SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
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 ss. 240.14a-11(c) or ss. 240.14a-12
BILLING CONCEPTS CORP.
(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)(4) 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:
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:
<PAGE>
January 28, 1999
Dear Stockholder:
On behalf of the Board of Directors, I cordially invite you to attend the 1999
Annual Meeting of the Stockholders of Billing Concepts Corp. The Annual Meeting
will be held Thursday, February 25, 1999, at 10:00 a.m. at the Omni San Antonio
Hotel, 9821 Colonnade Boulevard, San Antonio, Texas. The formal Notice of the
Annual Meeting is included in the enclosed material.
The matters expected to be acted upon at the meeting are described in the
attached Proxy Statement. During the meeting, stockholders will have the
opportunity to ask questions and comment on the operations of Billing Concepts
Corp.
It is important that your views be represented whether or not you are able to be
present at the Annual Meeting. PLEASE SIGN AND RETURN THE ENCLOSED PROXY CARD
PROMPTLY.
We appreciate your investment in Billing Concepts Corp. and urge you to return
your proxy card as soon as possible.
Sincerely,
/s/ PARRIS H. HOLMES, JR.
Parris H. Holmes, Jr.
Chairman of the Board
and Chief Executive Officer
<PAGE>
BILLING CONCEPTS CORP.
7411 JOHN SMITH DRIVE
SAN ANTONIO, TEXAS 78229-4898
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Billing
Concepts Corp. (the "Company") will be held on Thursday, February 25, 1999, at
10:00 a.m., C.S.T., at the Omni San Antonio Hotel, 9821 Colonnade Boulevard, San
Antonio, Texas, for the following purposes:
(1) A proposal to elect two (2) directors to serve until the 2002 Annual
Meeting of Stockholders;
(2) A proposal to ratify the appointment of Arthur Andersen LLP as independent
public accountants of the Company for the fiscal year ending September 30,
1999; and
(3) 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 11, 1999, 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,
W. AUDIE LONG
CORPORATE SECRETARY
San Antonio, Texas
January 28, 1999
----------------------
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>
BILLING CONCEPTS CORP.
7411 JOHN SMITH DRIVE
SAN ANTONIO, TEXAS 78229-4898
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 25, 1999
GENERAL INFORMATION
This Proxy Statement and the accompanying proxy are furnished to the
stockholders of Billing 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 25, 1999, at 10:00 a.m., C.S.T., at
the Omni San Antonio Hotel, 9821 Colonnade Boulevard, 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 11, 1999 (the "Record Date"), there were
outstanding and entitled to vote 36,973,129 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, as
amended, does not permit cumulative voting in the election of directors.
The Summary Annual Report to Stockholders for the year ended September 30,
1998 has been or is being furnished with this Proxy Statement, which is being
mailed on or about January 28, 1999, to the holders of record of Common Stock on
the Record Date. The Summary Annual Report to Stockholders and the Appendix
hereto do 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 nominees for
director named herein and for ratification of the appointment of Arthur Andersen
LLP as the Company's independent public accountants for the fiscal year ending
September 30, 1999. 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 Drive, Suite 200, San Antonio, Texas 78229-4898.
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 directors, 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
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.
<PAGE>
Abstentions are counted toward the calculation of a quorum but are not
treated as either a vote for or against a 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 also will 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 $4,000, 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 USLD
Communications Corp., formerly 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. USLD was merged into
a wholly owned subsidiary of LCI International, Inc. in December 1997, and LCI
International, Inc. was merged into a wholly owned subsidiary of Qwest
Communications International Inc. in June 1998.
OWNERSHIP OF COMMON STOCK
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the dates indicated, 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.
AMOUNT AND NATURE
OF BENEFICIAL
NAME AND ADDRESS OWNERSHIP PERCENT
---------------- ------------------ -------
Montgomery Asset Management, L.P. 3,278,000(1) 8.9%(1)
101 California
San Francisco, California 94111
AIM Management Group, Inc. 3,200,500(1) 8.7%(1)
11 Greenway Plaza, Suite 1919
Houston, Texas 77046
Edgemont Asset Management 2,450,000(1) 6.6%(1)
140 East 45th Street, 43rd Floor
New York, New York 10017
Larry A. Davis 2,500,060(2) 6.8%
10200 South Ocean Drive, No. 310
Jensen Beach, Florida 34957
- ---------------------------
(FOOTNOTES ON FOLLOWING PAGE)
2
<PAGE>
(1) Based on information provided by The Nasdaq Stock Market, Inc. for record
ownership as of September 30, 1998 (the most recent date for which
information is available to the Company) and a total of 36,916,215 shares
of Common Stock issued and outstanding on December 31, 1998.
(2) Based on record ownership as of December 31, 1998 and a total of
36,916,215 shares of Common Stock issued and outstanding on December 31,
1998. Includes 7,301 shares that Mr. Davis' wife has the right to acquire
upon exercise of stock options, exercisable within 60 days.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of December 31, 1998, 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 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.
AMOUNT AND NATURE
OF BENEFICIAL
NAME OWNERSHIP(1) PERCENT OF CLASS(2)
------ ------------------- ----------------------
Parris H. Holmes, Jr. 560,488(3) 1.5%
Alan W. Saltzman 513,049(4) 1.4%
Larry A. Davis 2,500,060(5) 6.8%
Kelly E. Simmons 238,301(6) *
Michael A. Harrelson 701,434(7) 1.9%
Michael W. Hancock 43,100(8) *
Lee Cooke 97,960(9) *
Thomas G. Loeffler 77,000(10) *
James E. Sowell 172,000(11) *
All executive officers and 5,219,843(12) 13.6%
directors as a group
(14 persons, including the
executive officers and
directors listed above)
- -------------------------
* 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 36,916,215 shares of Common Stock issued and
outstanding on December 31, 1998.
(3) Includes 363,750 shares that Mr. Holmes has the right to acquire upon the
exercise of stock options, exercisable within 60 days, 666 shares that Mr.
Holmes held in his Billing 401(k) Retirement Plan account and 6,072 shares
that Mr. Holmes held in his Employee Stock Purchase Plan account at
December 31, 1998.
(4) Includes 260,833 shares that Mr. Saltzman has the right to acquire upon
the exercise of stock options, exercisable within 60 days, an aggregate of
1,400 shares held in individual retirement accounts for Mr. Saltzman and
his wife, 8,800 shares that Mr. Saltzman held in his Billing 401(k)
Retirement Plan account and 6,072 shares that Mr. Saltzman held in his
Employee Stock Purchase Plan account at December 31, 1998.
(5) Includes 7,301 shares that Mr. Davis' wife has the right to acquire upon
exercise of stock options, exercisable within 60 days.
(6) Includes 234,668 shares that Mr. Simmons has the right to acquire upon
exercise of stock options, exercisable within 60 days, and 3,633 shares
that Mr. Simmons held in his Employee Stock Purchase Plan account at
December 31, 1998.
(7) Includes 50,000 shares that Mr. Harrelson has the right to acquire upon
exercise of stock options, exercisable within 60 days, 496 shares that Mr.
Harrelson held in his Billing 401(k) Retirement Plan account and 938
shares that Mr. Harrelson held in his Employee Stock Purchase Plan account
at December 31, 1998.
(8) Includes 37,500 shares that Mr. Hancock has the right to acquire upon
exercise of stock options, exercisable within 60 days.
3
<PAGE>
(9) Includes 82,000 shares that Mr. Cooke has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(10) Includes 52,000 shares that Mr. Loeffler has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(11) Includes 52,000 shares that Mr. Sowell has the right to acquire upon the
exercise of stock options, exercisable within 60 days.
(12) Includes 1,329,817 shares that the 14 directors and executive officers
have the right to acquire upon exercise of stock options, exercisable
within 60 days, 1,979 shares held in individual retirement accounts,
17,135 shares that such executive officers held in their respective
Billing 401(k) Retirement Plan accounts and 28,499 shares that such
executive officers held in their respective Employee Stock Purchase Plan
accounts at December 31, 1998.
MATTERS TO COME BEFORE THE ANNUAL MEETING
PROPOSAL 1: ELECTION OF TWO DIRECTORS
The Company's Amended and Restated Certificate of Incorporation, as
amended, 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 six. Directors are divided into three classes,
each of which has two members. 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 two persons for election as directors
in the class whose term of office will expire at the Company's 2002 Annual
Meeting of Stockholders or until their respective successor is elected and
qualified. The nominees are Parris H. Holmes, Jr. and Alan W. Saltzman. The
respective terms of the directors expire on the dates set forth below.
<TABLE>
<CAPTION>
DIRECTORS WHOSE TERMS EXPIRE AT
THE 1999 ANNUAL MEETING AND
NOMINEES FOR ELECTION FOR TERMS POSITION AND OFFICES
EXPIRING AT THE 2002 ANNUAL MEETING WITH THE COMPANY AGE DIRECTOR SINCE
- ----------------------------------- -------------------- --- --------------
<S> <C> <C> <C>
Parris H. Holmes, Jr. Chairman of the Board and 55 May 13, 1996
Chief Executive Officer
Alan W. Saltzman Director, President and 51 May 13, 1996
Chief Operating Officer
DIRECTORS WHOSE TERMS EXPIRE POSITION AND OFFICES
AT THE 2000 ANNUAL MEETING WITH THE COMPANY AGE DIRECTOR SINCE
- ----------------------------------- -------------------- --- --------------
Thomas G. Loeffler Director 52 August 21, 1996
James E. Sowell Director 50 June 21, 1996
DIRECTOR WHOSE TERM EXPIRES POSITION AND OFFICES
AT THE 2001 ANNUAL MEETING WITH THE COMPANY AGE DIRECTOR SINCE
- ----------------------------------- -------------------- --- --------------
Lee Cooke Director 54 May 13, 1996
Larry A. Davis Director and Senior Vice 41 January 5, 1999
President
</TABLE>
4
<PAGE>
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 nominees. Management of the Company does not
contemplate that either of such nominees will become unavailable for any reason,
but if that should occur before the meeting, proxies that do not withhold
authority to vote for directors will be voted for another nominee, or other
nominees, 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 both of the nominees listed therein or to withhold authority
to vote for one or both of such nominees. 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 nominees listed
therein or for other nominees as provided above. The director nominees receiving
a plurality of the votes cast at the Annual Meeting will be elected as
directors. Abstentions and broker non-votes will not be treated as a vote for or
against any particular 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, Loeffler and
Sowell 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.
5
<PAGE>
The Compensation Committee is comprised of certain directors who are not
employees of the Company or any of its subsidiaries. Messrs. Cooke, Loeffler and
Sowell 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.
The Nominating Committee is comprised of certain directors who are not
employees of the Company or any of its subsidiaries. Messrs. Cooke, Loeffler and
Sowell 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 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, as
amended, and Amended and Restated Bylaws.
MEETINGS OF THE BOARD OF DIRECTORS
During the fiscal year ended September 30, 1998, the Board of Directors
met 5 times and took action on 12 occasions by unanimous written consent, the
Compensation Committee met one time and took action on 26 occasions by unanimous
written consent, the Nominating Committee did not meet and the Audit Committee
met 2 times. 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
A total of 800,000 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 may grant
discretionary options under the Director Plan. Pursuant to such authority to
grant discretionary options, each outside member of the Board of Directors
receives an annual stock option grant of 6,000 shares, vesting 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.
THE BOARD OF DIRECTORS RECOMMIENDS A VOTE "FOR" THE ELECTION
OF THE INDIVIDUALS NOMINATED FOR ELECTION AS DIRECTORS
PROPOSAL 2: 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, 1999.
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,
1998, 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
6
<PAGE>
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 RECOMMIENDS A VOTE "FOR" THE PROPOSAL
TO RATIFY THE APPOINTMIENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC
ACCOUNTANTS OF THE COMIPANY FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 1999
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, 1998. 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.
NAME AGE POSITION
- ---- --- --------
Parris H. Holmes, Jr. 55 Chairman of the Board and Chief Executive
Officer
Alan W. Saltzman 51 Director, President and Chief Operating
Officer
Larry A. Davis 41 Director, Senior Vice President
Kelly E. Simmons 43 Executive Vice President and Chief Financial
Officer
W. Audie Long 54 Senior Vice President, General Counsel and
Corporate Secretary
Paul L. Gehri 45 Senior Vice President of LEC Sales; Vice
President of Sales and Marketing of
Billing Concepts, Inc. and Enhanced
Services Billing, Inc.
Michael A. Harrelson 43 Senior Vice President and Chief Technology
Officer; President and Chief Operating
Officer of Billing Concepts Systems, Inc.
Dennis M. Buck 39 Vice President of Financial Accounting and
Corporate Controller
Michael W. Hancock 54 Senior Vice President of Major Accounts of
Billing Concepts Systems, Inc.
Terri A. Hunter 35 Director of Investor Relations
Michael A. McQuade 38 Financial Planning Manager
Lee Cooke 54 Director(1)(2)(3)
Thomas G. Loeffler 52 Director(1)(2)(3)
James E. Sowell 50 Director(1)(2)(3)
- ----------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating Committee.
7
<PAGE>
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 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 Chairman of the Board of Directors of Tanisys Technology, Inc., a
developer, manufacturer and marketer of computer peripheral equipment. Mr.
Holmes also serves as a director of Sharps Compliance Corp., a provider of mail
sharps disposal services for certain types of medical sharps (needles, syringes
and razors) products. On December 18, 1996, the 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. ("ZPDI"), a subsidiary of USLD, prior to the Spin-Off, since
February 1991. In August 1994, Mr. Saltzman was elected President of ZPDI. Mr.
Saltzman 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.
LARRY A. DAVIS has served as a Director of the Company since January 1999
and as Senior Vice President of the Company since December 1998. Mr. Davis
joined the Company through the merger with Communications Software Consultants,
Inc. Mr. Davis founded Communications Software Consultants, Inc. in 1985 and had
served as sole Director from its inception until it was acquired by the Company
in December 1998. See "Related Transactions."
KELLY E. SIMMONS has served as Executive Vice President and Chief
Financial Officer of the Company since October 1998 and was Senior Vice
President and Chief Financial Officer from May 1996 to September 1998. He also
served as Corporate Secretary from May 1996 to February 1998 and as Corporate
Treasurer from May 1996 to September 1997. From 1988 until August 1996, Mr.
Simmons held various executive positions with USLD, including Vice President -
Finance and Corporate Treasurer, Vice President of Administration and Senior
Vice President of Business Development.
W. AUDIE LONG has served as Senior Vice President, General Counsel and
Corporate Secretary of the Company since February 1998. Mr. Long was Senior Vice
President-Legal and Regulatory Affairs and General Counsel of USLD from February
1991 to January 1998 and was Corporate Secretary of USLD from August 1993 to
January 1998.
PAUL L. GEHRI has served as Senior Vice President of LEC 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
Technology Officer of the Company and President of Billing Concepts Systems,
Inc., a wholly owned subsidiary of the Company ("BCS"), since June 1, 1997. In
addition, Mr. Harrelson was elected Chief Operating Officer of BCS in December
1998. He 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 "Related Transactions."
DENNIS M. BUCK has served as Vice President of Financial Accounting and
Corporate Controller of the Company since October 1997. Mr. Buck was Director of
Accounting from August 1996 to September 1997. October 1992 until August 1996,
Mr. Buck held various accounting positions with USLD, including Director of
Accounting.
8
<PAGE>
MICHAEL W. HANCOCK has served Senior Vice President of BCS since October
1997. Mr. Hancock also served as Vice President of the Company and as Chief
Operating Officer of BCS from October 1997 to December 1998. 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.
TERRI A. HUNTER has served as Director of Investor Relations of the
Company since April 1997. Ms. Hunter was Director of Financial Planning of the
Company from August 1996 to March 1997 and served as Director of Financial
Planning of USLD from February 1993 to July 1996.
MICHAEL A. MCQUADE has served as Financial Planning Manager of the Company
since October 1997. Mr. McQuade was Senior Financial Analyst of the Company from
October 1996 to August 1997. Previously, Mr. McQuade was Pricing Manager of
Pabst Brewing Company from October 1994 to October 1996 and Planning Coordinator
of Builders Square, Inc. from April 1992 to October 1994.
LEE COOKE has served as a director of the Company since May 1996 and was a
director of USLD from 1991 until July 1996. He was Chairman of the Board and
Chief Executive Officer of U.S. Medical Systems, Inc. from May 1992 to July
1998. In July 1998, U.S. Medical Systems, Inc. was reorganized and the name
changed to Sharps Compliance Corp., at which time Mr. Cooke resigned as Chairman
of the Board and Chief Executive Officer. He continues to serve as a member of
the Board of Directors of Sharps Compliance Corp. Mr. Cooke reformed U.S.
Medical Systems, Inc. in July 1998 and has served as Chairman of the Board,
President and Chief Executive Officer of such company since that time. 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 Sable Homes, Inc. ("SHI") and a general partner of Fleetwood Retail
Associates, Ltd. ("FRA"). Both of these entities filed petitions for relief
under the U.S. Bankruptcy Code, SHI in September 1993 (dismissed in 1995) and
FRA in October 1997 (dismissed in 1998).
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. Mr. Loeffler served as a member of Congress to the United States
House of Representatives from 1979 to 1987. Mr. Loeffler serves as a director of
Introgen Therapeutics, Inc. and the University of Texas Investment Management
Company and is Vice Chairman of the Board of Regents of the University of Texas
System.
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, 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. Cooke, Loeffler and Sowell, 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.
9
<PAGE>
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
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 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 $375,000 from the Company in fiscal 1998.
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 1998.
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.
10
<PAGE>
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 1998.
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 1998, Mr. Holmes received an option to purchase 275,000 shares
of Common Stock with an exercise price of $8.3125 per share. One fourth (25%) of
the shares subject to such option vest on each of August 28, 1998, 1999, 2000
and 2001. In determining the number of shares subject to the option granted to
Mr. Holmes, the Committee considered numerous subjective factors indicative of
Mr. Holmes's dedication to the success of the Company. As of December 31, 1998,
Mr. Holmes owned 190,000 shares of the Company's Common Stock and, including the
fiscal 1998 grant, held options to purchase a total of 870,000 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 $58,508 in matching
contributions during fiscal 1998, $18,660 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.
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
11
<PAGE>
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
Lee Cooke
Thomas G. Loeffler
James E. Sowell
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 four other most highly compensated executive officers for fiscal 1998.
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 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. The shares underlying stock option grants for
fiscal 1997 and 1996 and the restricted stock grant for fiscal 1997 have been
restated to give effect to the one-for-one common stock dividend that was
distributed on January 30, 1998 to stockholders of record on January 20, 1998.
12
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL -------------------------- OTHER ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) OPTIONS(#) COMPENSATION($)
- ------------------- ------ --------- --------- --------------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
PARRIS H. HOLMES, JR. 1998 $372,113 0 $51,533(1) 0 275,000 $ 150,014(2)
CHAIRMAN OF THE BOARD AND 1997 $300,000 0 $71,973(3) 0 400,000 $ 28,728(4)
CHIEF EXECUTIVE OFFICER 1996(5) $261,808(6) $805,000 $15,524 $602,800(7) 670,000(5) $1,339,979(8)
ALAN W. SALTZMAN 1998 $238,462 0 $28,314(9) 0 190,000 $ 25,349(10)
PRESIDENT AND CHIEF 1997 $200,000 0 $26,105(11) 0 260,000 $ 12,538(12)
OPERATING OFFICER 1996(13) $138,462(6) $100,000 $17,962 $133,330(14) 406,000(13) $ 239,032(15)
KELLY E. SIMMONS 1998 $185,961 0 $18,879 0 120,000 $ 7,152(16)
EXECUTIVE VICE PRESIDENT 1997 $140,000 0 $1,603 0 160,000 $ 1,777(17)
AND CHIEF FINANCIAL OFFICER 1996(18) $ 88,154(6) $ 33,000 $1,565 0 190,000(18) $ 63,489(19)
MICHAEL A. HARRELSON 1998 $209,615 0 $13,904 0 100,000 $ 5,700(20)
SENIOR VICE PRESIDENT AND 1997 $ 61,538(21) 0 0 0 400,000 0
CHIEF TECHNOLOGY OFFICER; 1996 N/A N/A N/A N/A N/A N/A
PRESIDENT AND CHIEF
OPERATING OFFICER OF BCS
MICHAEL W. HANCOCK 1998 $177,798 0 $ 410 0 30,000 $ 10,233(22)
SENIOR VICE PRESIDENT 1997 N/A N/A N/A $ 98,000(23) 150,000 N/A
OF MAJOR ACCOUNTS OF BCS 1996 N/A N/A N/A N/A N/A N/A
</TABLE>
- ----------------------
(1) Includes $31,269 reimbursed to Mr. Holmes during fiscal 1998 for the
payment of certain taxes.
(2) Represents $5,000 in Billing 401(k) Retirement Plan contributions, $18,660
in Billing deferred compensation contributions and $126,354 in life
insurance premiums made or paid on behalf of Mr. Holmes during fiscal
1998.
(3) Includes $28,163 reimbursed to Mr. Holmes during fiscal 1997 for the
payment of certain taxes.
(4) 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.
(5) During fiscal 1996, Mr. Holmes received from Billing a salary of $46,539
and was granted an option to purchase 300,000 shares of Billing Common
Stock. Pursuant to the terms of the Spin-Off, Mr. Holmes received options
to purchase 370,000 shares of Billing Common Stock to correspond to his
outstanding USLD options.
(6) Represents salary paid through August 1, 1996 by USLD.
(7) Mr. Holmes was granted 55,000 shares of USLD common stock on January 26,
1996 which, as amended, vested 100% on July 2, 1996, and was granted
50,000 shares of USLD common stock on July 16, 1996 which vested 100% on
the date of grant.
(8) 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.
(9) Includes $9,834 reimbursed to Mr. Saltzman during fiscal 1998 for the
payment of certain taxes.
(10) Represents $5,077 in Billing 401(k) Retirement Plan contributions, $10,272
in Billing deferred compensation contributions and $10,000 in life
insurance premiums made or paid on behalf of Mr. Saltzman during fiscal
1998.
(11) Includes $1,863 reimbursed to Mr. Saltzman during fiscal 1997 for the
payment of certain taxes.
(12) 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.
(13) During fiscal 1996, Mr. Saltzman received from Billing a salary of $30,423
and was granted an option to purchase 200,000 shares of Billing Common
Stock. Pursuant to the terms of the Spin-Off, Mr. Saltzman received
options to purchase 206,000 shares of Billing Common Stock to correspond
to his outstanding USLD options.
(14) Mr. Saltzman was granted 16,000 shares of USLD common stock on March 8,
1996 which, as amended, vested 100% on July 2, 1996, and was granted 7,000
shares of USLD common stock on July 16, 1996 which vested 100% on the date
of grant.
13
<PAGE>
(15) 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 during fiscal 1996, and a
$225,000 severance payment by USLD in connection with the Spin-Off.
(16) Represents $4,056 in Billing 401(k) Retirement Plan contributions and
$3,096 in Billing deferred compensation contributions made on behalf of
Mr. Simmons during fiscal 1998.
(17) Represents $1,777 in Billing 401(k) Retirement Plan contributions made on
behalf of Mr. Simmons during fiscal 1997.
(18) During fiscal 1996, Mr. Simmons received from Billing a salary of $21,046
and was granted an option to purchase 100,000 shares of Billing Common
Stock. Pursuant to the terms of the Spin-Off, Mr. Simmons received options
to purchase 90,000 shares of Billing Common Stock to correspond to his
outstanding USLD options.
(19) 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
Spin-Off.
(20) Represents $2,308 in Billing 401(k) Retirement Plan contributions and
$3,392 in Billing deferred compensation contributions made on behalf of
Mr. Harrelson during fiscal 1998.
(21) Amount shown reflects Mr. Harrelson's salary from June 4, 1997, the
beginning date of his employment with the Company, through the end of
fiscal 1997.
(22) Represents $10,233 in Billing deferred compensation contributions made on
behalf of Mr. Hancock during fiscal 1998.
(23) Mr. Hancock was granted 5,600 shares of stock on August 25, 1997 which
vests 50% on August 25, 1998 and 50% on August 25, 1999. The value of the
restricted stock award was determined by multiplying the market value of
the Common Stock on September 30, 1997, as determined by reference to the
closing price of the Common Stock on The Nasdaq Stock Market's National
Market System ($17.50 per share, after giving effect to the one-for-one
dividend paid on January 30, 1998) by the number of shares of restricted
stock held.
STOCK OPTION GRANTS IN FISCAL 1998
The following table provides certain information related to options
granted by Billing to the named executive officers during fiscal 1998 pursuant
to the Billing Employee Stock Plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION -------------------------
NAME GRANTED(#) 1998 ($/SH) DATE 5%($) 10%($)
- --------------------- ----------- ------------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Parris H. Holmes, Jr. 275,000 14.3% $8.3125 8/27/05 $930,606 $2,168,708
Alan W. Saltzman 190,000 9.9% $8.3125 8/27/05 $642,964 $1,498,380
Kelly E. Simmons 120,000 6.2% $8.3125 8/27/05 $406,083 $ 946,345
Michael A. Harrelson 100,000 5.2% $8.3125 8/27/05 $338,402 $ 788,621
Michael W. Hancock 30,000 1.6% $8.3125 8/27/05 $101,521 $ 236,586
</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.
14
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1998 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 1998 and
the number and value of Billing options held at September 30, 1998. All share
numbers presented have been restated to give effect to the one-for-one common
stock dividend that was distributed on January 30, 1998 to stockholders of
record on January 20, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE(2) OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END(#) OPTIONS AT FY-END($)
SHARES ACQUIRED VALUE ---------------------------- ---------------------------
NAME UPON OPTION EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ----------------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Parris H. Holmes, Jr. 225,000 $3,341.788 363,750 506,250 $955,078 $1,766,797
Alan W. Saltzman 160,000 $2,285,025 310,832 339,168 $764,946 $1,206,304
Kelly E. Simmons 0 0 234,668 203,332 $949,186 $ 709,784
Michael A. Harrelson 0 0 50,000 450,000 $284,375 $ 684,375
Michael W. Hancock 0 0 37,500 142,500 0 $ 170,625
</TABLE>
- ---------------------------
(1) Market value of the underlying securities at exercise date, minus the
exercise price.
(2) Market value of the underlying securities at September 30, 1998 ($14.00),
minus the exercise price.
EMPLOYEE BENEFIT PLANS
BILLING CONCEPTS CORP. 401(K) RETIREMENT PLAN
The Company maintains the Billing 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. As of January 1, 1998, the eligibility requirement was reduced
to six months of service during which 500 hours were worked.
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 6% 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.
15
<PAGE>
1996 EMPLOYEE COMPREHENSIVE STOCK PLAN
The Company has adopted the Billing Concepts Corp. 1996 Employee
Comprehensive Stock Plan (the "Billing Employee Stock Plan"). The Billing
Employee Stock Plan provides for (i) the grant of incentive 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, 10,500,000 shares of Common
Stock have been reserved for the granting of options and awards of restricted
stock. At December 31, 1998, options to purchase 8,489,158 shares, and 5,600
shares of restricted stock, 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, Thomas Loeffler and James Sowell. 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 810 eligible individuals at
December 31, 1998) 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.
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.
1999 COMMSOFT ACQUISITION STOCK OPTION PLAN
In December 1998, in connection with the Company's acquisition of
Communications Software Consultants, Inc. ("CommSoft"), the Company adopted the
Billing Concepts Corp. 1999 CommSoft Acquisition Stock Option Plan (the
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"CommSoft Employee Stock Plan"). The CommSoft Employee Stock Plan provides for
the grant of NQSOs. Under the terms of the CommSoft Employee Stock Plan, 173,153
shares of Common Stock have been reserved for the granting of options. At
December 31, 1998, options to purchase all 173,153 shares had been granted under
the CommSoft Employee Stock Plan. If any option or award granted under the
CommSoft Employee Stock Plan terminates, expires or is surrendered as to any
shares, new options or awards may thereafter be made covering such shares.
The CommSoft 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 CommSoft
Employee Stock Plan grants authority to the Compensation Committee to grant
options to those employees of CommSoft holding stock options to purchase shares
of Class B common stock, $.001 par value, of CommSoft on the closing date of the
Company's acquisition of all of the issued and outstanding capital stock of
CommSoft under the terms of the Plan of Merger and Acquisition Agreement (the
"Merger Agreement"). The Merger Agreement closed on December 18, 1998, at which
date 88 former employees of CommSoft were eligible for grants under the CommSoft
Employee Stock Plan. In addition, the Committee has the authority to determine
methods of exercise. The option price per share with respect to each option was
determined by a formula set forth in the Merger Agreement. 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.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted the Billing 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 377 employees
were eligible to participate under the Billing Purchase Plan at December 31,
1998.
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 2,000,000 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 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
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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, 1998, there were 16 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 $58,508 in Company Deferral
Contributions to this plan during fiscal 1998.
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 prior to the Spin-Off was credited under the Billing
Executive Deferral Plan for purposes of vesting. 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 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 1998.
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 $375,000 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 $240,000. 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 January 1998. This agreement provides for a two-year term, subject to
automatic extension for an additional two years on each two-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. Simmons for "good reason" (as defined in the employment
agreement). The employment agreement provides for an annual, calendar year base
salary of $185,000. The employment agreement also provides for an incentive
bonus at the discretion of the Compensation Committee.
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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). As amended in August 1998, the employment agreement provides for an
annual base salary of $200,000 during the term 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.
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 defined in their
employment agreements), they will be entitled to the following severance: Mr.
Holmes - 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
$1,500,000), continuation of his benefits through the unexpired term of his
agreement and vesting of all outstanding stock options; Mr. Saltzman - (i) if
terminated without cause, a lump-sum payment in the amount equal to two times
his then effective annual base salary ($480,000), continuation of his benefits
through the unexpired term of his agreement and vesting of all outstanding stock
options, and (ii) if he resigns for "good reason," a lump-sum payment in the
amount equal to two times his then effective annual base salary ($480,000) and
vesting of all outstanding stock options; and Mr. Simmons - a lump-sum payment
in the amount equal to two times his then effective annual base salary
($370,000) and continuation of his benefits through the unexpired term of his
agreement.
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 12 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 agreements) or (ii)
voluntary termination by the employee for "good reason upon change of control"
(as defined in the employment agreements), in addition to the severance stated
above, they will be entitled to 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).
The employment agreement with Mr. Harrelson provides that if, at any time
within 12 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 annual base salary.
The Company and Mr. Michael W. 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
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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 150,000
shares of Common Stock of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Lee Cooke, Thomas G. Loeffler and James E. Sowell, directors of the
Company, served on the Compensation Committee during the fiscal year ending
September 30, 1998. Mr. Cooke served as Chairman of the Board and Chief
Executive Officer of U.S. Medical Systems, Inc., now known as Sharps Compliance
Corp., until July 1998 and continues to serve as a member of the Board of
Directors of Sharps Compliance Corp. In addition, Mr. Cooke is Chairman of the
Board and Chief Executive Officer of the reformed U.S. Medical Systems, Inc. Mr.
Holmes, Chairman of the Board and Chief Executive Officer of the Company, also
serves on the Board of Directors of Sharps Compliance Corp.
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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 December 31, 1998, 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 seven hundred thirty-three (733) 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.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, S&P 500 INDEX AND PEER GROUP
- --------------------------------------------------------------------------------
INDEX FOR: 8/05/96 9/30/96 3/31/97 9/30/97 3/31/98 9/30/98
- ---------- ------- ------- ------- ------- ------- -------
The Company 100.0 104.7 112.9 164.7 244.1 132.8
S&P 500 Stocks 100.0 104.5 116.3 147.1 172.5 160.8
Nasdaq Computer and Data 100.0 109.4 105.6 148.0 184.6 193.1
Processing Stocks
- --------------------------------------------------------------------------------
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.
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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% 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%
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, 1998,
all Section 16(a) filing requirements applicable to its directors, executive
officers and greater than 10% beneficial owners were complied with.
RELATED TRANSACTIONS
In June 1997, the Company acquired Computer Resources Management, Inc.
("CRM") from Michael A. Harrelson, Senior Vice President and Chief Technology
Officer of the Company. In connection with the acquisition of CRM, Mr. Harrelson
received consideration from the Company of $8,450,000 in cash, 650,000 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.
The Company charters a jet airplane from a company associated with Parris
H. Holmes, Jr., Chairman of the Board and Chief Executive Officer of the
Company. Under the terms of the charter 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 fiscal year ended September 30, 1998, the
Company paid approximately $278,000 in fees related to this agreement.
On April 13, 1998, the Company made a $250,000 loan to Kelly E. Simmons,
Executive Vice President and Chief Financial Officer of the Company, with
interest accruing at the rate of 7% per annum. The largest aggregate amount of
this indebtedness outstanding for this loan (including interest) during fiscal
year 1998 was $258,151.50, and the aggregate amount outstanding at December 31,
1998 was $262,706.42.
In December 1998, the Company acquired Communications Software
Consultants, Inc. ("CommSoft") from Larry A. Davis, a Director and Senior Vice
President of the Company. In connection with the acquisition of CommSoft, Mr.
Davis received 2,492,759 shares of Common Stock (which such shares were valued
at $29,134,121 at the date of issuance).
PROPOSALS FOR NEXT ANNUAL MEETING
Any proposals of holders of Common Stock intended to be presented pursuant
to Rule 14a-8 under the Exchange Act ("Rule 14a-8") at the Annual Meeting of
Stockholders to be held in 2000 must be received by the Company, addressed to
the Secretary of the Company at 7411 John Smith Drive, Suite 200, San Antonio,
Texas 78229-4898, by September 30, 1999 to be considered for inclusion in the
Company's proxy statement and form of proxy related to such meeting. After
October 30, 1999, 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 2000 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.
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.
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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 (e) 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.
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,
W. Audie Long
CORPORATE SECRETARY
San Antonio, Texas
January 28, 1999
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APPENDIX
In accordance with Rule 14a-3(c) under the Securities Exchange Act of
1934, as amended (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,
1998 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.
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MARKET FOR THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Subsequent to its spin-off from USLD 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 October 1, 1996, through December 11, 1998, 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.
HIGH LOW
--------- ---------
Fiscal Year Ended September 30, 1997:
1st quarter $15 7/8 $12 1/8
2nd quarter $16 1/8 $12
3rd quarter $17 7/16 $10 11/16
4th quarter $19 9/16 $16 27/32
Fiscal Year Ending September 30, 1998:
1st quarter $24 11/16 $17 7/8
2nd quarter $30 $22
3rd quarter $29 5/8 $13 1/2
4th quarter $15 3/4 $8 5/16
Fiscal Year Ending September 30, 1999:
1st quarter (through December 11, 1998) $17 $10
STOCKHOLDERS
At December 11, 1998, there were 34,404,124 shares of Common Stock
outstanding, held by 476 holders of record. The last reported sales price of the
Common Stock on December 11, 1998, was $13 3/8 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.
A-2
<PAGE>
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 the
other financial information included elsewhere in this Report. 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 Concepts Corp. ("BCC")
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:
YEAR ENDED SEPTEMBER 30,
------------------------
1998 1997 1996
---- ---- ----
Operating revenues.............................. 100.0% 100.0% 100.0%
Cost of revenues................................ 61.5 62.4 64.4
---- ---- ----
Gross profit.................................... 38.5 37.6 35.6
Selling, general and administrative expenses.... 12.5 11.0 11.0
Research and development........................ 1.3 0.6 0.0
Advance funding program income.................. (4.9) (5.9) (6.3)
Advance funding program expense................. 0.1 0.6 1.3
Depreciation and amortization expense........... 4.0 3.1 2.0
Special charges................................. 1.2 17.3 0.0
---- ---- ----
Income from operations.......................... 24.3 10.9 27.6
Other income, net............................... 2.8 0.5 0.1
---- ---- ----
Income before provision for income taxes........ 27.0 11.4 27.7
Provision for income taxes...................... (10.9) (8.4) (10.5)
---- ---- ----
Net income...................................... 16.1% 3.0% 17.2%
==== === ====
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. 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
A-3
<PAGE>
to customers based on volume. Billing systems revenues also include retail sales
of computer hardware and third-party software.
Total revenues for 1998 were $160.8 million compared to $122.8 million in
1997 and $103.9 million in 1996, representing increases of 30.9% and 18.2%,
respectively. LEC billing services revenues increased 22.5% to $147.5 million in
1998, and increased 15.9% to $120.5 million in 1997 from $103.9 million in 1996.
The remaining increase in revenues from year to year 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 1998, 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 telephone user of competitive long distance
services available at the pay phone. Despite the overall increase in LEC billing
services revenue from 1997, revenue growth during 1998 was negatively impacted
by "slamming" and "cramming" issues. Slamming is defined as the unauthorized and
illegal switching of a customer's telephone service from one carrier to another
carrier while cramming is the practice of a company billing customers for
products and services that they may not have ordered, and may not have received.
During the third quarter of 1998, in response to these issues, certain LECs
established various temporary moratoriums that affected the ability of certain
customers to market some of their services. BCC played a very active role in
assisting certain local telephone companies, the Federal Communications
Commission ("FCC") and certain Public Utilities Commissions in providing the
best solution to eliminate these issues from the telecommunications industry,
including taking part in forming an industry coalition, which released a set of
"Standards of Practice" that addresses these issues. The FCC subsequently
published similar standards in its Best Billing Practices document. BCC will
continue to adhere to the Best Billing Practices, and will work with the local
telephone companies to reduce the level of consumer complaints. As a proactive
measure, BCC has taken action against certain customers that include, but is not
limited to, the cessation of billing for certain new or existing products. It is
still unclear what monetary impact these actions will have on the LEC billing
business in the future.
Telephone call record volumes were as follows:
YEAR ENDED
SEPTEMBER 30,
-----------------------
1998 1997 1996
----- ----- -----
(IN MILLIONS)
Direct dial long distance services .............. 612.6 510.3 402.8
Operator services ............................... 134.6 133.4 131.8
Enhanced billing services........................ 11.4 9.6 8.6
Billing management services...................... 329.1 342.1 308.9
Although billing management records decreased approximately 4% from 1997
to 1998, 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.
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 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.
A-4
<PAGE>
Gross profit margin of 38.5% reported for 1998 compares to 37.6% achieved
in 1997 and 35.6% achieved in 1996. The improvement from 1997 to 1998 is due
primarily to the addition of sales of billing systems and related services
revenues throughout 1998 that served to improve gross margin due to the higher
margins associated with systems sales. This improvement was offset partially by
higher LEC billing costs. 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 higher margin billing
systems and related services revenues in late 1997 also served to improve gross
margin. 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
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 although no assurance can be given in this regard.
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.
SG&A expenses for 1998 were $20.1 million or 12.5% of revenues, compared
to $13.6 million in 1997, and $11.4 million in 1996, both representing 11.0% of
revenues. SG&A expenses as a percentage of revenues for 1998 increased from the
prior year primarily due to the systems operations incurring a higher level of
SG&A expenses as a percentage of revenue than the Company as a whole. As the
revenues generated by systems operations have increased as a percentage of total
revenue, the overall SG&A percentage has increased accordingly.
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. Research and development expenses
in 1998 were $2.0 million compared to $688,000 in 1997. The Company intends to
continue its research and development efforts in the future and anticipates
spending approximately $6 million during 1999 for such expenses.
ADVANCE FUNDING PROGRAM INCOME AND EXPENSE
Advance funding program income was $7.9 million in 1998 compared with $7.3
million in 1997 and $6.6 million in 1996. 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 $83.0 million, $73.6 million and $60.9 million in
1998, 1997 and 1996, respectively.
Advance funding program expense was $126,000 in 1998, compared with
$688,000 in 1997 and $1.4 million in 1996. The 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 obtained in December 1996. The
expense recognized during 1998 represents unused credit facility fees and is the
minimum expense that the Company could have incurred during this year.
A-5
<PAGE>
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 $6.5 million in 1998 compared
with $3.8 million in 1997 and $2.1 million in 1996. Depreciation and
amortization expense as a percentage of revenues was 4.0%, 3.1% and 2.0% in
1998, 1997 and 1996, respectively. The increase in the percentage 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
leasehold improvements. Investments in leasehold improvements increased in
connection with the Company taking occupancy of a new facility in 1997 that
serves as both a customer service center and the corporate headquarters of the
Company and leasing an additional customer service center in 1998. During 1998
and 1997, the Company recognized $625,000 and $205,000 of amortization expense,
respectively, related to goodwill and other intangibles acquired in connection
with the acquisition of CRM in June 1997.
INCOME FROM OPERATIONS
Income from operations was $39.0 million, $13.4 million and $28.6 million
in 1998, 1997 and 1996, respectively. Income from operations for 1998 reflects
special charges of $2.0 million during the fourth quarter of 1998 representing
in-process research and development costs acquired in connection with the
acquisition of 22% of the capital stock of PTC. 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 25.5%, 28.2% and 27.6% of
revenues in 1998, 1997 and 1996, respectively. The decrease in income from
operations, exclusive of special charges, as a percentage of revenues from 1997
to 1998 is attributable to higher SG&A, research and development and
depreciation expenses and lower net advance funding income as a percentage of
1998 revenues, offset partly by a higher gross profit margin. 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.
OTHER INCOME
Net other income of $4.5 million in 1998 compares to net other income of
$552,000 in 1997 and $152,000 in 1996. The increase in 1998 and 1997 from the
prior year were both primarily due to increased interest income from short-term
investments due to higher cash reserves. Interest expense was also lower in 1998
due to the pay down of long term debt.
INCOME TAXES
The Company's effective tax rate was 40.3% in 1998, 73.5% in 1997 and
38.0% in 1996 . The Company's effective tax rate is higher than the federal
statutory rate due to the addition of state income taxes and certain deductions
taken for financial reporting purposes that are not deductible for federal
income tax purposes. The increase in the effective rate for 1998 and 1997 is
primarily due to nondeductible in-process research and development costs and
amortization expenses related to the acquisition of PTC and CRM, respectively.
Exclusive of special charges, the Company's effective tax rate would have been
38.5% and 38.0% in 1998 and 1997, respectively.
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
A-6
<PAGE>
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.
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.
The Company has installed the MBA 4.0 Y2K ready version in its Service Bureau
operation, which is processing 11 clients. BCS is currently beta testing at one
of its largest MBA clients and expects to complete the testing by December 30,
1998. BCS expects to prepare for a general release of MBA 4.0 in the first
quarter of 1999. The LEC systems are still anticipating its modifications and
replacements will be complete by April 1999. 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 less than $3
million. As of December 1998, the Company has spent approximately $1.5 million
on capital expenditures for related hardware and software and incurred and
expensed approximately $300,000 in personnel and other costs related to the Year
2000 readiness process. The Company anticipates incurring less than $1 million
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.
A-7
<PAGE>
The above year 2000 disclosure constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act
(the "Act"), which was signed into law on October 19, 1998. The Act provides
added protection from liability for certain public and private statements
concerning a company's year 2000 readiness.
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, 1998,
1997 and 1996. 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
1998, 1997 and 1996. 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
give effect to the Distribution as if it had occurred at the beginning of the
year.
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.
A-8
<PAGE>
BILLING 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 AS
REPORTED REPORTED
AS WITHOUT AS WITHOUT
REPORTED SPECIAL REPORTED SPECIAL
WITH CHARGES WITH CHARGES
SPECIAL --------- SPECIAL ---------
CHARGES (D) CHARGES (B)
--------- --------- --------- ---------
1998 1998 1997 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues ....................... $ 160,762 $ 160,762 $ 122,836 $ 122,836 $ 103,884
Cost of revenues ......................... 98,894 98,894 76,662 76,662 66,868
--------- --------- --------- --------- ---------
Gross profit ............................. 61,868 61,868 46,174 46,174 37,016
Selling, general and administrative
expenses ............................... 20,111 20,111 13,565 13,565 11,445
Research and development ................. 2,030 2,030 688 688 0
Advance funding program income ........... (7,919) (7,919) (7,255) (7,255) (6,564)
Advance funding program expense (A) ...... 126 126 688 688 2,760
Depreciation and amortization expense .... 6,494 6,494 3,797 3,797 2,127
Special charges .......................... 2,000 0 21,252 0 0
--------- --------- --------- --------- ---------
Income from operations ................... 39,026 41,026 13,439 34,691 27,248
Other income, net ........................ 4,450 4,450 552 552 152
--------- --------- --------- --------- ---------
Income before provision for income taxes . 43,476 45,476 13,991 35,243 27,400
Provision for income taxes (C) ........... (17,529) (17,529) (10,284) (13,381)
--------- --------- --------- --------- ---------
Net income ............................... $ 25,947 $ 27,947 $ 3,707 $ 21,862 $ 16,989
========= ========= ========= ========= =========
Net income per diluted common share ...... $ 0.74 $ 0.80 $ 0.11 $ 0.66 $ 0.55
Weighted average common shares and common
share equivalents outstanding (E) ...... 34,908 34,908 32,518 32,976 30,770
</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 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.
Interest expense was calculated at a rate of 8.0% per annum.
(B) Excludes special charges of $21,252 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) Excludes special charges of $2,000 representing in-process research and
development costs acquired in connection with the acquisition of 22% of the
common stock of PTC.
(E) The number of weighted average shares outstanding for 1996 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. Earnings per
share and weighted average common shares and common share equivalents
outstanding for all years presented have been restated to give effect to the
one-for-one common stock dividend that was distributed on January 30, 1998
to stockholders of record on January 20, 1998.
A-9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $118.3 million at September 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 increased to $58.6 million at September 30, 1998, from $27.6 million at
September 30, 1997, and its current ratio was 1.4:1 and 1.2:1 at September 30,
1998 and 1997, respectively. Net cash provided by operating activities was $37.8
million, $31.1 million and $26.0 million in 1998, 1997 and 1996, respectively,
and reflected the increases in net income from 1996 to 1998, exclusive of
special charges.
In December 1996, the Company obtained 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 September 30, 1998 or 1997. At
September 30, 1998, 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 was obligated as a guarantor of USLD's equipment financing agreements
with certain lenders during the period the debt remained outstanding. At
September 30, 1998, all indebtedness under such agreements had been paid in
full; therefore, the Company is no longer obligated as a guarantor. 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 was in compliance with all required covenants at
September 30, 1998 and 1997.
Capital expenditures amounted to approximately $11.3 million in 1998 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. There were no amounts financed in
1998. The Company anticipates capital expenditures before acquisitions, if any,
of approximately $13 million in fiscal 1999, 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 CRM, a company that develops
software systems for the direct billing of telecommunications services. An
aggregate of $8.5 million cash and 650,000 shares of the Company's Common Stock
were issued in connection with this purchase transaction. 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.
In September 1998, the Company acquired 22% of the capital stock of PTC
for $10 million. PTC was a privately held company located in Princeton, New
Jersey specializing in electronic bill publishing over the Internet and advanced
payment solutions. The Company accounts for this investment under the equity
method of accounting. In addition, the Company acquired the right of first
refusal for a period of five years to provide any future equity or debt
financing for PTC.
Effective October 1, 1998, the Company acquired Expansion Systems
Corporation ("ESC"), a privately held company headquartered in Glendale,
California that develops and markets billing and registration systems to
Internet Service Providers ("ISPs") under its flagship products TOTALBILL and
INSTANTREG. An aggregate of 170,000 shares of the Company's Common Stock were
issued in connection with this transaction, which will be accounted for as a
pooling of interests.
In December 1998, the Company completed the merger of Communications
Software Consultants, Inc. ("CommSoft") in consideration of 2,492,759 shares of
the Company's common stock. CommSoft was a privately held, international
software development and consulting firm specializing in the telecommunications
industry.
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<PAGE>
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 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 at September 30, 1998 and
1997.
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
A-11
<PAGE>
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 historically has not been 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 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
accounting standards recently issued by the authoritative bodies will have a
material impact on the Company's financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments, which would
require disclosure under this item.
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 report at the page indicated.
PAGE
----
Report of Independent Public Accountants............... A-13
Consolidated Balance Sheets at
September 30, 1998 and 1997.......................... A-14
Consolidated Statements of Income for
the Years Ended September 30, 1998,
1997 and 1996........................................ A-15
Consolidated Statements of Stockholders'
Equity for the Years Ended
September 30, 1998, 1997 and 1996.................... A-16
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1998,
1997 and 1996........................................ A-17
Notes to Consolidated Financial Statements............. A-18
A-12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Billing Concepts Corp.:
We have audited the accompanying consolidated balance sheets of Billing
Concepts Corp. (a Delaware corporation) and subsidiaries as of September 30,
1998 and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1998. 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 Concepts Corp. and
subsidiaries as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
November 12, 1998
A-13
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
SEPTEMBER 30,
----------------------
1998 1997
--------- ---------
Current assets:
Cash and cash equivalents ......................... $ 118,291 $ 41,444
Accounts receivable, net of allowance for
doubtful accounts of $268 (1998) and $138 (1997) 33,748 25,919
Purchased receivables ............................. 64,477 70,175
Prepaids and other ................................ 3,776 3,196
--------- ---------
Total current assets .......................... 220,292 140,734
Property and equipment ............................. 32,314 22,906
Less accumulated depreciation and amortization .... (10,282) (4,750)
--------- ---------
Net property and equipment .................... 22,032 18,156
Equipment held under capital leases, net of
accumulated amortization of $963 (1998)
and $964 (1997) .................................. 441 606
Other assets, net of accumulated
amortization of $2,503 (1998) and
$1,680 (1997) .................................... 8,299 7,516
Investment in equity affiliate ..................... 8,000 0
--------- ---------
Total assets .................................. $ 259,064 $ 167,012
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ............................ $ 17,757 $ 19,223
Accounts payable - billing customers .............. 118,599 75,166
Accrued liabilities ............................... 24,451 17,728
Current portion of long-term debt ................. 606 606
Current portion of obligations under capital leases 251 441
--------- ---------
Total current liabilities ..................... 161,664 113,164
Long-term debt, less current portion ............... 1,668 2,324
Obligations under capital leases,
less current portion ............................. 29 290
Deferred income taxes .............................. 2,575 2,048
Other liabilities .................................. 797 499
--------- ---------
Total liabilities ............................. 166,733 118,325
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, 1998 or 1997 ...................... 0 0
Common stock, $0.01 par value,
75,000,000 shares authorized, 34,150,131
shares issued and outstanding at
September 30, 1998; 60,000,000
shares authorized, 32,395,170 shares
issued and outstanding at
September 30, 1997 .............................. 342 324
Additional paid-in capital ......................... 60,039 42,916
Retained earnings .................................. 32,344 6,397
Deferred compensation .............................. (394) (950)
--------- ---------
Total stockholders' equity .................... 92,331 48,687
--------- ---------
Total liabilities and stockholders' equity .... $ 259,064 $ 167,012
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
A-14
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating revenues ...................................... $ 160,762 $ 122,836 $ 103,884
Cost of revenues ........................................ 98,894 76,662 66,868
--------- --------- ---------
Gross profit ............................................ 61,868 46,174 37,016
Selling, general and administrative expenses ............ 20,111 13,565 11,445
Research and development ................................ 2,030 688 0
Advance funding program income .......................... (7,919) (7,255) (6,564)
Advance funding program expense ......................... 126 688 1,367
Depreciation and amortization expense ................... 6,494 3,797 2,127
Special charges (See Note 6) ............................ 2,000 21,252 0
--------- --------- ---------
Income from operations .................................. 39,026 13,439 28,641
Other income (expense):
Interest income ........................................ 4,440 989 938
Interest expense ....................................... (184) (493) (287)
Other, net ............................................. 194 56 (499)
--------- --------- ---------
Total other income, net .............................. 4,450 552 152
--------- --------- ---------
Income before provision for income taxes ................ 43,476 13,991 28,793
Provision for income taxes .............................. (17,529) (10,284) (10,941)
--------- --------- ---------
Net income .............................................. $ 25,947 $ 3,707 $ 17,852
========= ========= =========
Basic:
Net income per common share ............................. $ 0.78 $ 0.12 --
Pro forma net income per common share
(Unaudited - See Note 2) .............................. -- -- $ 0.61
Weighted average common shares outstanding .............. 33,351 31,032 --
Pro forma weighted average common shares outstanding
(Unaudited - See Note 2) .............................. -- -- 29,210
Diluted:
Net income per common share and common share equivalents $ 0.74 $ 0.11 --
Pro forma net income per common share and common share
equivalents (Unaudited - See Note 2) .................. -- -- $ 0.58
Weighted average common shares and common share
equivalents outstanding ............................... 34,908 32,518 --
Pro forma weighted average common shares and common share
equivalents outstanding (Unaudited - See Note 2) ...... -- -- 30,770
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-15
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
USLD'S
INVESTMENT
PREFERRED STOCK COMMON STOCK IN AND ADDITIONAL
-------------------- ------------------ ADVANCES PAID-IN DEFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT TO BCC CAPITAL COMPENSATION EARNINGS
-------- -------- ------- -------- ---------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1995 10 $ 100 204 $ 2 $ 21,121 $ 0 $ 0 $ 0
Transfers (to) from affiliates 0 0 (204) (2) 2,851 (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 30,064 302 (35,234 34,932 0 0
Exercise of stock options .... 0 0 28 0 0 155 0 0
Net income ................... 0 0 0 0 15,162 0 0 2,690
-------- -------- -------- -------- -------- -------- -------- --------
Balances at September 30, 1996 0 0 30,092 302 0 19,639 0 2,690
Issuance of common stock ..... 0 0 686 6 0 9,831 0 0
Exercise of stock options
and warrants ............... 0 0 1,618 16 0 11,956 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 32,396 324 0 42,916 (950) 6,397
Issuance of common stock ..... 0 0 47 1 0 716 (170) 0
Exercise of stock
options and warrants ....... 0 0 1,707 17 0 16,407 0 0
Compensation expense ......... 0 0 0 0 0 0 726 0
Net income ................... 0 0 0 0 0 0 0 25,947
-------- -------- -------- -------- -------- -------- -------- --------
Balances at September 30, 1998 0 $ 0 34,150 $ 342 $ 0 $ 60,039 $ (394) $ 32,344
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-16
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................... $ 25,947 $ 3,707 $ 17,852
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ................. 6,494 3,797 2,127
Deferred compensation ......................... 726 540 10
(Gain)/Loss on disposition of equipment ....... (186) 141 376
Special charges ............................... 2,000 21,252 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable .. (7,829) (7,445) 406
Increase in prepaids and other .............. (580) (1,538) (259)
Increase (decrease) in trade accounts payable (1,466) 6,450 139
Increase in accrued liabilities ............. 11,517 3,695 5,403
Increase in deferred income taxes ........... 854 0 0
Increase (decrease) in other liabilities .... 298 499 (21)
--------- --------- ---------
Net cash provided by operating activities ........ 37,775 31,098 26,033
Cash flows from investing activities:
Purchases of property and equipment ............. (11,333) (17,578) (6,679)
Purchase of software development company,
net of cash acquired .......................... 0 (8,403) 0
Investments in net assets of affiliates ......... (10,000) 0 0
Collections of (payments for) purchased
receivables, net .............................. 5,698 745 (15,692)
Collections of proceeds due (payments made)
to billing customers, net ..................... 43,433 15,541 23,769
Collections of sales taxes due on behalf of
billing customers, net ........................ 3,692 2,136 743
Proceeds from sale of equipment ................. 538 127 0
Other investing activities ...................... (334) (1,001) (207)
--------- --------- ---------
Net cash provided by (used in) investing
activities ..................................... 31,694 (8,433) 1,934
Cash flows from financing activities:
Payments on revolving line of credit for
purchased receivables, net .................... 0 (19,010) (4,020)
Proceeds from issuance of long-term debt ........ 0 4,091 1,937
Payments on long-term debt ...................... (656) (4,184) (688)
Payments on capital leases ...................... (451) (2,831) (436)
Proceeds from issuance of common stock .......... 8,485 6,578 96
Transfers to affiliates ......................... 0 0 (17,491)
--------- --------- ---------
Net cash provided by (used in)
financing activities ........................... 7,378 (15,356) (20,602)
--------- --------- ---------
Net increase in cash and cash equivalents ........ 76,847 7,309 7,365
Cash and cash equivalents, beginning of year ..... 41,444 34,135 26,770
--------- --------- ---------
Cash and cash equivalents, end of year ........... $ 118,291 $ 41,444 $ 34,135
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
A-17
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
NOTE 1. BUSINESS ACTIVITY
Billing Concepts Corp. ("BCC"), formerly known as Billing Information
Concepts Corp., was incorporated in the State of Delaware in 1996. BCC 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. BCC
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
BCC and its wholly owned subsidiaries. The Company's 22% investment in the
capital stock of Princeton TeleCom Corporation ("PTC") (see Note 5) is accounted
for using the equity method of accounting. 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 BCC, pro rata to the stockholders of USLD (the
"Distribution") with the result being that BCC 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 BCC which, until the
Distribution, were combined with and reported as part of the consolidated
financial statements of USLD.
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 BCC have been adjusted to
include all of the expenses that appropriately and fairly could have been
allocated to BCC except for income taxes. USLD's federal income taxes have
historically been determined on a consolidated basis. For purposes of preparing
the BCC historical consolidated financial statements, income taxes have been
determined on a separate company basis. Deferred taxes have been recorded on
BCC's consolidated financial statements, as appropriate. Tax assets and
liabilities are reflected in a manner consistent with the Tax Sharing Agreement
between USLD and BCC.
Certain intercompany transactions that had previously been eliminated in
consolidation are properly reflected in the historical consolidated financial
statements of BCC 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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A-18
<PAGE>
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 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:
o all local telephone company charges, rejects, unbillables and bad
debt deductions;
o all credits and adjustments granted to end users;
o all of the Company's processing fees and sales taxes, if
appropriate;
o all financing service charges assessed by the Company; and
o 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 balance, reported as accounts
payable to billing customers ($118,599,000 and $75,166,000 at September 30, 1998
and 1997, respectively), consists of:
o an amount equal to the face value of all purchased receivables,
reduced for any amounts paid as initial payments under Advance
Payment Agreements',
o an amount equal to collections from local telephone companies that
have not yet been remitted to customers, and
A-19
<PAGE>
o 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:
SEPTEMBER 30,
--------------------
1998 1997
------- -------
(IN THOUSANDS)
Purchased receivables.............................. $64,477 $70,175
SOFTWARE SERVICES
The Company also develops, sells and supports convergent billing systems
for telecommunications service providers and provides direct billing
outsourcing. 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.
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.
A-20
<PAGE>
ACCRUED LIABILITIES
Accrued liabilities include sales taxes payable on behalf of billing
customers of $18,866,000 and $15,174,000 at September 30, 1998 and 1997,
respectively.
The Company self-insures its medical coverage for employees and dependents
up to $40,000 per covered individual and an aggregate annual maximum of $1
million. The Company accrues for known claims and an estimate of claims incurred
but not reported up to the maximum anticipated cost to the Company. During 1998,
the Company recognized approximately $420,000 in self-insurance expense. The
Company's insurer will pay cumulative claims above the attachment limit up to
$960,000 lifetime per covered individual. The Company does not believe that
claims reported and claims incurred but not reported will exceed the amounts to
be covered by the insurer.
COMMON STOCK DIVIDEND
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 consolidated financial
statements has been adjusted to give retroactive effect to the stock dividend.
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.
BCC 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 BCC's
business for tax years prior to the Distribution and with respect to certain tax
attributes of BCC 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 BCC 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).
BCC will reimburse USLD for a portion of such taxes and the cost of preparation
of the associated tax returns related to the BCC affiliated group. BCC is
responsible for filing returns and paying taxes related to the BCC affiliated
group for subsequent periods. BCC 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
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
A-21
<PAGE>
which a loss is reported because their inclusion would be antidilutive. The per
share and weighted average common shares outstanding data for the year ended
September 30, 1996 is unaudited and presented on a pro forma basis as BCC had no
publicly held common shares outstanding prior to its spin-off from USLD on
August 2, 1996. The number of weighted average common shares outstanding used in
the calculation of the pro forma earnings per share gives effect to the shares
assumed to be issued had the spin-off occurred at the beginning of each period
presented. The following is a reconciliation of the numerators and the
denominators of the basic and diluted per share computations for net income:
FOR THE YEAR ENDED SEPTEMBER 30, 1998
-------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------
BASIC EPS
Net income available to common
stockholders ......................... $25,947,000 33,351,000 $0.78
=====
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants ................................ 65,000
Stock options ........................... 1,492,000
-----------
DILUTED EPS
Net income available to common
stockholders including assumed
conversions .......................... $25,947,000 34,908,000 $0.74
=========== =========== =====
FOR THE YEAR ENDED SEPTEMBER 30, 1997
-------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- --------
BASIC EPS
Net income available to common
stockholders ......................... $ 3,707,000 31,032,000 $0.12
=====
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants ................................ 190,000
Stock options ........................... 1,296,000
-----------
DILUTED EPS
Net income available to common
stockholders including assumed
conversions .......................... $ 3,707,000 32,518,000 $0.11
=========== =========== =====
FOR THE YEAR ENDED SEPTEMBER 30, 1996
INCOME SHARES PER SHARE
(NUMERATOR ) (DENOMINATOR) AMOUNT
------------ ------------- -------
(PRO FORMA, UNAUDITED)
BASIC EPS
Net income available to common
stockholders ......................... $17,852,000 29,210,000 $0.61
=====
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants ................................ 381,000
Stock options ........................... 1,179,000
-----------
DILUTED EPS
Net income available to common
stockholders including assumed
conversions .......................... $17,852,000 30,770,000 $0.58
=========== =========== =====
A-22
<PAGE>
Certain options to purchase 5,829,260 shares of common stock at prices
ranging from $13 to $29 per share were outstanding for a portion of 1998. They
were not included in the computation of the diluted EPS because the options'
exercise price was greater than the average market price of the common shares.
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 that 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.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for reporting information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 supersedes SFAS No. 14,"
Financial Reporting for Segments of a Business Enterprise." Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 need not be applied to interim
financial statements in the initial year of its application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application.
STATEMENTS OF CASH FLOWS
Cash payments and non-cash activities during the periods indicated were as
follows:
YEAR ENDED SEPTEMBER 30,
---------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Cash payments for interest ................ $ 310 $ 1,375 $ 1,563
Cash payments for income taxes ............ 9,141 8,913 8,366
Noncash investing and financing activities:
Common stock issued in connection
with the Distribution .................. 0 0 35,234
Net assets transferred from USLD in
connection with the Distribution ....... 0 0 892
Capital lease obligations incurred ....... 0 0 2,432
Tax benefit recognized in connection
with stock option exercises ............ 8,484 5,765 59
Assets acquired in connection with
acquisition ............................ 0 20,512 0
Liabilities assumed in connection with
acquisition ............................ 0 2,596 0
Common stock issued in connection with
acquisition ............................ 0 9,466 0
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.
A-23
<PAGE>
NOTE 3. DEBT
Long-term debt is comprised of the following:
SEPTEMBER 30,
----------------------
1998 1997
------- -------
(IN THOUSANDS)
Fixed interest rate term notes ................... $ 2,274 $ 2,930
Less - Current portion ........................... (606) (606)
------- -------
Long-term debt, less current portion ............. $ 1,668 $ 2,324
======= =======
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.
In December 1996, the Company obtained 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 September 30, 1998 or 1997. At
September 30, 1998, the amount available under the Company's credit facility was
$50.0 million. Additionally, at September 30, 1997, the Company had 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, 1998.
Scheduled maturities of debt as of September 30, 1998, are as follows:
(IN THOUSANDS)
--------------
Year Ending September 30,
1999..................................................... $ 606
2000..................................................... 606
2001..................................................... 606
2002..................................................... 456
------
$2,274
======
NOTE 4. LEASES AND CHARTERS
The Company leases equipment and office space under operating leases and
leases a jet airplane under a charter agreement with a company associated with
an officer/director of the Company (see Note 12). Rental expense for the years
ended September 30, 1998, 1997 and 1996, was $2,456,000, $1,630,000 and
$726,000, respectively. Future minimum lease payments under non-cancelable
operating leases and this charter as of September 30, 1998 are as follows:
(IN THOUSANDS)
--------------
Year Ending September 30,
1999..................................................... $ 3,213
2000..................................................... 3,189
2001..................................................... 3,131
2002..................................................... 3,120
2003..................................................... 2,378
Thereafter............................................... 0
-------
Total minimum lease payments........................... $15,031
=======
A-24
<PAGE>
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,
1998, are as follows:
(IN THOUSANDS)
--------------
Total minimum lease payments............................. $ 298
Less: Amount representing interest....................... (18)
-----
Present value of net minimum lease payments.............. $ 280
=====
Scheduled maturities of the present value of the net minimum lease
payments as of September 30, 1998 are as follows:
(IN THOUSANDS)
--------------
Year ending September 30,
1999................................................... $ 251
2000................................................... 29
-----
Total present value of net minimum lease payments........ $ 280
=====
NOTE 5. ACQUISITIONS
In September 1998, the Company acquired 22% of the capital stock of PTC
for $10 million. PTC was a privately held company located in Princeton, New
Jersey specializing in electronic bill publishing over the Internet and advanced
payment solutions. The Company accounts for this investment under the equity
method of accounting. In addition, the Company acquired the right of first
refusal for a period of five years to provide any future equity or debt
financing for PTC.
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.
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996
----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Operating revenues ....................... $127,579 $109,153
Net income ............................... $ 4,203 $ 4,860
Net income per common share - basic ...... $ 0.13 $ 0.16
Net income per common share - diluted .... $ 0.13 $ 0.15
A-25
<PAGE>
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 650,000 shares of the Company's
common stock were issued in connection with this purchase transaction. 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 other intangibles, which are being amortized on a straight-line basis
over periods ranging from six to twelve years.
In December 1998, the Company completed the merger of Communications
Software Consultants, Inc. ("CommSoft") in consideration of 2,492,759 shares of
the Company's common stock. CommSoft was a privately held, international
software development and consulting firm specializing in the telecommunications
industry (see Note 14).
NOTE 6. SPECIAL CHARGES
During the fourth quarter of fiscal 1998, the Company recognized special
charges in the amount of $2.0 million. The $2.0 million charge represented the
in-process research and development costs acquired in connection with the
acquisition of 22% of the capital stock of PTC (see Note 5).
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 30,064,002 shares of the Company's
common stock to the existing stockholders of USLD in order to effect the
spin-off of BCC from USLD. Prior to August 2, 1996, BCC 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 1998, 1997 or
1996.
NOTE 8. STOCK OPTIONS AND STOCK PURCHASE WARRANTS
Prior to the Distribution, the Company adopted the BCC 1996 Employee
Comprehensive Stock Plan ("Comprehensive Plan") and the BCC 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. Employees of the Company also are
eligible to receive restricted stock grants under the Comprehensive Plan. The
A-26
<PAGE>
Company has reserved 10,500,000 and 800,000 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 under the Comprehensive Plan and five and seven
years for automatic and discretionary grants, respectively, under the Director
Plan. Immediately prior to the Distribution, the Company granted, under the
Comprehensive Plan and Director Plan, respectively, options to purchase BCC
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 BCC options are exercisable for BCC common
stock on the basis of one share of BCC common stock for every one share of USLD
common stock subject to the outstanding USLD options. BCC options to purchase a
total of 3,143,008 shares of BCC common stock were granted in connection with
the adjustment to the USLD options. In connection with the grant of the BCC
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 BCC options. The BCC
options will have vesting schedules mirroring the vesting schedules of the
related USLD options. Each BCC option granted in connection with the
Distribution will terminate in accordance with the original USLD option grant.
Option activity for the years ended September 30, 1998, 1997 and 1996 is
summarized as follows:
AVERAGE WEIGHTED NUMBER
OF SHARES EXERCISE PRICE
--------- ---------------
Outstanding, September 30, 1995 ............. 0 --
Granted ................................... 4,678,008 $ 5.26
Canceled .................................. (28,664) $ 3.89
Exercised ................................. (27,416) $ 3.50
----------
Outstanding, September 30, 1996 ............. 4,621,928 $ 5.26
Granted ................................... 2,580,200 $15.81
Canceled .................................. (179,048) $ 7.03
Exercised ................................. (1,443,192) $ 3.98
----------
Outstanding, September 30, 1997 ............. 5,579,888 $10.43
Granted ................................... 1,974,662 $10.92
Canceled .................................. (225,000) $17.60
Exercised ................................. (1,505,890) $ 4.96
----------
Outstanding, September 30, 1998 ............. 5,823,660 $11.73
==========
At September 30, 1998, 1997 and 1996, stock options to purchase an
aggregate of 2,027,508, 2,033,594 and 2,031,772 shares were exercisable and had
weighted average exercise prices of $10.46, $6.02 and $3.57 per share,
respectively.
Stock options outstanding and exercisable at September 30, 1998, were as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------- -----------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED WEIGHTED
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE(YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ------------ ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$3.15 - $6.95 464,364 1.4 $ 3.98 412,710 $ 3.94
$8.06 - $9.81 2,681,130 5.7 $ 8.21 863,712 $ 8.12
$12.38 - $16.84 2,358,666 5.6 $15.91 732,752 $16.72
$17.31 - $21.50 197,000 5.6 $19.46 18,334 $17.33
$22.19 - $25.38 74,000 6.2 $23.10 0 -
$26.44 - $29.00 48,500 5.8 $28.17 0 -
------- -------
5,823,660 5.3 $11.73 2,027,508 $10.46
========= =========
</TABLE>
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," but has elected to apply Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
A-27
<PAGE>
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 1998, 1997 and
1996, the Company recognized $726,000, $540,000 and $10,000, 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 Concepts Corp. Employee
Stock Purchase Plan ("ESPP").
Had compensation expense for the Company's stock options granted and ESPP
purchases in 1998, 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):
YEAR ENDED SEPTEMBER 30,
--------------------------
1998 1997 1996
------- ------ -------
Pro forma net income ................. $22,888 $2,230 $15,511
Pro forma net income per common share:
Basic ........................... $ 0.69 $ 0.07 $ 0.53
Diluted ......................... $ 0.66 $ 0.07 $ 0.50
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:
YEAR ENDED SEPTEMBER 30,
----------------------------------
1998 1997 1996
-------- -------- --------
Expected volatility ............. 25% 24% 25%
Expected dividend yield ......... 0% 0% 0%
Expected life ................... 2.5 years 2.4 years 2 years
Risk-free interest rate ......... 5.21% 6.05% 6.03%
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 were $2.33 and $10.40 for
the year ended September 30, 1998, $3.55 and $16.46 for the year ended September
30, 1997, and $5.07 and $5.23 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 were $4.48 and
$13.00, 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 450,000 shares of common stock at an exercise price
of $4.63 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 $6.01. 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 201,252 and 175,354 shares of
common stock were exercised in fiscal 1998 and 1997, respectively. There were no
warrants exercised in fiscal 1996.
A-28
<PAGE>
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following:
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1998 1997 1996
-------- --------- -------
(IN THOUSANDS)
Federal:
Current ................... $ 15,197 $ 9,386 $ 10,049
Deferred .................. 907 (146) (113)
-------- -------- --------
$ 16,104 $ 9,240 $ 9,936
======== ======== ========
State:
Current ................... $ 1,425 $ 1,044 $ 1,005
Total:
Current ................... $ 16,622 $ 10,430 $ 11,054
Deferred .................. 907 (146) (113)
-------- -------- --------
$ 17,529 $ 10,284 $ 10,941
======== ======== ========
The provision for income taxes for fiscal 1998, 1997 and 1996 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:
YEAR ENDED SEPTEMBER 30,
-------------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Computed income tax provision at
statutory rate ........................... $15,217 $ 4,897 $10,078
Increases in taxes resulting from:
Nondeductible research and
development expenses ..................... 700 4,536 0
State income taxes, net of federal
benefit ................................. 926 679 653
Other, net ................................ 686 172 210
------- ------- -------
Provision for income taxes ................. $17,529 $10,284 $10,941
======= ======= =======
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows:
SEPTEMBER 30,
-------------------
1998 1997
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Expense provisions ..................................... $ 123 $ 12
Deferred tax liabilities:
Acquisition of nondeductible intangibles ............... (1,680) (2,009)
Bad debt tax write-off provisions ...................... (1,018)
Tax depreciation and amortization in excess of book .... 0 (51)
------- -------
Total deferred tax liabilities ........................... (2,698) (2,060)
------- -------
Net deferred tax liability ............................... ($2,575) ($2,048)
======= =======
A-29
<PAGE>
The Company was 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 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 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 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 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 500 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 6% of a
participant's compensation contributed as salary deferral. The Company may make
additional discretionary contributions. No discretionary contributions were made
in fiscal 1998, 1997 or 1996. During fiscal 1998, 1997 and 1996, the Company's
matching contributions totaled approximately $193,000, $67,000 and $35,000,
respectively.
Participation in the Billing Concepts Corp. Executive Compensation
Deferral Plan ("Executive Plan") is offered to selected employees occupying
management positions as determined by BCC'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 1998, 1997 and 1996, the Company
contributed $150,000, $47,000 and $22,000, respectively, to the Executive Plan.
Additionally, the Billing 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
A-30
<PAGE>
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 Concepts Corp. 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 2,000,000
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 BCC'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 14,659 and 27,561 shares of its
common stock in January and July 1998 pursuant to the ESPP at purchase prices of
$15.99 and $11.32, respectively. The Company issued 19,504 and 15,704 shares of
its common stock in February and August 1997 pursuant to the ESPP at purchase
prices of $9.03 and $12.43, 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 $5.7 million, $4.2 million, $4.1 million, $4.1 million, $4.0
million, and $7.1 million during fiscal 1999, 2000, 2001, 2002, 2003 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.
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
provided billing and information management services for USLD and purchased
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:
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
Sales to USLD ..................... $ 0 $3,166 $5,347
Purchases from USLD ............... 0 1,705 3,332
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 years ended September 30, 1998, and 1997 was
$250,000 and $1.7 million, respectively. The Company had a $250,000 note
receivable bearing interest at 7.50% from an officer of the Company at September
30, 1998. The Company also had a $50,000 note bearing interest at 7.50% payable
to an officer of the Company at September 30, 1997. This amount was paid in full
during the year ended September 30, 1998.
The Company charters a jet airplane from a company associated with an
officer/director of the Company. Under the terms of the charter 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. Such amounts have been included
in the future minimum operating lease and charter payments in Note 4. During the
year ended September 30, 1998, the Company paid approximately $278,000 in fees
related to this agreement.
A-31
<PAGE>
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.
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,
1998 1998 1998 1997
------------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Operating revenues .................. $ 41,094 $ 40,406 $ 41,014 $ 38,248
Income from operations .............. 7,520 9,763 11,260 10,483
Net income .......................... 4,825 6,901 7,368 6,853
Net income per common share - basic . $ 0.14 $ 0.20 $ 0.22 $ 0.21
Net income per common share - diluted $ 0.14 $ 0.20 $ 0.21 $ 0.20
QUARTER ENDED
--------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1997 1997 1997 1996
------------- --------- --------- ------------
Operating revenues .................. $ 35,742 $ 31,894 $ 27,382 $ 27,818
Income from operations .............. 9,836 (12,453) 8,195 7,861
Net income .......................... 6,261 (12,622) 5,157 4,911
Net income per common share - basic . $ 0.19 $ (0.41) $ 0.17 $ 0.16
Net income per common share - diluted $ 0.18 $ (0.41) $ 0.16 $ 0.15
</TABLE>
Share data has been restated to give effect to the one-for-one common stock
dividend that was distributed on January 30, 1998 to stockholders of record on
January 20, 1998 (see Note 2).
NOTE 14. SUBSEQUENT EVENTS (UNAUDITED)
Effective October 1, 1998, the Company acquired Expansion Systems
Corporation ("ESC"), a privately held company headquartered in Glendale,
California that develops and markets billing and registration systems to
Internet Service Providers ("ISP") under its flagship products TOTALBILL and
INSTANTREG. An aggregate of 170,000 shares of the Company's common stock were
issued in connection with this transaction, which will be accounted for as a
pooling of interests.
A-32
<PAGE>
In December 1998, the Company completed the merger of Communications
Software Consultants, Inc. ("CommSoft") in consideration of 2,492,759 shares of
the Company's common stock. CommSoft was a privately held, international
software development and consulting firm specializing in the telecommunications
industry.
The following unaudited pro forma information summarizes the combined
operating results of the Company and CommSoft as if the merger had occurred at
the beginning of the periods presented. The impact of ESC on prior periods was
not material, and the Company does not intend to restate prior periods for the
ESC acquisition. The unaudited pro forma information is based on the historical
information of CommSoft for the periods presented. The number of average
weighted shares outstanding used in the calculation of the pro forma per share
data gives effect to the shares assumed to be issued had the CommSoft merger
occurred at the beginning of each period presented:
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Operating revenues .................. $ 177,378 $ 132,672 $ 109,763
Net income .......................... $ 27,879 $ 4,236 $ 18,073
Net income per common share - basic . $ 0.78 $ 0.13 $ 0.57
Net income per common share - diluted $ 0.74 $ 0.12 $ 0.54
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.
A-33
<PAGE>
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BILLING CONCEPTS CORP.
PROXY - ANNUAL MEETING OF STOCKHOLDLERS - FEBRUARY 25, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PLEASE MARK, SIGN, DATE AND RETURN IN THE ENCLOSED ENVELOPE.
The undersigned stockholder(s) of Billing Concepts Corp. (the "Company")
hereby appoint(s) 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 25, 1999, at 10:00 a.m., Central Standard Time, at the Omni
San Antonio Hotel, 9821 Colonnade Boulevard, 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 DIRECTORS
[ ] FOR both the nominees listed below [ ] WITHHOLD AUTHORITY to vote for both
(EXCEPT AS MARKED TO THE CONTRARY nominees listed below
below)
2002 CLASS-TERM EXPIRING AT 2002 ANNUAL MEETING: PARRIS H. HOLMES, JR.
ALAN W. SALTZMAN
INSTRUCTION: To withhold authority to vote for either individual nominee, write
that nominee's name on the line provided: _____________________________________
2. PROPOSAL TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING SEPTEMBER 30, 1999
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED, AND TO BE SIGNED AND DATED, ON REVERSE SIDE)
- --------------------------------------------------------------------------------
<PAGE>
(CONTINUED FROM OTHER SIDE)
3. To consider and act upon any other matter which may properly come before the
meeting or any adjournment thereof
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The above items of business are more particularly described in the Proxy
Statement dated January 28, 1999, 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(S). IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED FOR THE ELECTION OF THE NOMINEES LISTED IN PROPOSAL 1, FOR
RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS UNDER PROPOSAL 2, AND IN THE DISCRETION OF THE
PROXIES WITH RESPECT TO ANY OTHER MATTER THAT IS PROPERLY PRESENTED AT THE
MEETING.
______________________________
______________________________
Signature(s) 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 __________________, 1999
- --------------------------------------------------------------------------------
