USLD's out-of-pocket costs on this space should
USLD be unable to sublease this space for the remainder of the term ending in
January 1998, and (iii) Billing agreed to provide to USLD for six months after
the Spin-Off certain services requested by USLD for the conduct of USLD's
business. The fee for USLD's services is based on a cost-plus basis or other
negotiated arms-length basis. The fee for Billing's services is based on a
cost-plus basis or other negotiated arms-length basis. The subleases are on
the same terms and conditions as the terms and conditions of the lease
agreements pursuant to which USLD leases such space from its landlord.
Billing Agreements
USLD and Billing entered into a Zero Plus - Zero Minus Billing and
Information Management Services Agreement (the "Zero Plus - Zero Minus Billing
Agreement") and a One Plus Billing and Information Management Services
Agreement (the "One Plus Billing Agreement"). Under these agreements, Billing
provides to USLD billing through local telephone companies for certain
qualifying "zero plus," "zero minus" and "one plus" direct dialed or operator
assisted station to station or person to person calls. USLD is charged for the
local telephone company's applicable fees, charges, chargebacks, credits and
adjustments as prescribed in the agreement between Billing and the local
telephone company, as well as billing service fees, charges, chargebacks,
credits and assessments of Billing. These charges are deducted from the
amounts payable to USLD for qualifying calls. Each agreement has an initial
term of three (3) years.
Telecommunications Agreement
USLD and Billing entered into a Telecommunications Agreement (the
"Telecommunications Agreement") whereby USLD provides to Billing certain direct
dial long distance and 800 services. The Telecommunications Agreement has a
three- year term and renews for an additional one year unless either party
notifies the other not less than 60 days prior to the termination date. In
addition, Billing has the right to terminate services under the
Telecommunications Agreement by providing written notice within 30 days of
Billing's intent to cancel services 60 days from notice.
Leasing Agreement
USLD and Billing entered into a Leasing Agreement (the "Leasing
Agreement") whereby USLD may elect to lease an airplane owned by Billing on an
hourly or volume usage basis.
26
<PAGE> 29
Policies and Procedures for Addressing Conflicts
The relationship between USLD and Billing presented certain conflict
situations for Parris H. Holmes, Jr., who served as Chairman of the Board of
USLD until June 2, 1996, and serves as Chairman of the Board and Chief
Executive Officer of Billing. Billing and USLD adopted appropriate policies
and procedures which were followed by the board of directors of each company to
limit the involvement of Mr. Holmes in conflict situations, including matters
relating to contractual relations or litigation between USLD and Billing.
Whether or not a material conflict of interest situation existed was determined
on a case by case basis depending on such factors as the dollar value of the
matter, the degree of personal interest of Mr. Holmes in the matter and a
likelihood that resolution of the matter had significant strategic, operational
or financial implications for the business of Billing or USLD. It was the
principal responsibility of the general counsel of each of Billing and USLD to
monitor this issue in consultation with USLD's or Billing's (as applicable)
board of directors. In the event that the board of directors of either company
was unable to reach a decision on a particular matter because of a split in the
board of directors, the vote of its outside disinterested directors controlled.
Billing believes such conflicts have been minimal.
On April 1, 1997, the Company made non-interest bearing loans to
Parris H. Holmes, Jr., Chairman of the Board and Chief Executive Officer of the
Company, and Alan W. Saltzman, President and Chief Executive Officer of the
Company, in the amounts of $1,400,000 and $310,000, respectively. Mr. Holmes
and Mr. Saltzman repaid the loans in their entirety on June 23, and July 11,
1997, respectively.
In June 1997, the Company acquired Computer Resources Management, Inc.
("CRM"), from Michael A. Harrelson, Senior Vice President and Chief Information
Officer of the Company. In connection with the acquisition of CRM, Mr.
Harrelson received consideration from the Company of $8,450,000 in cash,
325,000 shares of Common Stock (which such shares were valued at $8,450,000 at
the date of issuance) and the assumption of a debt from CRM to Mr. Harrelson in
the principal amount of $50,000. The Company paid such debt in December 1997.
PROPOSALS FOR NEXT ANNUAL MEETING
Any proposals of holders of Common Stock intended to be presented at
the Annual Meeting of Stockholders of the Company to be held in 1999 must be
received by the Company, addressed to the Secretary of the Company at 7411 John
Smith, Suite 200, San Antonio, Texas 78229, no later than September 20, 1998,
to be considered for inclusion in the Proxy Statement and form of proxy
relating to that meeting.
The Company's Amended and Restated Bylaws establish an advance notice
procedure with regard to stockholder proposals to be brought before an annual
or special meeting of stockholders (the "Business Procedure"). The Business
Procedure provides that stockholder proposals must be submitted in writing in a
timely manner in order to be considered at any annual or special meeting. To
be timely, notice must be received by Billing (i) in the case of an annual
meeting, not less than 90 days nor more than 120 days prior to the date of
Billing's proxy materials for the previous year's annual meeting, or (ii) in
the case of a special meeting, not less than the close of business on the
seventh day following the day on which notice of such meeting is first given to
stockholders.
Under the Business Procedure, notice relating to a stockholder
proposal must contain certain information about such proposal and about the
stockholder who proposes to bring the proposal before the meeting, including
(a) the name and address of the stockholder who intends to make the proposal
and the text of the proposal to be introduced; (b) the class and number of
shares of stock held of record, owned beneficially and represented by proxy by
such stockholder as of the record date for the meeting (if such date shall then
have been made publicly available) and as of the date of such notice; and (c) a
representation that the stockholder intends to appear in person or by proxy at
the meeting to introduce the proposal or proposals, specified in the notice.
No business shall be conducted at a meeting except business brought before the
annual meeting in accordance with the procedures set forth above. If the
Chairman or other officer presiding at a meeting determines that the
stockholder proposal was not properly brought before such meeting, such
proposal will not be introduced at such meeting. Nothing in the Business
Procedure will preclude discussion by any stockholder of any proposal properly
made or brought before an annual or special meeting in accordance with the
above- mentioned procedures.
27
<PAGE> 30
The provisions of the Business Procedure will be subject to rules of
the Commission with respect to stockholder proposals so long as the Common
Stock remains quoted on the NASDAQ National Market or is listed on a national
securities exchange or is otherwise required to be registered under the
Exchange Act. Any stockholder proposal that is submitted in compliance with
such rules and is required by such rules to be set forth in the proxy statement
of the Company will be so set forth despite the requirements of the Amended and
Restated Bylaws of the Company with respect to the timing and form of notice
for such proposals.
OTHER MATTERS
As of the date of this Proxy Statement, management does not intend to
present any other items of business and is not aware of any matters to be
presented for action at the Annual Meeting other than those described above.
However, if any other matters should come before the Annual Meeting, it is the
intention of the persons named as proxies in the accompanying proxy card to
vote in accordance with their best judgment on such matters.
By order of the Board of Directors,
Kelly E. Simmons
Corporate Secretary
San Antonio, Texas
January 28, 1998
28
<PAGE> 31
APPENDIX
In accordance with Rule 14a-3(c) under the Securities Exchange Act of 1934
(the "Exchange Act"), as adapted to the "Summary Annual Report" procedure, this
appendix and the information contained herein is provided solely for the
information of stockholders and the Securities and Exchange Commission. Such
information shall not be deemed to be "soliciting material" or to be "filed"
with the Commission or subject to Regulations 14A and 14C under the Exchange Act
(except as provided in Rule 14a-3) or to the liabilities of Section 18 of the
Exchange Act.
FORM 10-K
The Company's annual report on Form 10-K for the year ended September 30,
1997, has been filed with the Securities and Exchange Commission. A copy of this
report may be obtained without cost by writing the Company's investor relations
department at 7411 John Smith Drive, Suite 200, San Antonio, Texas 78229-4898,
or calling (210) 949-7000.
The information contained in this Appendix contains certain
"forward-looking" statements as such term is defined in the Private Securities
Litigation Reform Act of 1995 and information relating to the Company and its
subsidiaries that are based on the beliefs of the Company's management as well
as assumptions made by and information currently available to the Company's
management. When used in this report, the words "anticipate," "believe,"
"estimate," "expect" and "intend" and words or phrases of similar import, as
they relate to the Company or its subsidiaries or Company management, are
intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitations, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, seasonality, distribution
networks, product introductions and acceptance, technological change, changes in
industry practices, onetime events and other factors described herein and in
other filings made by the Company with the Securities and Exchange Commission.
Based upon changing conditions, should any one or more of these risks or
uncertainties materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not intend to update
these forward-looking statements.
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Subsequent to its spin-off from U.S. Long Distance Corp. effective August
2, 1996, the Company began trading as an independent public company. The
Company's common stock, par value $0.01 per share (the "Common Stock"), is
quoted on the Nasdaq National Market under the symbol "BILL." The table below
sets forth the high and low bid prices for the Common Stock from August 5, 1996,
through December 11, 1997, as reported by the Nasdaq National Market. These
price quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended September 30, 1996:
4th quarter (beginning August 5, 1996).................... $22 3/4 $16
Fiscal Year Ended September 30, 1997:
1st quarter............................................... $31 3/4 $24 1/4
2nd quarter............................................... $32 1/4 $24
3rd quarter............................................... $34 7/8 $21 3/8
4th quarter............................................... $39 1/8 $33 11/16
Fiscal Year Ending September 30, 1998:
1st quarter (through December 11, 1997)................... $47 1/8 $35 3/4
</TABLE>
29
<PAGE> 32
STOCKHOLDERS
At December 11, 1997, there were 16,314,082 shares of Common Stock
outstanding, held by 462 holders of record. The last reported sales price of the
Common Stock on December 11, 1997, was $44 3/4 per share.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company presently intends to retain all earnings for the operation
and development of its business and does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future. Furthermore, certain
covenants in various credit agreements of the Company prohibit the payment of
dividends on the Common Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company, the Notes thereto and other
financial information included in the Company's Annual Report on Form 10-K for
the year ended September 30, 1997, and the Appendix to this Proxy Statement.
For purposes of the following discussion, references to yearly periods
refer to the Company's fiscal years ended September 30.
GENERAL
On August 2, 1996, U.S. Long Distance Corp. ("USLD") distributed to its
stockholders all of the outstanding shares of common stock of the Company (the
"Distribution") which, prior to the Distribution, was a wholly-owned subsidiary
of USLD. Upon the completion of the Distribution, Billing Information Concepts
Corp. ("BIC") became an independent, publicly held company that owns and
operates the billing clearinghouse and information management services business
previously owned by USLD (see "Pro Forma Results of Operations" below).
RESULTS OF OPERATIONS
The following table presents certain items in the Company's Consolidated
Statements of Income as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Operating revenues.......................................... 100.0% 100.0% 100.0%
Cost of revenues............................................ 62.4 64.4 63.5
----- ----- -----
Gross profit................................................ 37.6 35.6 36.5
Selling, general and administrative expenses................ 11.0 11.0 11.5
Research and development.................................... 0.6 0.0 0.0
Advance funding program income.............................. (5.9) (6.3) (5.7)
Advance funding program expense............................. 0.6 1.3 1.7
Depreciation and amortization expense....................... 3.1 2.0 1.5
Special charges............................................. 17.3 0.0 0.0
----- ----- -----
Income from operations...................................... 10.9 27.6 27.5
Other income, net........................................... 0.5 0.1 0.7
----- ----- -----
Income before provision for income taxes.................... 11.4 27.7 28.2
Provision for income taxes.................................. (8.4) (10.5) (10.7)
----- ----- -----
Net income.................................................. 3.0% 17.2% 17.5%
===== ===== =====
</TABLE>
30
<PAGE> 33
Operating Revenues
The Company's revenues are primarily derived from the provision of billing
clearinghouse and information management services to direct dial long distance
carriers and operator services providers ("Local Exchange Carrier billing" or
"LEC billing"). Revenues are also derived from enhanced billing services
provided to companies that offer 900 services or other non-regulated
telecommunications equipment and services. Effective June 1, 1997, the Company
acquired Computer Resources Management, Inc. ("CRM"), a company that develops
software systems for the direct billing of telecommunications services. As a
result of this acquisition, the Company also develops, licenses, and supports
billing systems for telecommunications service providers and provides direct
billing services through a service bureau operation. LEC billing fees charged by
the Company include processing and customer service inquiry fees. Processing
fees are assessed to customers either as a fee charged for each telephone call
record or other transaction processed or as a percentage of the customer's
revenue that is submitted by the Company to local telephone companies for
billing and collection. Processing fees also include any charges assessed to the
Company by local telephone companies for billing and collection services that
are passed through to the customer. Customer service inquiry fees are assessed
to customers either as a fee charged for each record processed by the Company or
as a fee charged for each billing inquiry made by end-users.
Total revenues for 1997 were $122.8 million compared to $103.9 million in
1996 and $80.8 million in 1995, representing increases of 18.2% and 28.5%,
respectively. LEC billing services revenues increased 15.9% to $120.5 million in
1997 from $103.9 million in the prior year. The remaining increase in revenues
from 1996 to 1997 was attributable to billing systems sales and related services
revenues. The LEC billing services revenue increases are primarily attributable
to an increase in the number of telephone call records processed and billed on
behalf of direct dial long distance customers. Direct dial long distance billing
services revenues have exceeded prior period revenues on a quarterly basis since
the inception of this business in 1993. From 1993 through 1996, revenues derived
from operator services customers have been relatively flat. This lack of
operator services growth was attributable to several factors, including
increased regulation and an increased awareness on the part of the consumer of
the ability of the telephone user to select a carrier of choice by dialing
access codes of carriers other than the carrier contracted by the telephone
owner, resulting in a lower number of billable telephone calls generated by the
Company's customers. In 1997, the number of zero telephone call records
processed increased from the prior year primarily due to records billed on
behalf of a certain Regional Bell Operating Company. Although the total revenue
increase in 1996 from the prior year was partly due to the growth of enhanced
billing services revenues, 1997 revenues from enhanced billing services were
consistent with those of the prior year. Management believes that such revenues
do not represent a significant growth opportunity in the future.
Telephone call record volumes (exclusive of records processed for billing
management customers) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1995 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Direct dial long distance services.......................... 510.3 402.8 252.0
Operator services........................................... 133.4 131.8 138.0
Enhanced billing services................................... 9.6 8.6 4.4
</TABLE>
Revenue per record for billing management customers, who have their own
billing and collection agreements with the local telephone companies, is
significantly less than revenue per record for the Company's other customers,
and thus, the volume of records processed for billing management customers is
not presented in the table above.
Cost of Revenues
Cost of revenues includes billing and collection fees charged to the
Company by local telephone companies and related transmission costs, as well as
all costs associated with the customer service organization, including staffing
expenses and costs associated with telecommunications services. Billing and
31
<PAGE> 34
collection fees charged by the local telephone companies include fees that are
assessed for each record submitted and for each bill rendered to its end-user
customers. The Company achieves discounted billing costs due to its aggregated
volumes and can pass these discounted costs on to its customers. Cost of
revenues also includes the cost of computer hardware and software sold, and the
salaries and benefits of software development, technical, service bureau and
client service personnel who generate revenue from hourly billings.
Gross profit margin of 37.6% reported for 1997 compares to 35.6% achieved
in 1996 and 36.5% achieved in 1995. The improvement from 1996 to 1997 is due
primarily to lower customer service and telecommunications services costs, which
were offset partially by higher transmission costs. The addition of sales of
billing systems and related services revenues in late 1997 also served to
improve gross margin due to the higher margins associated with systems sales.
The lower customer service costs were attributable to efficiencies resulting
from the implementation of an automated voice response system. The lower
telecommunications costs were due to a price decrease from the Company's vendor
as well as savings associated with the voice response system. The decrease in
gross profit margin from 1995 to 1996 is attributable to higher customer service
costs that were partially offset by lower billing and collection fees as a
percentage of revenues. The higher customer service costs were due to increased
telecommunications services usage and staffing expenses incurred by the Company
in order to support the rapid growth in the volume of customer inquiries
resulting from the significant growth in the number of records processed. The
lower billing and collection fees as a percentage of revenues were the results
of growth of the Company's direct dial long distance business as such call
records cost less per record to bill than other types of records. The Company's
gross profit margin could increase in subsequent periods as a result of the
addition of higher gross margin billing systems sales and related services
revenues.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses are comprised of all
selling, marketing and administrative costs incurred in direct support of the
business operations of the Company. Additionally, a portion of the expense of
certain USLD corporate functions, such as treasury, financial reporting,
investor relations, legal, payroll and management information systems has been
allocated to the Company and is reflected in its historical operating results
for 1996 and 1995.
SG&A expenses for 1997 were $13.6 million, compared to $11.4 million in
1996, both representing 11.0% of revenues, and $9.3 million in 1995, or 11.5% of
revenues. SG&A expenses as a percentage of revenues for 1996 decreased from the
prior year primarily as a result of efficiencies associated with significant
revenue growth.
Research and Development
Research and development expenses are comprised of the salaries and
benefits of the employees involved in software development and related expenses.
In 1997, the Company commenced internally funded research and development
activities with respect to efforts to offer "invoice ready" billing services.
During the third quarter of 1997, the Company also acquired a software
development company that was actively involved in ongoing research and
development efforts associated with creating new and enhanced products related
to its convergent billing software platform. Consequently, research and
development expenses in 1997 were $688,000. The Company intends to continue its
research and development efforts in the future and anticipates spending from $3
to $5 million during 1998 for such expenses.
Advance Funding Program Income and Expense
Advance funding program income was $7.3 million in 1997 compared with $6.6
million in 1996 and $4.6 million in 1995. The year-to-year increases were
primarily the result of financing a higher level of customer receivables under
the Company's advance funding program (see "Advance Funding Program and
Receivable Financing Facility" below). The quarterly average balance of
purchased receivables was $73.6 million, $60.9 million and $51.1 million in
1997, 1996 and 1995, respectively. Advance funding program income
32
<PAGE> 35
may decrease in subsequent periods due to a number of customers that are
expected to discontinue participating in the program.
Advance funding program expense was $700,000 in 1997, compared with $1.4
million in both 1996 and 1995. In addition to declining from 1996 to 1997,
advance funding program expense in 1997 and 1996 declined relative to advance
funding program income reported in the respective years. These decreases were
primarily attributable to the Company financing a higher level of customer
receivables with internally generated funds rather than with funds borrowed
through the Company's revolving credit facility. Cost savings were also realized
from the more favorable terms of its new credit facility.
Depreciation and Amortization
Depreciation and amortization expenses are incurred with respect to certain
assets, including computer hardware, software, office equipment, furniture,
leasehold improvements, costs incurred in securing contracts with local
telephone companies, goodwill and other intangibles. Asset lives range between
three and fifteen years.
Depreciation and amortization expense was $3.8 million in 1997 compared
with $2.1 million in 1996 and $1.2 million in 1995. Depreciation and
amortization expense as a percentage of revenues was 3.1%, 2.0% and 1.5%, in
1997, 1996 and 1995, respectively. The increase in the percentage of revenues
from year to year is attributable to increased capital expenditures made in
order to provide the infrastructure needed to support the growth of the
Company's employee base and the anticipated expansion of the Company's business.
These expenditures included the purchase of office furniture, computer equipment
and software and, during 1997, investments in leasehold improvements in
connection with the Company taking occupancy of a new facility that serves as
both a customer service center and the corporate headquarters of the Company.
During 1997, the Company recognized $205,000 of amortization expense with
respect to goodwill and other intangibles acquired in connection with the
acquisition of CRM.
Income from Operations
Income from operations was $13.4 million, $28.6 million and $22.3 million
in 1997, 1996 and 1995, respectively. Income from operations decreased from 1996
to 1997, due to special charges of $21.3 million in the third quarter of 1997.
The $21.3 million charge includes in-process research and development costs of
$13.0 million acquired in connection with the acquisition of CRM. The remaining
$8.3 million represents accumulated costs associated with the development of a
direct billing system for a service bureau operation. The Company abandoned this
development during the third quarter of 1997. Income from operations, exclusive
of special charges, represented 28.2%, 27.6% and 27.5% of revenues in 1997, 1996
and 1995, respectively. The improvement in income from operations, exclusive of
special charges, as a percentage of revenues from 1996 to 1997 is attributable
to a higher gross profit margin and higher net advance funding income as a
percentage of revenues, offset partly by higher depreciation expenses as a
percentage of revenues and research and development expenses incurred in 1997.
Income from operations as a percentage of revenues improved from 1995 to 1996
due to higher net advance funding income and lower SG&A expenses as a percentage
of revenues, but this improvement was partially offset by a lower gross profit
margin and higher depreciation expenses as a percentage of revenues.
Other Income
Net other income of $552,000 in 1997 compares to net other income of
$152,000 in 1996 and $526,000 in 1995. The increase from 1996 to 1997, and the
decrease from 1995 to 1996, were both primarily due to a loss of $376,000
recognized in 1996 on the disposition of assets that were determined to be
obsolete, including certain assets that were transferred to the Company from
USLD as a result of the Distribution.
Income Taxes
The Company's effective tax rate was 73.5% in 1997 and 38.0% in both 1996
and 1995. The Company's effective tax rate is higher than the federal statutory
rate due to the addition of state income taxes and certain
33
<PAGE> 36
deductions taken for financial reporting purposes that are not deductible for
federal income tax purposes. The increase in the effective rate for 1997 is
primarily due to nondeductible in-process research and development costs and
amortization expenses related to the acquisition of CRM. Exclusive of special
charges, the Company's effective tax rate would have been 38.0% in 1997.
PRO FORMA RESULTS OF OPERATIONS
The audited Consolidated Statements of Income included in this report
reflect the operations of the Company for the years ended September 30, 1997,
1996 and 1995. Included below is supplemental unaudited consolidated pro forma
financial information that management believes is important to provide an
understanding of the results of operations of the Company. Pro Forma Condensed
Consolidated Statements of Income are presented below on an annual basis for
1997, 1996 and 1995. These Pro Forma Condensed Consolidated Statements of Income
are based on the historical statements of the periods presented adjusted to
reflect the items discussed in the accompanying notes to the pro forma financial
statements. The Pro Forma Condensed Consolidated Statements of Income for 1996
and 1995 give effect to the Distribution as if it had occurred at the beginning
of each year. The Pro Forma Condensed Consolidated Statements of Income for 1997
include the results of operations for CRM since June 1, 1997, the effective date
of acquisition.
The unaudited consolidated pro forma financial information is presented for
informational purposes only and should be read in conjunction with the
accompanying notes to the pro forma financial statements and with the Company's
historical financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" set forth herein
and in the Post Effective Amendment No. 2 to the Company's Registration
Statement on Form 10/A dated August 1, 1996. The pro forma financial statements
should not be considered indicative of the operating results that the Company
will achieve in the future because, among other things, these statements are
based on historical rather than prospective information and include certain
assumptions that are subject to change.
The unaudited Pro Forma Condensed Consolidated Statements of Income
reflect, in management's opinion, all adjustments necessary to fairly state the
pro forma results of operations for the periods presented to make the unaudited
pro forma statements not misleading.
34
<PAGE> 37
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------------------
AS
REPORTED
AS REPORTED WITHOUT
WITH SPECIAL SPECIAL
CHARGES CHARGES(B)
------------ ----------
1997 1997 1996 1995
------------ ---------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues................................ $122,836 $122,836 $103,884 $80,847
Cost of revenues.................................. 76,662 76,662 66,868 51,337
-------- -------- -------- -------
Gross profit...................................... 46,174 46,174 37,016 29,510
Selling, general and administrative expenses...... 13,565 13,565 11,445 9,272
Research and development.......................... 688 688 0 0
Advance funding program income.................... (7,255) (7,255) (6,564) (4,582)
Advance funding program expense(A)................ 688 688 2,760 3,075
Depreciation and amortization expense............. 3,797 3,797 2,127 1,216
Special Charges................................... 21,252 0 0 0
-------- -------- -------- -------
Income from operations............................ 13,439 34,691 27,248 20,529
Other income, net................................. 552 552 152 526
-------- -------- -------- -------
Income before provision for income taxes.......... 13,991 35,243 27,400 21,055
Provision for income taxes(C)..................... (10,284) (13,381) (10,411) (8,005)
-------- -------- -------- -------
Net income........................................ 3,707 $ 21,862 $ 16,989 $13,050
======== ======== ======== =======
Net income per common share....................... $ 0.23 $ 1.33 $ 1.10 $ 0.89
Weighted average common shares and common share
equivalents outstanding(D)...................... 16,259 16,488 15,385 14,587
</TABLE>
Notes to unaudited pro forma condensed consolidated statements of income:
(A) Reflects an adjustment to increase interest expense for the assumed
borrowings for the cash transfer made to USLD of $11,713,000 in accordance
with the terms of the Distribution Agreement and cash payments for direct
costs incurred in connection with the Distribution of approximately
$9,200,000. Interest expense was calculated at a rate of 8.0% and 8.25% per
annum for 1996 and 1995, respectively.
(B) Excludes special charges of $21,252,000 representing in-process research and
development costs of $13.0 million acquired in connection with the
acquisition of CRM and $8.3 million of accumulated costs associated with the
development of a direct billing system that was abandoned by the Company.
(C) Reflects related income tax effect of the adjustments in notes (A) and (B)
(D) The number of weighted average shares outstanding for 1996 and 1995 gives
effect to the shares assumed to be issued had the Distribution occurred at
the beginning of each year. The number of weighted average shares
outstanding for 1997 as reported without special charges explained in note
(B) gives effect to the net income that would have been recognized during
the third quarter of 1997 had the special charges not been incurred.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $41.4 million at September 30,
1997, from $34.1 million at September 30, 1996. Large fluctuations in daily cash
balances are normal due to the large amount of customer receivables that the
Company collects on behalf of its customers. The Company's working capital
position increased to $27.6 million at September 30, 1997, from $13.5 million at
September 30, 1996, and its current ratio was 1.2:1 and 1.1:1 at September 30,
1997 and 1996, respectively. Net cash provided by operating
35
<PAGE> 38
activities was $31.1 million, $26.0 million and $14.3 million in 1997, 1996 and
1995, respectively, and reflected the increases in net income from 1995 to 1997,
exclusive of special charges.
In December 1996, the Company obtained a new $50.0 million revolving line
of credit facility with certain lenders primarily to draw upon to advance funds
to its billing customers prior to collection of the funds from the local
telephone companies. This new credit facility terminates on December 20, 1999,
and provides the Company with more favorable terms than those of the Company's
previous credit facility. Borrowings under the credit facility are limited to a
portion of the Company's eligible receivables. Management believes that the
capacity under the credit facility will be sufficient to fund advances to its
billing customers for the foreseeable future. The amount borrowed by the Company
under its credit facility to finance the advance funding program was $0 and
$19.0 million at September 30, 1997 and 1996, respectively. At September 30,
1997, the amount available under the Company's credit facility was $50.0
million.
In addition to the revolving line of credit facility described above, the
Company is obligated as a guarantor of USLD's equipment financing agreements
with certain lenders. The aggregate unpaid principal amount of indebtedness
under such agreements at September 30, 1997 was approximately $7.2 million, due
in varying amounts through October 2000. Under certain of its credit agreements,
the Company is prohibited from paying dividends on its common stock, is required
to comply with certain financial covenants and is subject to certain limitations
on the issuance of additional secured debt. Cross-default provisions of certain
of the Company's equipment loans may place the Company in default of such loans
in the event that USLD defaults under the equipment finance agreements that the
Company has guaranteed. The Company was in compliance with all required
covenants at September 30, 1997.
Capital expenditures amounted to approximately $17.6 million in 1997 and
related primarily to the purchase of computer equipment and software. During
1997, the Company financed approximately $4.1 million of equipment through term
debt agreements with two separate lenders. The Company anticipates spending
approximately $12 million over the next twelve months, including expenditures
for local telephone company agreements that will enable it to offer "invoice
ready" billing services. The Company believes that it will be able to fund
expenditures with internally generated funds and borrowings, but there can be no
assurance that such funds will be available or expended.
Effective June 1, 1997, the Company acquired Computer Resources Management,
Inc. ("CRM"), a company that develops software systems for the direct billing of
telecommunications services. An aggregate of $8.5 million cash and 325,000
shares of the Company's common stock were issued in connection with this
purchase transaction. Of these shares, 65,000 were deposited in an escrow
account to satisfy certain indemnification obligations. All of the shares
related to the acquisition have been included in the weighted average shares
outstanding for purposes of the earnings per share calculations. During the
third quarter of 1997, the Company expensed $13.0 million of in-process research
and development costs acquired from the acquisition. The Company granted certain
registration rights to and entered into an employment agreement with the
principal of CRM.
The Company's operating cash requirements consist principally of working
capital requirements, requirements under its advance funding program, scheduled
payments of principal on its outstanding indebtedness and capital expenditures.
The Company believes that it has the ability to continue to secure long-term
equipment financing and that this ability, combined with cash flows generated
from operations and periodic borrowings under its receivable financing facility,
will be sufficient to fund capital expenditures, advance funding requirements,
working capital needs and debt repayment requirements for the foreseeable
future.
ADVANCE FUNDING PROGRAM AND RECEIVABLE FINANCING FACILITY
Since it generally takes 40 to 90 days to collect receivables from the
local telephone companies, customers can significantly accelerate cash receipts
by utilizing the Company's advance funding program. The Company offers
participation in this program to qualifying customers through its Advance
Payment Agreement. Under the terms of this agreement, the Company purchases the
customer's accounts receivable for an amount equal to the face amount of the
billing records submitted to the local telephone companies by
36
<PAGE> 39
the Company for billing and collection, less certain deductions. The purchase
price is remitted by the Company to its customers in two payments.
Within five days from receiving a customer's records, an initial payment is
made to the customer based on a percentage of the value of the customer's call
records submitted to the local telephone companies. This percentage is
established by the Advance Payment Agreement and generally ranges between 50%
and 80%. The Company pays the remaining balance of the purchase price upon
collection of funds from the local telephone companies. A portion of the funds
used to make the advance payments may be borrowed under the Company's revolving
line of credit facility. The amount borrowed by the Company under this credit
facility to finance the advance funding program was $0 and $19.0 million at
September 30, 1997 and 1996, respectively.
Service fees charged to customers by the Company are recorded as Advance
Funding Program Income and are computed at a rate above the prime rate on the
amount of advances (initial payments) outstanding to a customer during the
period commencing from the date the initial payment is made until the Company
recoups the full amount of the initial payment from local telephone companies.
The rate charged to the customer by the Company is higher than the interest rate
charged to the Company, in part to cover the administrative expenses incurred in
providing this service. Borrowing costs are computed at a rate below the prime
interest rate and are based on the amount of borrowings outstanding during the
period commencing from the date the funds are borrowed until the loan is repaid
by the Company. Borrowing costs are recorded as Advance Funding Program Expense.
The result of these financing activities is the generation of a net amount of
Advance Funding Program Income that contributes to the net income of the
Company.
As part of the Advance Payment Agreement, the Company contractually
purchases the customer accounts receivable upon which funds are advanced.
Further, the customer may grant a first lien security interest in other customer
accounts and assets and will take other action as may be required to perfect the
Company's first lien security interest in such assets. Under the terms of the
credit facility agreement, the Company is obligated to repay amounts borrowed
whether or not the purchased accounts receivable are actually collected.
SEASONALITY
To some extent, the revenues and telephone call record volumes of most
customers of the Company are affected by seasonality. For example, the Company's
direct dial long distance customers use the Company's services primarily to bill
residential accounts, which typically generate a higher traffic volume around
holidays, particularly Thanksgiving, Christmas and New Year's Day. As a result
of this seasonal variation, direct dial long distance telephone call record
volumes processed by the Company during the Company's first and second fiscal
quarters ending December 31 and March 31, respectively, (which include the
Thanksgiving, Christmas and New Year's Day holidays), historically have been the
highest level of any quarter of the year after adjusting for new business.
Consequently, revenues reported by the Company that are derived from direct dial
long distance telephone call records are similarly affected. The seasonal effect
caused by the Company's direct dial long distance customers has been lessened,
however, as a result of the Company's business from operator services customers.
Typically, the Company's operator services customers experience decreases in
operator services revenues and telephone call record volumes in the fall and
winter months as pay telephone usage declines due to cold and inclement weather
in many parts of the United States. Conversely, due to increased traffic from
pay telephones during the spring and summer months, the Company has historically
processed its highest volumes of operator services telephone call records and
reported its highest operator services-related revenues in the third and fourth
quarters of the fiscal year. The billing revenues derived from operator services
customers have mitigated the seasonal effects of the revenues derived from the
Company's direct dial long distance customers.
EFFECT OF INFLATION
Inflation is not a material factor affecting the Company's business. Prices
charged to the Company by local telephone companies and third-party vendors for
billing, collection and transmission services have not
37
<PAGE> 40
increased significantly during the past year. General operating expenses such as
salaries, employee benefits and occupancy costs are, however, subject to normal
inflationary pressures.
NEW ACCOUNTING STANDARDS
Management of the Company does not anticipate the adoption of any new
standards recently issued by the Financial Accounting Standards Board will have
a material impact on the Company's financial position or results of operations.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and the related report
of the Company's independent public accountants thereon are included in this
Appendix at the page indicated.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 39
Consolidated Balance Sheets at September 30, 1997 and
1996...................................................... 40
Consolidated Statements of Income for the Years Ended
September 30, 1997, 1996 and 1995......................... 41
Consolidated Statements of Stockholders' Equity for the
Years Ended September 30, 1997, 1996 and 1995............. 42
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995......................... 43
Notes to Consolidated Financial Statements.................. 44
</TABLE>
38
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Billing Information Concepts Corp.:
We have audited the accompanying consolidated balance sheets of Billing
Information Concepts Corp. (a Delaware corporation) and subsidiaries as of
September 30, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Billing Information Concepts
Corp. and subsidiaries as of September 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
November 14, 1997
39
<PAGE> 42
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 41,444 $ 34,135
Accounts receivable, net of allowance for doubtful
accounts of $138 (1997) and $0 (1996).................. 25,919 17,707
Purchased receivables..................................... 70,175 70,920
Prepaids and other........................................ 3,196 883
-------- --------
Total current assets.............................. 140,734 123,645
Property and equipment.................................... 22,906 11,403
Less accumulated depreciation and amortization............ (4,750) (2,023)
-------- --------
Net property and equipment........................ 18,156 9,380
Equipment held under capital leases, net of accumulated
amortization of $964 (1997) and $482 (1996)............ 606 3,519
Other assets, net of accumulated amortization of $1,680
(1997) and $1,190 (1996)............................... 7,516 1,238
-------- --------
Total assets...................................... $167,012 $137,782
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 19,223 $ 12,743
Accounts payable -- billing customers..................... 75,166 58,525
Accrued liabilities....................................... 17,728 18,338
Revolving line of credit for purchased receivables........ 0 19,010
Current portion of long-term debt......................... 606 603
Current portion of obligations under capital leases....... 441 896
-------- --------
Total current liabilities......................... 113,164 110,115
Long-term debt, less current portion...................... 2,324 2,370
Obligations under capital leases, less current portion.... 290 2,666
Deferred income taxes..................................... 2,048 0
Other liabilities......................................... 499 0
-------- --------
Total liabilities................................. 118,325 115,151
Commitments and contingencies (See Notes 4 and 11)
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding at
September 30, 1997 or 1996............................. 0 0
Common stock, $0.01 par value, 60,000,000 shares
authorized, 16,197,585 shares issued and outstanding at
September 30, 1997; 15,045,709 shares issued and
outstanding at September 30, 1996...................... 162 151
Additional paid-in capital................................ 43,078 19,790
Retained earnings......................................... 6,397 2,690
Deferred compensation..................................... (950) 0
-------- --------
Total stockholders' equity........................ 48,687 22,631
-------- --------
Total liabilities and stockholders' equity........ $167,012 $137,782
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE> 43
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Operating revenues.......................................... $122,836 $103,884 $80,847
Cost of revenues............................................ 76,662 66,868 51,337
-------- -------- -------
Gross profit................................................ 46,174 37,016 29,510
Selling, general and administrative expenses................ 13,565 11,445 9,272
Research and development.................................... 688 0 0
Advance funding program income.............................. (7,255) (6,564) (4,582)
Advance funding program expense............................. 688 1,367 1,351
Depreciation and amortization expense....................... 3,797 2,127 1,216
Special charges (See Note 6)................................ 21,252 0 0
-------- -------- -------
Income from operations...................................... 13,439 28,641 22,253
Other income (expense):
Interest income............................................. 989 938 883
Interest expense............................................ (493) (287) (188)
Other, net.................................................. 56 (499) (169)
-------- -------- -------
Total other income, net........................... 552 152 526
-------- -------- -------
Income before provision for income taxes.................... 13,991 28,793 22,779
Provision for income taxes.................................. (10,284) (10,941) (8,661)
-------- -------- -------
Net income.................................................. $ 3,707 $ 17,852 $14,118
======== ======== =======
Primary:
Net income per common share................................. $ 0.23 -- --
Pro forma net income per common share
(Unaudited -- See Note 2)................................. -- $ 1.16 $ 0.97
Weighted average common shares and common share equivalents
outstanding............................................... 16,259 -- --
Pro forma weighted average common shares and common share
equivalents outstanding (Unaudited -- See Note 2)......... -- 15,385 14,587
Fully diluted:
Net income per common share................................. $ 0.22 -- --
Pro forma net income per common share
(Unaudited -- See Note 2)................................. -- $ 1.15 $ 0.97
Weighted average common shares and common share equivalents
outstanding............................................... 16,627 -- --
Pro forma weighted average common shares and common share
equivalents outstanding (Unaudited -- See Note 2)......... -- 15,527 14,617
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE> 44
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
USLD'S
INVESTMENT IN
PREFERRED STOCK COMMON STOCK AND ADDITIONAL
--------------- ---------------- ADVANCES TO PAID-IN DEFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT BIC CAPITAL COMPENSATION EARNINGS
------ ------ ------- ------ ------------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1994......... 10 $100 102 $ 1 $ 13,001 $ 0 $ 0 $ 0
Transfers to affiliates................ 0 0 0 0 (5,997) 0 0 0
Net income............................. 0 0 0 0 14,118 0 0 0
--- ---- ------ ---- -------- ------- ------- ------
Balances at September 30, 1995......... 10 100 102 1 21,122 0 0 0
Transfers (to) from affiliates......... 0 0 (102) (1) 2,850 (15,448) 0 0
Redemption of preferred stock.......... (10) (100) 0 0 (3,900) 0 0 0
Issuance of common stock in connection
with Distribution (See Note 2)....... 0 0 15,032 151 (35,234) 35,083 0 0
Exercise of stock options.............. 0 0 14 0 0 155 0 0
Net income............................. 0 0 0 0 15,162 0 0 2,690
--- ---- ------ ---- -------- ------- ------- ------
Balances at September 30, 1996......... 0 0 15,046 151 0 19,790 0 2,690
Issuance of common stock............... 0 0 343 3 0 9,834 0 0
Exercise of stock options and
warrants............................. 0 0 809 8 0 11,964 0 0
Issuance of stock options.............. 0 0 0 0 0 1,490 (1,490) 0
Compensation expense................... 0 0 0 0 0 0 540 0
Net income............................. 0 0 0 0 0 0 0 3,707
--- ---- ------ ---- -------- ------- ------- ------
Balances at September 30, 1997......... 0 $ 0 16,198 $162 $ 0 $43,078 $ (950) $6,397
=== ==== ====== ==== ======== ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE> 45
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,707 $ 17,852 $14,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 3,797 2,127 1,216
Deferred compensation................................ 540 10 18
Loss on disposition of equipment..................... 141 376 0
Special charges...................................... 21,252 0 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable........ (7,445) 406 (5,445)
Increase in prepaids and other.................... (1,538) (259) (550)
Increase in trade accounts payable................ 6,450 139 4,856
Increase in accrued liabilities................... 3,695 5,403 81
Increase (decrease) in other liabilities.......... 499 (21) (35)
-------- -------- -------
Net cash provided by operating activities................... 31,098 26,033 14,259
Cash flows from investing activities:
Purchases of property and equipment....................... (17,578) (6,679) (1,922)
Purchase of software development company, net of cash
acquired............................................... (8,403) 0 0
Collections of (payments for) purchased receivables,
net.................................................... 745 (15,692) (1,881)
Collections of proceeds due (payments made) to billing
customers, net......................................... 15,541 23,769 (2,239)
Collections of sales taxes due on behalf of billing
customers, net......................................... 2,136 743 6,818
Proceeds from sale of equipment........................... 127 0 0
Other investing activities................................ (1,001) (207) (792)
-------- -------- -------
Net cash provided by (used in) investing activities......... (8,433) 1,934 (16)
Cash flows from financing activities:
Payments on revolving line of credit for purchased
receivables, net....................................... (19,010) (4,020) (2,205)
Proceeds from issuance of long-term debt.................. 4,091 1,937 917
Payments on long-term debt................................ (4,184) (688) (148)
Payments on capital leases................................ (2,831) (436) (230)
Proceeds from issuance of common stock.................... 6,578 96 0
Transfers to affiliates................................... 0 (17,491) (6,549)
-------- -------- -------
Net cash used in financing activities....................... (15,356) (20,602) (8,215)
-------- -------- -------
Net increase in cash and cash equivalents................... 7,309 7,365 6,028
Cash and cash equivalents, beginning of year................ 34,135 26,770 20,742
-------- -------- -------
Cash and cash equivalents, end of year...................... $ 41,444 $ 34,135 $26,770
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE> 46
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 1. BUSINESS ACTIVITY
Billing Information Concepts Corp. ("BIC") was incorporated in the State of
Delaware in 1996. BIC was previously a wholly-owned subsidiary of U.S. Long
Distance Corp. ("USLD") that, upon its spin-off from USLD, became an
independent, publicly held company. BIC and its subsidiaries (collectively, the
"Company") primarily provide billing clearinghouse and information management
services in the United States to the telecommunications industry. In addition to
processing call records, the Company provides a wide range of back office
services including customer service, data processing, tax filings, accounting
services and an advance funding program. The Company also develops, licenses and
supports billing systems for telecommunications service providers and provides
direct billing services.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
BIC and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
On August 2, 1996 (the "Distribution Date"), USLD distributed all of the
outstanding common stock of BIC, pro rata to the stockholders of USLD (the
"Distribution") with the result being that BIC became an independent, publicly
held company that owns and operates all of the assets of, and is responsible for
all of the liabilities associated with, the billing clearinghouse and
information management services business previously owned by USLD. The
accompanying financial statements include the operations of BIC which, until the
Distribution, were combined with and reported as part of the consolidated
financial statements of USLD. Immediately prior to the Distribution, BIC
canceled all of USLD's intercompany payable owed to BIC. In recognition of this,
the balance of the intercompany receivable from USLD has been combined with and
included in the balance sheet caption entitled "USLD's investment in and
advances to BIC." All stockholder equity account balances, except for the par
value of BIC common stock, have also been reported as "USLD's investment in and
advances to BIC."
Certain selling, general and administrative expenses of USLD were
historically accounted for on a consolidated basis with no allocation to
individual subsidiaries. The historical statements of BIC have been adjusted to
include all of the expenses that appropriately and fairly could have been
allocated to BIC except for the income taxes. USLD's federal income taxes have
historically been determined on a consolidated basis. For purposes of preparing
the BIC historical consolidated financial statements, income taxes have been
determined on a separate company basis. Deferred taxes have been recorded on
BIC's consolidated financial statements, as appropriate. Tax assets and
liabilities are reflected in a manner consistent with the Tax Sharing Agreement
between USLD and BIC.
For purposes of preparing BIC's consolidated financial statements, certain
amounts that were previously classified as operating revenues, cost of revenues,
selling, general and administrative expenses, and other income (expense) have
been reclassified. Certain intercompany transactions that had been eliminated in
consolidation are properly reflected in the historical consolidated financial
statements of BIC at amounts that are believed by management to reflect an
arm's-length relationship. Certain prior period amounts have been reclassified
for comparative purposes.
Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
44
<PAGE> 47
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Revenue Recognition Policies
The Company recognizes revenue from its billing services when records that
are to be billed and collected by the Company are processed. Revenue from the
sale of billing systems, including the licensing of software rights, is
recognized at the time that the product is delivered to the customer, provided
that the Company has no significant related obligations or collection
uncertainties remaining. If there are significant obligations related to the
installation or development of the system delivered, revenue is recognized in
the period that the Company fulfills its obligations. Services revenue related
to the Company's billing systems is recognized in the period that the services
are provided.
Billing Services
The Company provides billing services to operator services providers and
direct dial long distance companies through billing agreements with the local
telephone companies, which maintain the critical database of end-user names and
addresses of the billed parties. Bills are generated by the local telephone
companies and the collected funds are remitted to the Company, which in turn
remits these funds, net of fees, to its billing customers. The Company records a
trade accounts receivable and operating revenue for fees charged for its billing
services. When the customer's receivables are collected by the Company from the
local telephone companies, the Company's trade receivables are reduced by the
amount corresponding to the Company's processing fees and the remaining funds
are recorded as an accounts payable to billing customers.
The Company offers participation in an advance funding program to
qualifying customers through its Advance Payment Agreement. Under the terms of
this agreement, the Company purchases the customer's accounts receivable for an
amount equal to the face amount of the billing records submitted to the local
telephone companies by the Company for billing and collection less:
- all local telephone company charges, rejects, unbillables and bad debt
deductions;
- all credits and adjustments granted to end-users;
- all of the Company's processing fees and sales taxes, if appropriate;
- all financing service charges assessed by the Company; and
- any and all losses, costs or expenses incurred by the Company in
processing or collecting the customer accounts from all previously billed
records.
The purchase price is remitted by the Company to its customers in two
payments. Within five days from receiving a customer's records, an initial
payment is made to the customer based on a percentage of the face amount of the
customer's call records submitted by the Company to the local telephone
companies. The Company pays the remaining balance of the purchase price to the
customer upon collection of funds from the local telephone companies. The
purchase date is the date the initial payment is made. In connection with its
purchase of billing records, the Company may draw on its revolving credit
facility.
Any accounts receivable purchased by the Company are recorded as purchased
receivables in an amount equal to the face amount of the billing records
submitted to the local telephone companies by the Company for billing and
collection. Concurrently, an equal amount is recorded as accounts payable to
billing customers. The amount of the initial payment made to the customer
reduces accounts payable to billing customers. The
45
<PAGE> 48
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balance, reported as accounts payable to billing customers ($75,166,000 and
$58,525,000 at September 30, 1997 and 1996, respectively), consists of:
- an amount equal to the face value of all purchased receivables, reduced
for any amounts paid as initial payments under Advance Payment
Agreements,
- an amount equal to collections from local telephone companies that have
not yet been remitted to customers, and
- an amount accrued for the estimated liability associated with future
end-user refunds and local telephone company adjustments related to
customers who are no longer serviced by the Company.
The purchased receivables balance is relieved at the time the customer
receivables are collected from the local telephone companies. Any differences
between the amount initially recorded as a purchased receivable and the amount
ultimately collected from the local telephone companies are recorded as a
reduction of both the purchased receivable and accounts payable to billing
customers in an equal amount. The funds are remitted to the customer after the
Company deducts the amount funded, the financing service charges earned under
the Advance Payment Agreement, local telephone company billing fees due the
Company and any end-user customer service refunds.
The Company has some risk with regard to these deductions to the extent
that they exceed the amount collected from the local telephone companies.
Generally, the Company will collect these amounts from future funds received
from the local telephone companies. However, in certain cases, such as if the
Company is no longer providing services to the customer, there may not be
adequate funds from which to collect these amounts. The Company does have the
right of offset against all funds held for the account of such customers and may
hold a first lien security interest in such billing customers' accounts,
generally including those not acquired by the Company. The Company has an
accrued liability included in the balance sheet caption entitled "Accounts
payable -- billing customers" for the estimated amount that such deductions
exceed funds withheld from such customers.
The following receivables purchased and financed by the Company were
outstanding at:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Purchased receivables....................................... $70,175 $70,920
Revolving line of credit for purchased receivables.......... 0 19,010
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
related assets, which range from three to ten years. Upon disposition, the cost
and related accumulated depreciation and amortization are removed from the
accounts and the resulting gain or loss is reflected in other income (expense)
for that period. Expenditures for maintenance and repairs are charged to expense
as incurred and major improvements are capitalized.
Other Assets
Other assets include costs incurred to acquire billing agreements with
local telephone companies for billing and collection services and other
agreements. These costs are being amortized over five to seven years. Other
assets also include financing costs related to the issuance of debt, which have
been deferred and are amortized over the life of the respective financing
agreement, and goodwill and other intangibles related to the acquisition of a
software development company (see Note 5). In addition, long-term deposits have
been included in other assets.
46
<PAGE> 49
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accrued Liabilities
Accrued liabilities include sales taxes payable on behalf of billing
customers of $13,061,000 and $12,025,000 at September 30, 1997 and 1996,
respectively.
Fair Value of Financial Instruments
The estimated fair values of the Company's cash and cash equivalents and
all other financial instruments have been determined using appropriate valuation
methodologies and approximate their related carrying values.
Income Taxes
Deferred tax assets and liabilities are recorded based on enacted income
tax rates that are expected to be in effect in the period in which the deferred
tax asset or liability is expected to be settled or realized. A change in the
tax laws or rates results in adjustments to the deferred tax assets or
liabilities. The effects of such adjustments are required to be included in
income in the period in which the tax laws or rates are changed.
BIC and USLD entered into a Tax Sharing Agreement that defines the parties'
respective rights and obligations with respect to deficiencies and refunds of
federal, state and other income or franchise taxes relating to BIC's business
for tax years prior to the Distribution and with respect to certain tax
attributes of BIC after the Distribution. In general, with respect to periods
ending on or before the last day of the year in which the Distribution occurred,
USLD is responsible for (i) filing both consolidated federal tax returns for the
USLD affiliated group and combined or consolidated state tax returns for any
group that includes a member of the USLD affiliated group, including in each
case BIC and its subsidiaries for the relevant periods of time that such
companies were members of the applicable group and (ii) paying the taxes related
to such returns (including any subsequent adjustments resulting from the
redetermination of such tax liabilities by the applicable taxing authorities).
BIC will reimburse USLD for a portion of such taxes and the cost of preparation
of the associated tax returns related to the BIC affiliated group. BIC is
responsible for filing returns and paying taxes related to the BIC affiliated
group for subsequent periods. BIC and USLD have agreed to cooperate with each
other and to share information in preparing such tax returns and in dealing with
other tax matters.
Net Income Per Common Share
Net income per common share is computed by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding during each period. Any options or warrants outstanding are
considered common stock equivalents provided they have a dilutive effect on net
income per common share. Net income per common share is presented on a pro forma
basis for fiscal 1996 and 1995, as BIC had no publicly held common shares
outstanding prior to the Distribution. The unaudited pro forma net income per
common share was computed by dividing net income by the pro forma weighted
average number of common shares and common share equivalents outstanding during
the applicable period. The pro forma weighted average number of common shares
outstanding during each fiscal year gives effect to the number of shares assumed
to be issued had the Distribution occurred at the beginning of each period
presented, including the assumed conversions of options and warrants that were
assumed to be outstanding during the respective periods. The unaudited pro forma
per share data is presented for informational purposes only and should not be
considered indicative of the operating results which the Company will achieve in
the future because, among other things, this data is based on historical rather
than prospective information and includes certain assumptions which are subject
to change.
Actual net income per common share for the period from the Distribution
Date to September 30, 1996, was $0.17 per share. The approximate weighted
average number of common shares and common share
47
<PAGE> 50
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equivalents used in computing actual net income per common share for the period
from the Distribution Date to September 30, 1996 was 15,761,000.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which establishes standards for computing and presenting earnings per
share ("EPS") for entities with publicly held common stock or potential common
stock. SFAS No. 128 simplifies the standards for computing EPS previously found
in Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share," and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS, which excludes
dilution. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
SFAS No. 128 is effective for financial statements for periods ending after
December 15, 1997, and earlier application is not permitted. After the effective
date, SFAS No. 128 requires restatement of all prior period EPS data presented.
The pro forma effect of adopting SFAS No. 128 on EPS data is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Primary EPS as reported..................................... $0.23 $1.16 $0.97
Pro forma effect of SFAS No. 128............................ 0.01 0.06 0.09
----- ----- -----
Basic EPS as restated....................................... $0.24 $1.22 $1.06
===== ===== =====
Fully diluted EPS as reported............................... $0.22 $1.15 $0.97
Pro forma effect of SFAS No. 128............................ 0.01 0.01 0.00
----- ----- -----
Diluted EPS as restated..................................... $0.23 $1.16 $0.97
===== ===== =====
</TABLE>
Basic earnings per share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share differs from basic earnings per share due to the
assumed conversions of options and warrants that were outstanding during the
period.
New Accounting Standards
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for, among other things, the
transfer and servicing of financial assets, such as factoring receivables. SFAS
No. 125 is effective for transfers and servicing of financial assets occurring
after December 31, 1996 and is to be applied prospectively. In December 1996,
the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of SFAS No. 125." SFAS No. 127 amends the effective date for certain
provisions of SFAS No. 125 to December 31, 1997. Management of the Company does
not anticipate the adoption of SFAS No.'s 125 and 127 will have a material
impact on the Company's financial position or results of operations.
48
<PAGE> 51
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statements of Cash Flows
Cash payments and non-cash activities during the periods indicated were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash payments for interest................................ $ 1,375 $ 1,563 $1,564
Cash payments for income taxes............................ 8,913 8,366 8,859
Noncash investing and financing activities:
Common stock issued in connection with the Distribution... 0 35,234 0
Net assets transferred from USLD in connection with the
Distribution............................................ 0 892 0
Capital lease obligations incurred........................ 0 2,432 1,249
Tax benefit recognized in connection with stock option
exercises................................................. 5,765 59 94
Assets acquired in connection with acquisition............ 20,512 0 0
Liabilities assumed in connection with acquisition........ 2,596 0 0
Common stock issued in connection with acquisition........ 9,466 0 0
</TABLE>
For purposes of determining cash flows, the Company considers all temporary
cash investments purchased with an original maturity of three months or less to
be cash equivalents.
NOTE 3. DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
------ --------
(IN THOUSANDS)
<S> <C> <C>
Revolving line of credit for purchased receivables, 8.75% at
September 30, 1996 (prime rate (8.25%) plus .5%), due in
varying amounts through December 31, 1996................. $ 0 $ 19,010
Fixed interest rate term notes.............................. 2,930 2,973
------ --------
Total debt.................................................. 2,930 21,983
Less -- Current portion..................................... (606) (19,613)
------ --------
$2,324 $ 2,370
====== ========
</TABLE>
The Company has various fixed rate term notes with rates ranging from 7.62%
to 7.73%, due in varying amounts through June 2002. The proceeds from the
issuance of these notes were used to acquire certain computer equipment and
office furniture. The loans are secured by the assets acquired with the proceeds
of such notes.
In December 1996, the Company repaid all amounts outstanding under its $45
million revolving line of credit, which bore interest at the prime rate plus
0.5%, and matured December 31, 1996. Effective December 23, 1996, the Company
obtained a new $50.0 million revolving line of credit facility with certain
commercial lending institutions to finance the purchase of accounts receivable
under the Company's Advance Funding Program and for general corporate purposes.
The credit facility terminates on December 20, 1999, and bears interest at a
variable rate based on the prime rate or federal funds rate as determined by a
formula defined in the credit agreement. The facility is secured by the related
accounts receivable, the stock of BIC's subsidiaries and various other assets of
the Company. The amount borrowed by the Company and the amount
49
<PAGE> 52
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
available for borrowing under this credit facility was $0 and $50.0 million,
respectively, at September 30, 1997. Additionally, at September 30, 1997, the
Company has a $1.2 million letter of credit outstanding.
Under the most restrictive terms of the Company's credit agreements, the
Company is prohibited from paying dividends on its common stock, is required to
comply with certain financial covenants and is subject to certain limitations on
the issuance of additional secured debt. The Company was in compliance with all
such covenants at September 30, 1997.
In addition to the revolving line of credit facility and equipment
financing agreements described above, the Company is also obligated as a
guarantor of USLD's equipment financing agreements with certain lenders. Prior
to the Distribution, the Company obtained financing for capital expenditures
through term debt agreements and capital lease agreements that were guaranteed
and cross-collateralized by USLD and its other subsidiaries. Most of these debt
agreements were secured by the assets of all the subsidiaries within the
consolidated group, and in some cases, the existing cross guarantees and
security arrangements between the Company and USLD will remain in place for the
duration of the facility. In this regard, USLD and the Company have agreed to
pay each other a credit support fee equal to 1% per annum of the average monthly
balance of indebtedness guaranteed by one on behalf of the other for as long as
such guarantees continue. The aggregate unpaid principal amount of indebtedness
guaranteed by BIC under such agreements at September 30, 1997, was approximately
$7.2 million, due in varying amounts through October 2000. Cross-default
provisions of certain of these equipment loans may place the Company in default
of such loans in the event that USLD defaults under the equipment finance
agreements that the Company has guaranteed.
Scheduled maturities of debt as of September 30, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, (IN THOUSANDS)
------------------------- --------------
<S> <C>
1998................................................... $ 606
1999................................................... 606
2000................................................... 606
2001................................................... 606
2002................................................... 506
------
$2,930
======
</TABLE>
NOTE 4. LEASES
The Company leases equipment and office space under operating leases.
Rental expense for the years ended September 30, 1997, 1996 and 1995, was
$1,630,000, $726,000, and $555,000, respectively. Future minimum lease payments
under non-cancelable operating leases as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, (IN THOUSANDS)
------------------------- --------------
<S> <C>
1998................................................... $ 1,908
1999................................................... 2,042
2000................................................... 2,042
2001................................................... 2,042
2002................................................... 2,042
Thereafter............................................. 8,176
-------
Total minimum lease payments...................... $18,252
=======
</TABLE>
50
<PAGE> 53
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also leases various computer equipment under capital lease
arrangements. Future minimum lease payments under these capital leases, together
with the present value of the net minimum lease payments as of September 30,
1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, (IN THOUSANDS)
------------------------- --------------
<S> <C>
1998................................................... $498
1999................................................... 298
----
Total minimum lease payments................................ 796
Less: Amount representing interest.......................... (65)
----
Present value of net minimum lease payments................. $731
====
</TABLE>
NOTE 5. ACQUISITION
Effective June 1, 1997, the Company acquired Computer Resources Management,
Inc. ("CRM"), a company that develops software systems for the direct billing of
telecommunications services. This acquisition has been accounted for as a
purchase. Accordingly, the results of operations for CRM have been included in
the Company's consolidated financial statements, and the shares related to the
acquisition have been included in the weighted average shares outstanding for
purposes of calculating net income per common share since the date of
acquisition. The following unaudited pro forma information gives effect to the
acquisition of CRM as if it had occurred at the beginning of the periods
presented. The unaudited pro forma information is based on the historical
information for the periods presented and includes adjustments to reflect the
special charge resulting from expensing acquired in-process research and
development costs (see Note 6) and the effect on depreciation and amortization
expense of recording the fair value of assets acquired. The number of weighted
average shares outstanding used in the calculation of the pro forma per share
data gives effect to the shares assumed to be issued had the acquisition
occurred at the beginning of each period presented.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1996
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Operating revenues.......................................... $127,579 $109,153
Net income.................................................. $ 4,203 $ 4,860
Net income per common share -- primary...................... $ 0.26 $ 0.31
Net income per common share -- fully diluted................ $ 0.25 $ 0.31
</TABLE>
The pro forma financial information should not be considered indicative of
the operating results that would have occurred had the acquisition actually
taken place at the beginning of the periods specified or that the Company will
achieve in the future because, among other things, this information is based on
historical rather than prospective information and includes certain assumptions
which are subject to change. The unaudited pro forma financial information
reflects, in management's opinion, all adjustments necessary to fairly state the
pro forma operating results for the periods presented to make the unaudited pro
forma financial information not misleading.
An aggregate of $8.5 million cash and 325,000 shares of the Company's
common stock were issued in connection with this purchase transaction. Of these
shares, 65,000 were deposited in an escrow account to satisfy certain
indemnification obligations. The excess of the purchase price over the fair
value of net tangible assets acquired was determined through an independent
appraisal and amounted to approximately $17.5 million, of which approximately
$1.2 million was recorded as goodwill and is being amortized on a straight-line
basis over fifteen years. In addition, $13.0 million was recorded as in-process
research and development expenses (see Note 6). The remaining balance was
recorded as the purchase price for a customer list and
51
<PAGE> 54
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
other intangibles, which are being amortized on a straight-line basis over
periods ranging from six to twelve years.
NOTE 6. SPECIAL CHARGES
During the third quarter of fiscal 1997, the Company recognized special
charges in the amount of $21.3 million. The $21.3 million charge included
in-process research and development costs of $13.0 million acquired in
connection with the acquisition of CRM (see Note 5). At the date of acquisition,
the technological feasibility of the acquired technology had not yet been
established, and the technology had no future alternative uses. The remaining
$8.3 million charge represented accumulated costs associated with the
development of a direct billing system for a service bureau operation. This
development was abandoned by the Company.
NOTE 7. SHARE CAPITAL
On July 10, 1996, the Company, upon authorization by its Board of
Directors, adopted a Shareholder Rights Plan ("Rights Plan") and declared a
dividend of one preferred share purchase right on each share of its outstanding
common stock. The rights will become exercisable if a person or group acquires
15% or more of the Company's common stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's common stock. These rights, which expire on July 10, 2006,
entitle stockholders to buy one ten-thousandth of a share of a new series of
participating preferred shares at a purchase price of $130 per one
ten-thousandth of a preferred share. The Rights Plan was designed to ensure that
stockholders receive fair and equal treatment in the event of any proposed
takeover of the Company.
On August 2, 1996, USLD distributed 15,032,001 shares of the Company's
common stock to the existing stockholders of USLD in order to effect the
spin-off of BIC from USLD. Prior to August 2, 1996, BIC operated as a
wholly-owned subsidiary of USLD and, consequently, had no publicly owned common
shares. No dividends were paid on the Company's common stock during fiscal 1997,
1996 or 1995.
NOTE 8. STOCK OPTIONS AND STOCK PURCHASE WARRANTS
Prior to the Distribution, the Company adopted the BIC 1996 Comprehensive
Stock Plan ("Comprehensive Plan") and the BIC 1996 Non-Employee Director Plan
("Director Plan") under which officers and employees, and non-employee
directors, respectively, of the Company and its affiliates are eligible to
receive stock option grants. The Company has reserved 3,500,000 and 400,000
shares of its common stock for issuance pursuant to the Comprehensive Plan and
Director Plan, respectively. Under each plan, options vest and expire pursuant
to individual award agreements; however, the expiration date of unexercised
options may not exceed ten years from the date of grant. Immediately prior to
the Distribution, the Company granted, under the Comprehensive Plan and Director
Plan, respectively, options to purchase BIC common stock to each holder of an
outstanding option to purchase shares of USLD common stock under the USLD
Employee Stock Option Plan and the USLD Non-Employee Director Plan,
respectively. The BIC options are exercisable for BIC common stock on the basis
of one share of BIC common stock for every one share of USLD common stock
subject to the outstanding USLD options. BIC options to purchase a total of
1,566,504 shares of BIC common stock were granted in connection with the
adjustment to the USLD options. In connection with the grant of the BIC options,
the exercise price of the USLD options was adjusted to preserve the economic
value of the USLD options existing immediately prior to the Distribution after
giving effect to the grant of the BIC options. The BIC options will have vesting
schedules mirroring the vesting schedules of the related USLD options. Each BIC
option granted in connection with the Distribution will terminate in accordance
with the original USLD option grant.
52
<PAGE> 55
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option activity for the years ended September 30, 1997 and 1996 is
summarized as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding, September 30, 1995......................... 0 --
Granted............................................... 2,339,004 $10.51
Canceled.............................................. (14,332) $ 7.78
Exercised............................................. (13,708) $ 6.99
----------
Outstanding, September 30, 1996......................... 2,310,964 $10.51
Granted............................................... 1,290,100 $31.62
Canceled.............................................. (89,524) $14.06
Exercised............................................. (721,596) $ 7.96
----------
Outstanding, September 30, 1997......................... 2,789,944 $20.85
==========
</TABLE>
At September 30, 1997 and 1996, stock options to purchase an aggregate of
1,016,797 and 1,015,886 shares were exercisable and had weighted average
exercise prices of $12.03 and $7.14 per share, respectively.
Stock options outstanding and exercisable at September 30, 1997, were as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.11 - $ 2.22...................... 45,000 0.8 $ 1.48 45,000 $ 1.48
$ 6.30 - $ 9.26...................... 722,645 2.3 $ 7.81 631,331 $ 7.74
$13.62 - $14.55...................... 52,499 3.3 $14.00 7,167 $13.74
$16.13 - $19.63...................... 700,300 4.9 $16.14 230,799 $16.14
$24.75 - $29.13...................... 325,000 5.6 $26.33 0 --
$33.69 - $34.88...................... 944,500 6.9 $33.73 102,500 $33.69
--------- ---------
2,789,944 4.9 $20.85 1,016,797 $12.03
========= =========
</TABLE>
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," but has elected to apply APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option plans as allowed under SFAS No. 123. Accordingly, the Company has
not recognized compensation expense for stock options granted where the exercise
price is equal to the market price of the underlying stock at the date of the
grant. During fiscal 1997, 1996 and 1995, the Company recognized $540,000,
$10,000 and $18,000, respectively, of compensation expense for options granted
below the market price of the underlying stock on such measurement date. In
addition, in accordance with the provisions of APB Opinion No. 25, the Company
has not recognized compensation expense for employee stock purchases under the
Billing Information Concepts Corp. Employee Stock Purchase Plan ("ESPP").
53
<PAGE> 56
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation expense for the Company's stock options granted and ESPP
purchases in 1997 and 1996 been determined based on the fair value at the grant
dates consistent with the methodology of SFAS No. 123, pro forma net income and
net income per common share would have been as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------
1997 1996
------ -------
<S> <C> <C>
Pro forma net income........................................ $2,230 $15,511
Pro forma net income per common share:
Primary................................................... $ 0.14 $ 1.01
Fully diluted............................................. $ 0.13 $ 1.00
</TABLE>
The fair value for these options was estimated at the respective grant
dates using the Black-Scholes option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- -------
<S> <C> <C>
Expected volatility......................................... 24% 25%
Expected dividend yield..................................... 0% 0%
Expected life............................................... 2.4 years 2 years
Risk-free interest rate..................................... 6.05% 6.03%
</TABLE>
The weighted average fair value and weighted average exercise price,
respectively, of options granted where the exercise price was equal to the
market price of the underlying stock at the grant date was $7.10 and $32.92 for
the year ended September 30, 1997, and $10.14 and $10.46 for the year ended
September 30, 1996. The weighted average fair value and weighted average
exercise price of options granted during the year ended September 30, 1997 where
the exercise price was below the market price of the underlying stock at the
grant date was $8.95 and $26.00, respectively. For purposes of the pro forma
disclosures, the estimated fair value of options is amortized to expense over
the options' vesting periods.
Warrants to purchase 225,000 shares of common stock at an exercise price of
$9.25 per share were granted during fiscal 1996 immediately prior to the
Distribution to each holder of a warrant to purchase shares of USLD common stock
and had a weighted average fair value of $12.02. The fair value for these
warrants was estimated at the grant date using the Black-Scholes option pricing
model with an expected volatility of 25%, an expected dividend yield of 0%, an
expected life of 2 years and a risk-free interest rate of 6.09% as the
weighted-average assumptions. Warrants to purchase 87,677 shares of common stock
were exercised in fiscal 1997. There were no warrants exercised in fiscal 1996.
54
<PAGE> 57
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current................................................ $ 9,386 $10,049 $7,957
Deferred............................................... (146) (113) (266)
------- ------- ------
$ 9,240 $ 9,936 $7,691
======= ======= ======
State:
Current................................................ $ 1,044 $ 1,005 $ 970
Total:
Current................................................ $10,430 $11,054 $8,927
Deferred............................................... (146) (113) (266)
------- ------- ------
$10,284 $10,941 $8,661
======= ======= ======
</TABLE>
The provision for income taxes for fiscal 1997, 1996 and 1995 differs from
the amount computed by applying the statutory federal income tax rate of 35% to
income before provision for income taxes. The reasons for these differences were
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed income tax provision at statutory rate.......... $ 4,897 $10,078 $7,973
Increases in taxes resulting from:
Nondeductible research and development expenses........ 4,536 0 0
State income taxes, net of federal benefit............. 679 653 631
Other, net............................................. 172 210 57
------- ------- ------
Provision for income taxes............................... $10,284 $10,941 $8,661
======= ======= ======
</TABLE>
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1997 1996 1995
------- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred Tax Assets:
Expense provisions...................................... $ 12 $885 $ 530
Deferred tax liabilities:
Acquisition of nondeductible intangibles................ (2,009) 0 0
Tax depreciation and amortization in excess of book..... (51) (96) (325)
Prepaid expenses........................................ 0 0 (21)
------- ---- -----
Total deferred tax liabilities.................. (2,060) (96) (346)
------- ---- -----
Net deferred tax asset (liability).............. $(2,048) $789 $ 184
======= ==== =====
</TABLE>
The Company has been notified by the Internal Revenue Service ("IRS") that
a fiscal 1992 transaction between a wholly-owned foreign subsidiary of USLD
(Mega Plus Dialing, Inc.) and the Company is proposed
55
<PAGE> 58
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to be treated differently by the IRS than originally characterized by the
Company. The IRS district office issued a report that proposed an assessment of
taxes, interest and penalties. The Company filed a written protest, and the
assessment was appealed to the appellate division of the IRS. The appellate
division of the IRS agreed with the Company's original treatment of the
transaction.
NOTE 10. BENEFIT PLANS
The Company did not have any benefit plans in effect prior to its spin-off
from USLD; however, certain employees and directors of the Company were eligible
to participate in certain similar compensation and benefit plans provided by
USLD.
The Benefit Plans and Employment Matters Allocation Agreement ("Benefits
Agreement") entered into by the Company and USLD (see Note 12) provides for the
allocation of certain responsibilities with respect to employee compensation
benefit and labor matters. The allocation of responsibility and adjustments made
pursuant to the Benefits Agreement was substantially consistent with the
existing benefits provided to USLD employees under USLD's various compensation
plans. Among other things, the Benefits Agreement provides that, effective as of
the Distribution Date, the Company will or will cause one or more of its
subsidiaries to, assume or retain, as the case may be, all liabilities of USLD,
to the extent unpaid as of the Distribution Date, under employee benefit plans,
policies, arrangements, contracts and agreements, with respect to employees who,
on or after the Distribution Date, were employees of the Company or its
subsidiaries. The Benefits Agreement also provides that, effective as of the
Distribution Date, USLD will, or will cause one or more of its subsidiaries to
assume or retain, as the case may be, all liabilities of USLD, to the extent
unpaid as of the Distribution Date, under employee benefit plans, policies,
arrangements, contracts and agreements, with respect to employees who on or
after the Distribution Date were employees of USLD or its subsidiaries.
In addition, the Company has assumed, with respect to employees who, on or
after the Distribution Date, were employees of the Company or any of its
subsidiaries, all responsibility for liabilities and obligations as of the
Distribution Date for medical and dental plan coverage and for vacation and
welfare plans. USLD has assumed, with respect to the employees who, on or after
the Distribution Date, were employees of USLD or any of its subsidiaries, all
responsibilities for all liabilities and obligations as of the Distribution Date
for medical and dental plan coverage and for vacation and welfare plans.
Participation in the Billing Information Concepts Corp. 401(k) Retirement
Plan ("Retirement Plan") is offered to eligible employees of the Company.
Generally, all employees of the Company who are 21 years of age or older and who
have completed six months of service during which they worked at least 1,000
hours were eligible for participation in the Retirement Plan. The Retirement
Plan is a defined contribution plan which provides that participants generally
may make voluntary salary deferral contributions, on a pretax basis, of between
1% and 15% of their compensation in the form of voluntary payroll deductions up
to a maximum amount as indexed for cost-of-living adjustments. The Company makes
matching contributions as a percentage determined annually of the first 3% of a
participant's compensation contributed as salary deferral. The Company may make
additional discretionary contributions. No discretionary contributions were made
in fiscal 1997, 1996 or 1995. During fiscal 1997, 1996 and 1995, the Company's
matching contributions totaled approximately $67,000, $35,000 and $27,000,
respectively.
Participation in the Billing Information Concepts Corp. Executive
Compensation Deferral Plan ("Executive Plan") is offered to selected employees
occupying management positions as determined by BIC's board of directors from
time to time. The Executive Plan is a defined contribution plan which provides
that participants may make voluntary salary deferral contributions, on a pretax
basis, of between 1% and 100% of their eligible compensation. Under the
Executive Plan, the Company makes matching contributions equal to the lesser of
100% of a participant's contributions or an amount based on a formula
established by the plan. During fiscal 1997, 1996 and 1995, the Company
contributed $47,000, $22,000 and $12,000, respectively, to the Executive Plan.
56
<PAGE> 59
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, the Billing Information Concepts Corp. Executive Qualified
Disability Plan ("Disability Plan") is provided to certain employees occupying
management positions. The Disability Plan provides long-term disability benefits
through disability insurance coverage purchased by the Company and through
Company funded payments. Benefits under the Disability Plan are provided
directly by the Company based on definitions contained in the applicable
insurance policies.
The Billing Information Concepts Corp. Employee Stock Purchase Plan (the
"ESPP"), which was established under the requirements of Section 423 of the
Internal Revenue Code of 1986, as amended, is offered to eligible employees of
the Company. The Company has reserved 1,000,000 shares of its common stock for
issuance pursuant to the ESPP. The ESPP enables employees who have completed at
least six months of continuous service with the Company to purchase shares of
BIC's common stock at a 15% discount through voluntary payroll deductions. The
purchase price is the lesser of 85% of the closing price of the common stock on
the opening date of each participation period or 85% of the closing price of the
common stock on the ending date of each participation period. The Company issued
9,751 and 7,852 shares of its common stock in January and June 1997 pursuant to
the ESPP at purchase prices of $18.06 and $24.86, respectively.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. The Company believes it
is unlikely that the final outcome of any of the claims or proceedings to which
the Company is a party will have a material adverse effect on the Company's
financial position or results of operations; however, due to the inherent
uncertainty of litigation, there can be no assurance that the resolution of any
particular claim or proceeding would not have a material adverse effect on the
Company's results of operations for the fiscal period in which such resolution
occurred.
The Company is obligated to pay certain local telephone companies a total
of approximately $6.9 million, $5.7 million, $4.2 million, $4.1 million, $4.1
million and $11.0 million during fiscal 1998, 1999, 2000, 2001, 2002 and
thereafter, respectively, for minimum usage charges under billing and collection
agreements that, unless automatically renewed, expire at varying dates through
the end of fiscal 2005. The billing and collection agreements do not provide for
any penalties other than payment of the obligation should the usage levels not
be met. The Company has met all such volume commitments in the past and
anticipates exceeding the minimum usage volumes with all of these vendors.
The Distribution Agreement (see Note 12) provides the Company will only
assume liabilities and obligations for claims and litigation that arose from the
ordinary course of the Company's business. The Company will not assume any
liabilities that relate to the direct dial long distance and operator service
businesses of USLD. The Company is obligated as a guarantor of USLD's equipment
financing agreements with certain lenders. The aggregate unpaid principal amount
of indebtedness under such agreements at September 30, 1997 was approximately
$7.2 million, due in varying amounts through October 2000.
57
<PAGE> 60
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. RELATED PARTIES
The Company and USLD shared a common individual on their respective boards
of directors through June 2, 1997. Therefore, USLD was considered a related
party for purposes of financial disclosure through this date. The Company
provides billing and information management services for USLD and purchases
telecommunications services from USLD. Transactions under the agreements for
these services have been reflected in the accompanying consolidated financial
statements at market prices. Related party transactions between the Company and
USLD are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales to USLD.............................................. $3,166 $5,347 $5,322
Purchases from USLD........................................ 1,705 3,332 1,729
</TABLE>
In addition, at September 30, 1996, the Company's accounts receivable
balance included $998,000 and the billing customers accounts payable balance
included $1,337,000 related to billing services performed for USLD. The Company
also had $1,288,000 payable to USLD included in accrued liabilities and
$1,034,000 payable to USLD included in long-term debt at September 30, 1996.
From time to time, the Company has made advances to or was owed amounts
from certain officers of the Company. The highest aggregate amount outstanding
of advances to officers during the year ended September 30, 1997, was $1.7
million and no amounts were outstanding at September 30, 1997. The Company also
had a $50,000 note bearing interest at 7.50% payable to a certain officer of the
Company at September 30, 1997.
For purposes of governing certain ongoing relationships between the Company
and USLD after the Distribution and to provide for an orderly transition, the
Company and USLD entered into certain agreements. Such agreements include: (i)
the Distribution Agreement, providing for, among other things, the Distribution
and the division between the Company and USLD of certain assets and liabilities
and material indemnification provisions; (ii) the Benefit Plans and Employment
Matters Allocation Agreement, providing for certain allocations of
responsibilities with respect to benefit plans, employee compensation, and labor
and employment matters; (iii) the Tax Sharing Agreement, pursuant to which the
Company and USLD agreed to allocate tax liabilities that relate to periods prior
to and after the Distribution Date; (iv) the Transitional Services and Sublease
Agreement, pursuant to which USLD will provide certain services on a temporary
basis and sublease certain office space to the Company and the Company will
provide certain services to USLD on a temporary basis; (v) the Zero Plus -- Zero
Minus Billing and Information Management Services Agreement and the One Plus
Billing and Information Management Services Agreement, pursuant to which the
Company will provide billing clearinghouse and information management services
to USLD for an initial period of three years; and (vi) the Telecommunications
Agreement, pursuant to which USLD will provide long distance telecommunications
services to the Company for an initial period of three years. It is the
intention of USLD and the Company that the Transitional Services and Sublease
Agreement, the Zero Plus -- Zero Minus Billing and Information Management
Services Agreement, the One Plus Billing and Information Management Services
Agreement, and the Telecommunications Agreement reflect terms and conditions
similar to those that would have been arrived at by independent parties
bargaining at arm's length; however, there can be no assurances that such
agreements are on terms at least as favorable as could have been obtained from
unaffiliated third parties.
58
<PAGE> 61
BILLING INFORMATION CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1997 1997 1997 1996
------------- -------- --------- ------------
<S> <C> <C> <C> <C>
Operating revenues............................... $35,742 $ 31,894 $27,382 $27,818
Income (loss) from operations.................... 9,836 (12,453) 8,195 7,861
Net income (loss)................................ 6,261 (12,622) 5,157 4,911
Net income (loss) per common share -- primary.... $ 0.37 $ (0.81) $ 0.32 $ 0.30
Net income (loss) per common share -- fully
diluted........................................ $ 0.37 $ (0.81) $ 0.32 $ 0.30
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1996 1996 1996 1995
------------- -------- --------- ------------
<S> <C> <C> <C> <C>
Operating revenues................................ $27,854 $25,729 $26,947 $23,354
Income from operations............................ 7,545 6,866 7,967 6,263
Net income........................................ 4,566 4,317 5,021 3,948
Pro forma net income per common
share -- primary................................ $ 0.29 $ 0.27 $ 0.33 $ 0.27
Pro forma net income per common share -- fully
diluted......................................... $ 0.29 $ 0.27 $ 0.33 $ 0.26
</TABLE>
Per share data is shown on a pro forma basis for fiscal year 1996 as BIC
had no publicly held common stock outstanding prior to August 2, 1996 (see Note
2).
59
<PAGE> 62
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BILLING INFORMATION CONCEPTS CORP.
PROXY -- ANNUAL MEETING OF STOCKHOLDERS -- FEBRUARY 26, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PLEASE MARK, SIGN, DATE AND RETURN IN THE ENCLOSED ENVELOPE.
The undersigned stockholder of Billing Information Concepts Corp.
(the "Company") hereby appoints Parris H. Holmes, Jr., Alan W. Saltzman
and Kelly E. Simmons, or each of them, proxies of the undersigned with
full power of substitution to vote at the Annual Meeting of Stockholders
of the Company to be held on Thursday, February 26, 1998, at 10:00 a.m.,
Central Standard Time, at the Omni San Antonio Hotel, 9821 Colonnade
Blvd., San Antonio, Texas, and at any adjournment thereof, the number of
votes which the undersigned would be entitled to cast if personally
present:
(1) ELECTION OF DIRECTOR
<TABLE>
<S> <C>
[ ] FOR nominee listed below [ ] WITHHOLD AUTHORITY to
(except as marked below) vote for nominee listed
below
</TABLE>
Lee Cooke
INSTRUCTIONS: To withhold authority to vote for nominee, draw a line
P through or strike out nominee's name as set forth above.
R (2) PROPOSAL TO AMEND THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO CHANGE THE NAME OF THE COMPANY TO "BILLING CONCEPTS
O CORP."
X [ ] FOR [ ] AGAINST [ ] ABSTAIN
Y (3) PROPOSAL TO AMEND THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF THE
COMPANY'S COMMON STOCK FROM 60,000,000 TO 75,000,000
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued, and to be signed and dated, on reverse side)
- --------------------------------------------------------------------------------
<PAGE> 63
- --------------------------------------------------------------------------------
(Continued from other side)
(4) PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 1998
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(5) To consider and act upon any other matter which may properly come before the
meeting or any adjournment thereof;
all as more particularly described in the Proxy Statement dated January 17,
1997, relating to such meeting, receipt of which is hereby acknowledged.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy will
be voted FOR the nominee listed in Proposal 1, FOR Proposal 2, FOR Proposal 3
and FOR Proposal 4.
----------------------------------
----------------------------------
Signature of Stockholder(s)
Please sign your name exactly as
it appears hereon. Joint owners
must each sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give
your full title as it appears
hereon.
Dated , 1998.
--------------------
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