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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-28536
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BILLING CONCEPTS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2781950
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
7411 JOHN SMITH DRIVE, SUITE 200 78229
SAN ANTONIO, TEXAS (Zip code)
(Address of principal executive offices)
(210) 949-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicated below is the number of shares outstanding of the registrant's
only class of common stock at August 7, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
-------------- ----------------
<S> <C>
Common Stock, $.01 par value 33,895,328
</TABLE>
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BILLING CONCEPTS CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 1998 and September 30, 1997.............. 3
Condensed Consolidated Statements of Income - For the Three and Nine Months Ended
June 30, 1998 and 1997................................................................ 4
Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended
June 30, 1998 and 1997................................................................ 5
Notes to Interim Condensed Consolidated Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 10
PART II OTHER INFORMATION
Item 5. Deadline for Submission of Stockholder Proposals.......................................... 16
Item 6. Exhibits and Reports on Form 8-K.......................................................... 16
SIGNATURE......................................................................................... 17
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, SEPTEMBER 30,
1998 1997
--------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 127,702 $ 41,444
Accounts receivable, net ................................................... 36,741 25,919
Purchased receivables ...................................................... 85,151 70,175
Prepaids and other ......................................................... 4,008 3,196
--------- ---------
Total current assets ..................................................... 253,602 140,734
Property and equipment, net .................................................. 19,687 18,156
Equipment held under capital leases, net ..................................... 511 606
Other assets, net ............................................................ 6,534 7,516
--------- ---------
Total assets ............................................................. $ 280,334 $ 167,012
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade .................................................................... $ 14,567 $ 19,223
Billing customers ........................................................ 149,959 75,166
Accrued liabilities ....................................................... 25,433 17,728
Current portion of long-term debt ......................................... 606 606
Current portion of obligations under capital leases ....................... 331 441
--------- ---------
Total current liabilities ............................................... 190,896 113,164
Long-term debt, less current portion ......................................... 1,819 2,324
Obligations under capital leases, less current portion ....................... 32 290
Deferred income taxes ........................................................ 2,133 2,048
Other liabilities ............................................................ 709 499
--------- ---------
Total liabilities ....................................................... 195,589 118,325
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; no
shares issued or outstanding at June 30 or September 30 ................... 0 0
Common stock, $0.01 par value, 75,000,000 shares authorized; 33,866,436
shares issued and outstanding at June 30; 60,000,000 shares authorized;
32,395,170 shares issued and outstanding at September 30 .................. 339 324
Additional paid-in capital ................................................... 57,415 42,916
Retained earnings ............................................................ 27,519 6,397
Deferred compensation ........................................................ (528) (950)
--------- ---------
Total stockholders' equity .............................................. 84,745 48,687
--------- ---------
Total liabilities and stockholders' equity .............................. $ 280,334 $ 167,012
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE> 4
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues ........................................ $ 40,406 $ 31,894 $ 119,668 $ 87,094
Cost of revenues .......................................... 25,339 19,896 73,425 54,790
--------- --------- --------- ---------
Gross profit .............................................. 15,067 11,998 46,243 32,304
Selling, general and administrative expenses .............. 5,076 3,615 14,871 9,513
Research and development .................................. 572 306 1,393 306
Advance funding program income ............................ (2,035) (1,960) (6,362) (5,444)
Advance funding program expense ........................... 31 163 94 652
Depreciation and amortization expense ..................... 1,660 1,075 4,740 2,422
Special charges ........................................... 0 21,252 0 21,252
--------- --------- --------- ---------
Income (loss) from operations ............................. 9,763 (12,453) 31,507 3,603
Other income (expense):
Interest income ......................................... 1,350 214 2,778 646
Interest expense ........................................ 6 (131) (131) (374)
Other, net .............................................. 101 42 190 36
--------- --------- --------- ---------
Total other income ..................................... 1,457 125 2,837 308
--------- --------- --------- ---------
Income (loss) before income taxes ......................... 11,220 (12,328) 34,344 3,911
Income tax expense ........................................ (4,319) (294) (13,222) (6,465)
--------- --------- --------- ---------
Net income (loss) ......................................... $ 6,901 $ (12,622) $ 21,122 $ (2,554)
========= ========= ========= =========
Earnings (loss) per common share - basic (See Note 3) ..... $ 0.20 $ (0.41) $ 0.64 $ (0.08)
Earnings (loss) per common share - diluted (See Note 3) ... $ 0.20 $ (0.41) $ 0.60 $ (0.08)
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE> 5
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................................................... $ 21,122 $ (2,554)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ....................................... 4,740 2,422
Deferred compensation ............................................... 592 0
Gain on disposition of property and equipment ....................... (197) (73)
Special charges ..................................................... 0 21,252
Changes in operating assets and liabilities:
Increase in accounts receivable .................................... (10,822) (11,307)
Increase in prepaids and other ..................................... (812) (1,744)
Increase (decrease) in accounts payable ............................ (4,656) 3,311
Increase (decrease) in accrued liabilities ......................... 9,806 (126)
Increase in other liabilities ...................................... 210 384
Increase in deferred taxes ......................................... 331 0
--------- ---------
Net cash provided by operating activities ............................... 20,314 11,565
Cash flows from investing activities:
Purchases of property and equipment ................................... (5,880) (13,481)
Purchase of software company, net of cash acquired .................... 0 (8,403)
Payments for purchased receivables from billing customers, net ........ (14,976) (13,650)
Collections of proceeds due to billing customers, net ................. 74,793 12,245
Collections of sales taxes due on behalf of billing customers, net .... 5,508 5,423
Proceeds from disposition of property and equipment ................... 538 125
Other investing activities ............................................ 99 (777)
--------- ---------
Net cash provided by (used in) investing activities ..................... 60,082 (18,518)
Cash flows from financing activities:
Payments on revolving line of credit for purchased receivables, net ... 0 (8,561)
Proceeds from issuance of long-term debt .............................. 0 4,091
Payments on long-term debt ............................................ (505) (568)
Payments on capital leases ............................................ (368) (674)
Proceeds from issuance of common stock ................................ 6,735 5,137
--------- ---------
Net cash provided by (used in) financing activities ..................... 5,862 (575)
--------- ---------
Net increase (decrease) in cash and cash equivalents .................... 86,258 (7,528)
Cash and cash equivalents, beginning of period .......................... 41,444 34,135
--------- ---------
Cash and cash equivalents, end of period ................................ $ 127,702 $ 26,607
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE> 6
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by Billing Concepts Corp. ("BIC"), formerly known as Billing
Information Concepts Corp., and subsidiaries (collectively referred to as the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of the Company's management, the
accompanying interim condensed consolidated financial statements reflect all
adjustments that are necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for such periods. All
such adjustments are of a normal recurring nature. It is recommended that these
interim condensed consolidated financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended September 30, 1997.
Results of operations for interim periods are not necessarily indicative of
results that may be expected for any other interim periods or the full fiscal
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
On January 9, 1998, the Company announced that its Board of Directors
declared a one-for-one common stock dividend. The dividend was distributed on
January 30, 1998 to stockholders of record on January 20, 1998. No additional
proceeds were received on the dividend date and all costs associated with the
share dividend were capitalized as a reduction of additional paid-in capital.
All share and per share information in the accompanying condensed consolidated
financial statements has been adjusted to give retroactive effect to the stock
dividend.
NOTE 2. STATEMENTS OF CASH FLOWS
Cash payments and non-cash activities during the periods indicated were
as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
---------------------
1998 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash payments for income taxes........................................... $ 9,364 $ 8,913
Cash payments for interest............................................... 227 1,178
Non-cash investing and financing activities:
Assets acquired in connection with acquisition...................... 0 20,512
Liabilities assumed in connection with acquisition.................. 0 2,596
Common stock issued in connection with acquisition.................. 0 9,466
Treasury stock acquired in connection with warrant exercises........ 0 578
Tax benefit recognized in connection with stock option exercises.... 7,607 4,606
</TABLE>
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<PAGE> 7
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. EARNINGS PER SHARE
Earnings per share for all periods have been restated to reflect the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which established standards for computing and presenting
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. SFAS No. 128 requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. Basic EPS were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS differs from basic EPS due to the assumed conversions of potentially
dilutive options and warrants that were outstanding during the period. The
effects of potentially dilutive securities are excluded in periods in which a
loss is reported because their inclusion would be antidilutive. The following is
a reconciliation of the numerators and the denominators of the basic and diluted
per-share computations for net income.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 1998
---------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income available to common stockholders $6,901,000 33,688,000 $ 0.20
========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Stock options 1,463,000
----------
DILUTED EPS
Net income available to common stockholders
including assumed conversions $6,901,000 35,151,000 $ 0.20
========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 1997
---------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net loss available to common stockholders $(12,622,000) 31,144,000 $ (0.41)
=========
DILUTED EPS
Net loss available to common stockholders $(12,622,000) 31,144,000 $ (0.41)
=========
</TABLE>
7
<PAGE> 8
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JUNE 30, 1998
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income available to common stockholders $21,122,000 33,140,000 $ 0.64
========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants 87,000
Stock options 1,754,000
----------
DILUTED EPS
Net income available to common stockholders
including assumed conversions $21,122,000 34,981,000 $ 0.60
=========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JUNE 30, 1997
-----------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net loss available to common stockholders $(2,554,000) 30,614,000 $ (0.08)
=========
DILUTED EPS
Net loss available to common stockholders $(2,554,000) 30,614,000 $ (0.08)
=========== =========== =========
</TABLE>
NOTE 4. 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.
8
<PAGE> 9
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. RELATED PARTY TRANSACTIONS
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 that 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>
NINE MONTHS ENDED
JUNE 30, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Sales to USLD................................ $ 3,166
Purchases from USLD.......................... 1,705
</TABLE>
The Company leases a jet airplane from a company associated with an
officer/director of the Company. Under the terms of the lease agreement, the
Company is obligated to pay annual minimum fees of $500,000 over the five years
ending March 31, 2003 for such charter services. During the quarter ended June
30, 1998, the Company paid approximately $112,000 in fees related to this
agreement.
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 nine months ended June 30, 1998 was $250,000.
The Company had a $250,000 note receivable bearing interest at 7.0% from a
certain officer of the Company at June 30, 1998.
NOTE 6. NEW ACCOUNTING STANDARDS
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," which provides guidance on when revenue should be recognized and
in what amounts for licensing, selling, leasing or otherwise marketing computer
software. SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997 and is to be applied prospectively. In March
1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of a Provision
of SOP 97-2." SOP 98-4 defers for one year the application of certain provisions
of SOP 97-2. Management of the Company does not anticipate the adoption of SOP
97-2 and SOP 98-4 will have a material impact on the Company's financial
position or results of operations.
9
<PAGE> 10
ITEM 2.
This Quarterly Report on Form 10-Q 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is a discussion of the consolidated financial condition
and results of operations of the Company for the quarters and nine months ended
June 30, 1998 and 1997. It should be read in conjunction with the Interim
Condensed Consolidated Financial Statements of the Company, the notes thereto
and other financial information included elsewhere in this report, and the
Company's Annual Report on Form 10-K for the year ended September 30, 1997. For
purposes of the following discussion, references to year periods refer to the
Company's fiscal year ended September 30 and references to quarterly periods
refer to the Company's fiscal quarter ended June 30.
RESULTS OF OPERATIONS
The following table presents certain items in the Company's Condensed
Consolidated Statements of Income as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating revenues ............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues ............................... 62.7 62.4 61.4 62.9
------ ------ ------ ------
Gross profit ................................... 37.3 37.6 38.6 37.1
Selling, general and administrative expenses ... 12.6 11.3 12.4 10.9
Research and development ....................... 1.4 1.0 1.2 0.4
Advance funding program income ................. (5.0) (6.1) (5.3) (6.3)
Advance funding program expense ................ 0.1 0.5 0.1 0.7
Depreciation and amortization expense .......... 4.1 3.4 4.0 2.8
Special charges ................................ 0.0 66.6 0.0 24.4
------ ------ ------ ------
Income (loss) from operations .................. 24.2 (39.0) 26.3 4.1
Other income, net .............................. 3.6 0.4 2.4 0.4
------ ------ ------ ------
Income (loss) before income taxes .............. 27.8 (38.7) 28.7 4.5
Income tax expense ............................. (10.7) (0.9) (11.0) (7.4)
------ ------ ------ ------
Net income (loss) .............................. 17.1% (39.6)% 17.7% (2.9)%
====== ====== ====== ======
</TABLE>
10
<PAGE> 11
Operating Revenues
The Company's revenues are derived primarily 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. 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.
The Company also develops, sells and supports convergent billing
systems for telecommunications service providers and provides direct billing
outsourcing services through its wholly owned subsidiary, Billing Concepts
Systems, Inc. ("BCS"). In addition to license and maintenance fees charged by
the Company for the use of its billing software applications, fees are also
charged on a time and materials basis for software customization and
professional services. Processing fees for direct billing services provided
through the Company's service bureau are assessed to customers based on volume.
Billing systems revenues also include retail sales of computer hardware and
third party software.
Total revenues for the quarter ended June 30, 1998 were $40.4 million,
an increase of 26.7% from $31.9 million for the comparable prior year quarter.
During the first nine months of 1998, total revenues increased 37.4% to $119.7
million from $87.1 million during the comparable period of 1997. LEC billing
services revenues increased 16.0% to $36.2 million in the third quarter of 1998,
from $31.2 million in the third quarter of 1997. For the first nine months of
1998, LEC billing services increased 27.0% to $109.8 million from $86.4 million
in the first nine months of 1997. The remaining increase in revenues from the
prior year periods was attributable to billing systems sales and related
services. The LEC billing services revenue increases are attributable primarily
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. Despite the overall increase in LEC
billing services revenue from prior periods, the percentage increase was lower
than originally anticipated. Due to the "slamming and cramming" issues that have
occurred in the long distance industry, certain LECs established various
temporary moratoriums during the third quarter of 1998 that affected the ability
of certain of the Company's customers to market certain services. Consequently,
the number of call records processed for billing was below earlier expectations
for this quarter. Management believes that these actions by certain LECs have
permanently eliminated certain types of call records from the LEC billing market
and that the Company has permanently lost a portion of its recurring revenue due
to this activity. Telephone call record volumes were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Direct dial long distance services ... 142.9 131.3 467.8 372.7
Operator services .................... 32.8 34.8 106.7 92.8
Enhanced billing services ............ 2.6 3.1 9.0 6.8
Billing management services .......... 68.6 80.8 252.3 252.4
</TABLE>
Although billing management records decreased significantly from the
prior quarter, the impact on revenues was minimal because 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.
11
<PAGE> 12
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
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 discounts 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 professional
service personnel who generate revenue from hourly billings.
The gross profit margin of 37.3% for the third quarter of 1998
decreased from 37.6% reported in the prior year quarter. The gross profit margin
improved to 38.6% for the nine months ended June 30, 1998 from 37.1% achieved in
the comparable prior year period. The decrease from the prior year quarter is
primarily due to an increase in customer service costs partially offset by the
increase in sales from the systems business. The additional sales of billing
systems and related services revenues in 1998 served to improve gross margin due
to the higher margins associated with systems sales.
Selling, General and Administrative Expenses
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. SG&A expenses for the third quarter of
1998 and 1997 were $5.1 million and $3.6 million, representing 12.6% and 11.3%
of revenues, respectively. SG&A expenses for the first nine months of 1998
increased to $14.9 million, or 12.4% of revenues, from $9.5 million, or 10.9% of
revenues, in the comparable period of 1997. The higher SG&A expenses were
primarily due to the growth of the management infrastructure and technical staff
of BCS, which was acquired during the third quarter of 1997.
Research and Development
Research and development expenses are comprised primarily of the
salaries and benefits of the employees involved in software development and
related expenses. During the third quarter of 1997, the Company 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. In the fourth quarter of 1997, the
Company also commenced internally funded research and development activities
with respect to efforts to offer "invoice ready" billing services. Consequently,
research and development expenses were $572,000 in the third quarter of 1998 and
$1.4 million for the first nine months of 1998 compared to $306,000 for the
quarter and nine months ended June 30, 1997. The Company intends to continue its
research and development efforts in the future and anticipates spending a total
of approximately $2 million during 1998 for such expenses.
Advance Funding Program Income and Expense
Advance funding program income was $2.0 million for the third quarter
of both 1998 and 1997 and increased to $6.4 million for the first nine months of
1998 from $5.4 million for the first nine months of 1997. The increase from the
prior nine-month period was primarily the result of financing a higher level of
customer receivables under the Company's advance funding program. The quarterly
average balance of purchased receivables was $87.6 million and $74.5 million for
the nine months ended June 30, 1998 and 1997, respectively. Advance funding
program expense decreased to $31,000 for the third quarter of 1998 from $163,000
for the third quarter of 1997. Advance funding program expense for the first
nine months of 1998 decreased to $94,000 from $652,000 in the comparable period
of 1997. In addition to declining from period to period, advance funding program
expense declined relative to advance funding program income due to the use of
internally generated funds for the financing of all purchased receivables during
the first nine months of 1998. The expense recognized during 1998 represents
unused credit facility fees and is the minimum expense that the Company could
have incurred during this period.
12
<PAGE> 13
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 $1.7 million in the third
quarter of 1998 compared with $1.1 million in the third quarter of 1997.
Depreciation and amortization expense as a percentage of revenues was 4.1% and
3.4% in the third quarter of 1998 and 1997, respectively. For the first nine
months of 1998, depreciation and amortization expense was $4.7 million, or 4.0%
of revenues, compared to $2.4 million, or 2.8% of revenues, for the first nine
months of 1997. The increase in depreciation and amortization expense as a
percentage of revenues from the prior year periods is attributable to increased
capital expenditures made to provide the infrastructure needed to support the
growth of the Company's wholly owned subsidiary, BCS, and the continued
expansion of the Company's business.
Income (Loss) from Operations
Income from operations in the third quarter of 1998 was $9.8 million
compared to a loss from operations of $12.5 million in the third quarter of
1997. Income from operations in the first nine months of 1998 increased to $31.5
million from $3.6 million in the first nine months of 1997. Income from
operations increased primarily due to special charges of $21.3 million in the
third quarter of 1997. The $21.3 million charge represented in-process research
and development costs of $13.0 million acquired in connection with the
acquisition of a software development company and $8.3 million of 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 in the third quarter and first nine
months of 1997, exclusive of the special charges, would have been $8.8 million
and $24.9 million, respectively.
The Company's effective tax rate decreased to 38.5% in the first nine
months of 1998, from 165.3% in the first nine months of 1997, due to certain
deductions taken for financial reporting purposes in 1997 which are not
deductible for federal income tax purposes. The decrease in the effective rate
is primarily due to nondeductible research and development costs and
amortization expenses related to the acquisition of a software development
company during the third quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $127.7 million at June 30, 1998
from $41.4 million at September 30, 1997. 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 and current ratio increased to $62.7 million and 1.3:1 at June 30,
1998, from $27.6 million and 1.2:1 at September 30, 1997, respectively. This
improvement in working capital is due in part to $6.5 million in cash received
and a tax benefit of $7.6 million recognized by the Company in connection with
stock options and warrants exercised during the nine months ended June 30, 1998.
The Company also received $200,000 in cash from the issuance of common stock
under the Company's Employee Stock Purchase Plan during this period. Net cash
provided by operating activities was $20.3 million and $11.6 million in the
first nine months of 1998 and 1997, respectively, and reflected the increase in
net income from the prior year period.
The Company has a $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 credit
facility terminates on December 20, 1999. 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. No amounts were
borrowed by the Company under its credit facility to finance the advance funding
program at either June 30, 1998 or September 30, 1997. At June 30, 1998, the
amount available under the Company's receivable financing facility was $50.0
million.
13
<PAGE> 14
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. The Company obtained a waiver from a certain lender consenting to
the distribution of a one-for-one common stock dividend to stockholders on
January 30, 1998. The Company was in compliance with all required covenants at
June 30, 1998.
Capital expenditures amounted to approximately $5.9 million in the
first nine months of 1998 and related primarily to purchases of computer
equipment and software. The Company anticipates spending approximately $3
million over the next three 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 capital expenditures
with internally generated funds and borrowings, but there can be no assurance
that such funds will be available or expended.
On January 9, 1998, the Company announced that its Board of Directors
declared a one-for-one common stock dividend. The dividend was distributed on
January 30, 1998 to stockholders of record on January 20, 1998. No additional
proceeds were received on the dividend date and all costs associated with the
share dividend were capitalized as a reduction of additional paid-in capital.
The Company also amended its Certificate of Incorporation on February 27, 1998,
changing the name of the Company to Billing Concepts Corp. and increasing the
number of shares of the Company's authorized common stock to 75,000,000 from
60,000,000. These amendments were approved by vote of the Company's stockholders
at the Annual Meeting of Stockholders held on February 26, 1998.
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.
The Company continually evaluates business opportunities, including
potential acquisitions. The success of the Company's acquisition activities
depends, among other things, on the availability of acquisition candidates, the
availability of funds to finance acquisitions and the availability of management
resources to oversee the operation of acquired businesses. While the Company
has, from time to time, had discussions with other companies, it has no
agreements or pending negotiations with respect to any acquisition at the date
of this report. As consideration for any acquisitions, the Company may issue
common stock, preferred stock, convertible debt or other securities, in addition
to or in lieu of the payment of cash, that could result in dilution of the
percentage ownership of public stockholders.
YEAR 2000 CONTINGENCY
The operation of the Company's business is highly dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services, third-party
billing clearinghouse services (including the advance funding program), direct
billing services and financial reporting, as well as in various administrative
functions. In providing information management, third-party billing
clearinghouse and direct billing services, the Company processes telephone call
records which are date-sensitive. The Company also develops, sells and supports
sophisticated billing systems and software (the "Billing Systems") which must be
able to process date-dependent data correctly. Certain of the Billing Systems
sold by the Company have been warranted to process information related to or
including dates that are prior to, on or after January 1, 2000.
14
<PAGE> 15
The Company has been evaluating its Programs and Systems to identify
potential Year 2000 readiness problems, as well as manual processes, external
interfaces with customers and services supplied by vendors to coordinate Year
2000 compliance and conversion. The Year 2000 problem refers to the limitations
of the programming code in certain existing software programs to recognize
date-sensitive information for the Year 2000 and beyond. Unless modified prior
to December 31, 1999, such systems may not properly recognize such information
and could generate erroneous data or cause a system to fail to operate properly.
Based on current information, the Company expects to attain Year 2000 readiness
and complete appropriate testing of its modifications and replacements by
October 1998 with respect to its Billing Systems and by April 1999 with respect
to the remainder of its Programs and Systems. It is anticipated that
modification or replacement of the Company's Programs and Systems will be
performed in-house by Company personnel.
The Company believes that, with modifications to existing software and
conversions to new software, the Year 2000 problem will not pose a significant
operational problem for the Company. However, because the Company's business
relies on processing date-sensitive telephone call records supplied by third
parties, it is possible that non-compliant third-party computer systems may not
be able to provide accurate data for processing through the Company's computer
systems. The Company's business, financial condition and results of operations
could be materially adversely affected by the Year 2000 problem if it or
unrelated parties fail to successfully address this issue.
Management of the Company currently anticipates that the total expenses
and capital expenditures associated with its Year 2000 readiness project,
including costs associated with modifying the Programs and Systems and the cost
of purchasing or leasing certain hardware and software, will be approximately
$2.1 million. As of June 30, 1998, the Company has spent approximately $1.5
million on capital expenditures for related hardware and software and incurred
and expensed approximately $210,000 in personnel and other costs related to the
Year 2000 readiness process. The Company anticipates incurring an additional
$340,000 in personnel and other costs, which will be expensed as incurred. The
cost of Year 2000 readiness and the expected completion dates are the best
estimates of Company management and are believed to be reasonably accurate.
In the event the Company's plan to address the Year 2000 problem is not
successfully or timely implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could have
a material adverse effect on the Company's financial condition and results of
operations. Problems encountered by the Company's vendors, customers and other
third parties also may have a material adverse effect on the Company's financial
condition and results of operations.
In the event the Company determines, following the Year 2000 date
change, that its Programs and Systems are not Year 2000 ready, the Company will
be unable to process date-sensitive telephone call records and thus be unable to
provide most of its revenue-producing services, which will have a material
adverse effect on the Company's financial condition and results of operations.
The Company will also likely experience considerable delays in compiling
information required for financial reporting and performing various
administrative functions. In addition, in the event the Company's Billing
Systems are not Year 2000 ready, the Company will be required to devote more
monetary and other resources to achieving such readiness, which could have a
material adverse effect on the Company's financial condition and results of
operations.
The Company is currently developing a contingency plan for
implementation in the event its Programs and Systems are not Year 2000 ready
prior to December 31, 1999. Such contingency plan will be modeled upon the
Company's Disaster Recovery Plan. The Disaster Recovery Plan outlines a strategy
for reduced continued operations following a natural disaster which damages the
Company's operations center in San Antonio, Texas.
15
<PAGE> 16
PART II OTHER INFORMATION
ITEM 5. DEADLINE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
The deadline for submission of stockholder proposals pursuant to Rule
14a-8 under the Securities Exchange Act of 1934, as amended ("Rule 14a-8"), for
inclusion in the Company's proxy statement for its 1999 annual meeting of
stockholders is September 30, 1998. After December 14, 1998, notice to the
Company of a stockholder proposal submitted otherwise than pursuant to Rule
14a-8 will be considered untimely, and the person named in proxies solicited by
the Board of Directors of the Company for its 1999 Annual meeting of
Stockholders may exercise discretionary authority voting power with respect to
any such proposal as to which the Company does not receive timely notice.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed below are filed as part of or incorporated by
reference in this report. Where such filing is made by
incorporation by reference to a previously filed document, such
document is identified in parentheses.
EXHIBIT
NUMBER DESCRIPTION
27.1 Financial Data Schedule (filed herewith)
(b) Current Reports on Form 8-K:
None.
ITEMS 1, 2, 3, AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
BILLING CONCEPTS CORP.
(Registrant)
Date: August 10, 1998 By: /s/ KELLY E. SIMMONS
-------------------------------------------------
Kelly E. Simmons
Senior Vice President
Chief Financial Officer
(Duly authorized and principal financial officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial Data Schedule (filed herewith)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR BILLING
CONCEPTS CORP. AND SUBSIDIARIES AS OF AND FOR THE NINE MONTHS ENDED JUNE 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 127,702
<SECURITIES> 0
<RECEIVABLES> 37,112
<ALLOWANCES> 371
<INVENTORY> 0
<CURRENT-ASSETS> 253,602
<PP&E> 29,875
<DEPRECIATION> 9,677
<TOTAL-ASSETS> 280,334
<CURRENT-LIABILITIES> 190,896
<BONDS> 1,851
0
0
<COMMON> 339
<OTHER-SE> 84,406
<TOTAL-LIABILITY-AND-EQUITY> 280,334
<SALES> 0
<TOTAL-REVENUES> 119,668
<CGS> 0
<TOTAL-COSTS> 73,425
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131
<INCOME-PRETAX> 34,344
<INCOME-TAX> 13,222
<INCOME-CONTINUING> 21,122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,122
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.60
</TABLE>
