================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
or
[X] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-28536
-----------
BILLING CONCEPTS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2781950
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
7411 JOHN SMITH DRIVE, SUITE 200
SAN ANTONIO, TEXAS 78229
(Address of principal executive offices) (Zip code)
(210) 949-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicated below is the number of shares outstanding of the registrant's
only class of common stock at August 4, 2000:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
-------------- -----------
Common Stock, $.01 par value 42,312,534
================================================================================
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance
Sheets - June 30, 2000 and September 30, 1999................... 3
Condensed Consolidated Statements of Operations - For
the Quarter and Nine Months Ended June 30, 2000 and 1999........ 4
Condensed Consolidated Statements of Cash
Flows - For the Nine Months Ended June 30, 2000 and 1999........ 5
Notes to Interim Condensed Consolidated Financial
Statements...................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk....... 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................... 21
Item 6. Exhibits and Reports on Form 8-K................................ 21
SIGNATURE................................................................ 22
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
JUNE 30, SEPTEMBER 30,
2000 1999
--------- ---------
Current assets:
Cash and cash equivalents ......................... $ 96,331 $ 134,007
Accounts receivable, net .......................... 37,068 44,053
Purchased receivables ............................. 15,261 31,375
Prepaids and other ................................ 3,852 3,776
--------- ---------
Total current assets ............................ 152,512 213,211
Property and equipment, net ........................ 24,934 25,868
Other assets, net .................................. 33,136 8,470
Investments in and advances to equity
affiliates ........................................ 39,197 7,530
--------- ---------
Total assets .................................... $ 249,779 $ 255,079
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ........................... $ 15,514 $ 21,397
Accounts payable - billing customers ............. 96,391 90,089
Accrued liabilities .............................. 24,920 28,172
--------- ---------
Total current liabilities ....................... 136,825 139,658
Deferred income taxes .............................. 1,725 1,971
Other liabilities .................................. 1,380 1,315
--------- ---------
Total liabilities ............................... 139,930 142,944
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock, $0.01 par value,
10,000,000 shares authorized; no
shares issued or outstanding at
June 30 or September 30 ......................... -- --
Common stock, $0.01 par value,
75,000,000 shares authorized;
42,312,534 shares issued and
outstanding at June 30; 37,378,216
shares issued and outstanding at
September 30 .................................... 417 374
Additional paid-in capital ......................... 88,665 63,771
Retained earnings .................................. 21,623 48,213
Deferred compensation .............................. (96) (223)
Treasury stock, at cost ............................ (760) --
--------- ---------
Total stockholders' equity ...................... 109,849 112,135
--------- ---------
Total liabilities and stockholders' equity ... $ 249,779 $ 255,079
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues .............................. $ 36,262 $ 43,392 $ 111,345 $ 137,139
Cost of revenues ................................ 26,259 26,622 76,444 82,714
--------- --------- --------- ---------
Gross profit .................................... 10,003 16,770 34,901 54,425
Selling, general and administrative expenses .... 11,248 9,802 29,793 24,749
Bad debt expense ................................ 4,008 423 5,754 543
Research and development ........................ 2,150 1,453 12,937 3,278
Advance funding program income, net ............. (377) (878) (1,452) (3,061)
Depreciation and amortization expense ........... 3,278 2,312 9,572 6,804
Special charges ................................. -- 806 2,950 806
--------- --------- --------- ---------
Income (loss) from operations ................... (10,304) 2,852 (24,653) 21,306
Other income (expense):
Interest income, net ........................... 1,923 1,318 4,916 4,625
Equity in net loss of investees ................ (3,567) (438) (6,288) (1,208)
In-process research and development of investees -- -- (4,965) --
Other, net ..................................... 2 (14) (321) (106)
--------- --------- --------- ---------
Total other income (expense), net ............. (1,642) 866 (6,658) 3,311
--------- --------- --------- ---------
Income (loss) before income taxes ............... (11,946) 3,718 (31,311) 24,617
Benefit (provision) for income taxes ............ 2,889 (1,431) 4,721 (9,475)
--------- --------- --------- ---------
Net income (loss) ............................... $ (9,057) $ 2,287 $ (26,590) $ 15,142
========= ========= ========= =========
Basic:
Net income (loss) per common share .............. $ (0.22) $ 0.06 $ (0.68) $ 0.41
Weighted average common shares outstanding ...... 41,462 37,203 39,367 37,043
Diluted:
Net income (loss) per common share and
common share equivalents ...................... $ (0.22) $ 0.06 $ (0.68) $ 0.40
Weighted average common shares and
common share equivalents outstanding .......... 41,462 37,990 39,367 37,772
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................................... $ (26,590) $ 15,142
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization ....................... 9,572 6,804
Equity in net loss of investees ..................... 6,288 1,208
In-process research and development of investees .... 4,965 --
Noncash special charges ............................. 1,700 --
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ......... 8,765 (4,987)
Decrease in prepaids and other ..................... 38 1,408
Decrease in accounts payable ....................... (6,414) (4,063)
Decrease in accrued liabilities .................... (2,209) (1,577)
Increase (decrease) in other liabilities and other
noncash items .................................... 949 (279)
--------- ---------
Net cash (used in) provided by operating activities .... (2,936) 13,656
Cash flows from investing activities:
Purchases of property and equipment ................... (4,819) (6,212)
Purchase of companies, net of cash acquired ........... (4,523) (539)
Investments in and advances to equity affiliates ...... (44,500) --
Collections of purchased receivables from billing
customers, net ...................................... 16,114 21,057
Collections of proceeds due (payments made) to billing
customers, net ...................................... 6,302 (26,337)
Payments for sales taxes due on behalf of billing
customers, net ...................................... (2,850) (1,269)
Other investing activities ............................ (425) (662)
--------- ---------
Net cash used in investing activities .................. (34,701) (13,962)
Cash flows from financing activities:
Payments on long-term debt ............................ -- (3,199)
Payments on capital leases ............................ -- (252)
Proceeds from issuance of common stock ................ 721 2,180
Purchases of treasury stock ........................... (760) --
--------- ---------
Net cash used in financing activities .................. (39) (1,271)
--------- ---------
Net decrease in cash and cash equivalents .............. (37,676) (1,577)
Cash and cash equivalents, beginning of period ......... 134,007 120,972
--------- ---------
Cash and cash equivalents, end of period ............... $ 96,331 $ 119,395
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by Billing Concepts Corp. ("BCC") and subsidiaries
(collectively referred to as the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
the Company's management, the accompanying interim condensed consolidated
financial statements reflect all adjustments that are necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for such periods. All such adjustments are of a normal recurring nature.
It is recommended that these interim condensed consolidated financial statements
be read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1999. Results of operations for interim periods are not
necessarily indicative of results that may be expected for any other interim
periods or the full fiscal year. Certain prior period amounts have been
reclassified for comparative purposes.
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.
NOTE 2. EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," 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 excludes dilution and is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in earnings
of the Company. As the Company had a net loss for the quarter and nine months
ended June 30, 2000, diluted EPS equals basic EPS, as potentially dilutive
common stock equivalents are antidilutive in loss periods. If the Company would
have had net income for the quarter and nine months ended June 30, 2000, the
denominator (weighted average number of common shares and common share
equivalents outstanding) in the diluted EPS calculation would have been
increased, through application of the treasury stock method, for each class of
options for which the average market price per share of the Company's common
stock exceeded the common stock equivalent's exercise price. For the quarter and
nine months ended June 30, 2000, certain options to purchase 5,736,000 shares of
common stock at prices ranging from $4.78 to $29.00 per share would not have
been included in the computation of diluted EPS because the options' exercise
price was greater than the average market price of the common shares. There were
additional options to purchase 2,889,000 shares of common stock at prices
ranging from $1.98 to $4.71 per share which were excluded as they were
antidilutive for the losses incurred for the quarter and nine months ended June
30, 2000.
6
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the numerators and the denominators
of the basic and diluted per-share computations for net income.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 30, 1999
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Net income available to common stockholders $2,287,000 37,203,000 $0.06
=====
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Stock options ............................. 787,000
----------
DILUTED EPS
Net income available to common stockholders
including assumed conversions .......... $2,287,000 37,990,000 $0.06
========== ========== =====
FOR THE NINE MONTHS ENDED JUNE 30, 1999
-----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS
Net income available to common stockholders $15,142,000 37,043,000 $ 0.41
=========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Stock options ............................. 729,000
-------------
DILUTED EPS
Net income available to common stockholders
including assumed conversions .......... $15,142,000 37,772,000 $ 0.40
=========== ============= =========
</TABLE>
Certain options to purchase 2,422,000 shares of common stock at prices
ranging from $12.14 to $29.00 per share were outstanding for the quarter ended
June 30, 1999. Certain options to purchase 2,745,000 shares of common stock at
prices ranging from $10.19 to $29.00 per share were outstanding for a portion of
the nine months ended June 30, 1999. 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.
NOTE 3. OTHER ASSETS
Other assets is comprised of the following:
JUNE 30, SEPTEMBER 30,
2000 1999
------- -------
(In thousands)
Goodwill - Transaction Processing....... $16,913 $ --
Goodwill - Software .................... 986 1,048
Goodwill - Internet .................... 6,384 --
LEC Contract costs ..................... 2,981 2,726
Other non-current assets ............... 5,872 4,696
------- -------
Total other assets .................. $33,136 $ 8,470
======= =======
7
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INVESTMENTS IN AND ADVANCES TO EQUITY AFFILIATES
Investments in and advances to equity affiliates is comprised of the
following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Equity investment in Princeton eCom Corporation ........... $30,834 $ 7,530
Advance to Princeton eCom Corporation ..................... 5,000 --
Equity investment in COREINTELLECT, Inc. .................. 3,363 --
------- -------
Total investments in and advances to equity affiliates.. $39,197 $ 7,530
======= =======
</TABLE>
NOTE 5. ACQUISITIONS AND INVESTMENTS
In April 2000, the Company completed the acquisition of Operator Service
Company ("OSC"), a Lubbock, Texas-based provider of inbound directory
assistance, interactive voice response and customer relationship management
services to the telecommunications and consumer products industries. The Company
acquired OSC through the issuance of 3.077 million shares of common stock. This
acquisition is accounted for under the purchase method of accounting.
Accordingly, the results of operations for OSC 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 (loss) per common share since the date of
acquisition. A portion of the total purchase price of $19.2 million has been
allocated to assets acquired and liabilities assumed based on estimated fair
market value at the date of acquisition. The additional balance of $17.1 million
was recorded as goodwill and is being amortized over twenty years on a
straight-line basis.
In March 2000, the Company completed the purchase of a voting preferred
stock investment of $6.0 million in privately-held COREINTELLECT, Inc. ("CORE"),
giving the Company a 22% equity ownership stake, assuming conversion of the
voting preferred stock. This investment is accounted for under the equity
method. Based in Dallas, Texas, CORE is an application service provider that
develops and markets Internet-based business-to-business products for the
acquisition, classification, retention and dissemination of business-critical
knowledge and information. The Company expensed $2.5 million of the
consideration for the purchase of in-process research and development in
connection with this equity investment, which is included in Other income
(expense).
In March 2000, the Company invested an additional $33.5 million through
the purchase of $27.0 million of convertible preferred stock and $6.5 million of
common stock in privately-held Princeton eCom Corporation ("Princeton"),
increasing its ownership stake to approximately 51%, assuming conversion of the
preferred stock, from approximately 24%. The Company accounts for this
investment under the equity method because the Company does not have majority
control of the board of directors and it considers its voting control to be
temporary. The Company expects its interest in Princeton to be less than 50% by
September 30, 2000. The Company expensed $2.5 million of in-process research and
development in connection with this additional equity investment, which is
included in Other income (expense). In June 2000, under the terms of a
Convertible Promissory Note due July 15, 2001, the Company advanced $5.0 million
to Princeton. The Convertible Promissory Note may be converted into shares of
Princeton's preferred stock, which are convertible into 1,111,111 shares of
Princeton's Common Stock.
8
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 1999, the Company completed the acquisition of FIData, Inc.
("FIData"), a San Antonio, Texas-based company that provides Internet-based
automated loan approval products to the financial services industries. This
acquisition has been accounted for as a purchase. Accordingly, the results of
operations for FIData 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
(loss) per common share since the date of acquisition. The total consideration
for the acquisition of FIData was approximately $4.2 million in cash and debt
assumption and 1,100,000 shares of the Company's common stock. The excess of the
purchase price over the fair value of net tangible assets acquired amounted to
approximately $9.1 million, of which approximately $7.4 million was recorded as
goodwill and other intangibles and is being amortized on a straight-line basis
over five years. The remaining balance of $1.7 million was expensed as acquired
in-process research and development (see Note 9).
In connection with these acquisitions, the Company acquired certain
intangible assets, including goodwill and in-process research and development.
In connection with these allocations, the Company expensed approximately $2.5
million of each of its equity investments in CORE and Princeton and $1.7 million
of the purchase price for FIData as in-process research and development. In
performing these allocations, the Company considered the respective company's
research and development projects in-process at the date of acquisition, among
other factors such as the stage of development of the technology at the time of
investment, the importance of each project to the overall development plan,
alternative future use of the technology and the projected incremental cash
flows from the projects when completed and any associated risks.
The in-process research and development purchased from CORE focused on
next generation Internet-based acquisition, classification, retention and
dissemination of business-critical knowledge and information. The in-process
research and development purchased from Princeton focused on next generation
Internet-based bill publishing and payment systems and solutions. The in-process
research and development purchased from FIData focused on next generation
Internet-based automated loan approval products and banking systems and
solutions. Due to their specialized nature, the in-process research and
development projects had no alternative future use, either for re-deployment
elsewhere in the business or in liquidation, in the event the projects failed.
The Income Approach was the primary technique utilized in valuing the
purchased research and development. The valuation technique employed in the
appraisals was designed to properly reflect all intellectual property rights in
the intangible assets, including core technology. The value of the developed
technology was derived from direct sales of existing products, including their
contribution to in-process research and development. In this way, value was
properly attributed to the engineering know-how embedded in the existing product
that will be used in developmental products. The appraisals also considered the
fact that the existing know-how diminishes in value over time as new
technologies are developed and changes in market conditions render current
products and methodologies obsolete. The assumptions underlying the cash flow
projections used were derived primarily from investment banking reports,
historical results, company records and discussions with management.
Revenue estimates for each in-process project were developed by management
and based on an assessment of the industry. Cost of goods sold for each project
is expected to be in line with historical industry accepted pricing. Due to the
technological and economic risks associated with the developmental projects,
discount rates of 40%, 25% and 35% were used to discount cash flows from the
in-process projects for CORE, Princeton and FIData, respectively. The Company
believes that the foregoing assumptions used in the forecasts were reasonable at
the time of the acquisition. No assurance can be given, however, that the
underlying assumptions used to estimate sales, development costs or
profitability, or the events associated with such projects, will transpire as
estimated. For these reasons, actual results may vary from projected results.
The most significant and uncertain assumptions relating to the in-process
projects relate to the projected timing of completion and revenues attributable
to each project.
9
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. COMMITMENTS AND CONTINGENCIES
A lawsuit was filed on December 31, 1998, in the United States District
Court in San Antonio, Texas by an alleged stockholder of the Company against the
Company and various of its officers and directors, alleging unspecified damages
as a result of alleged false statements in various press releases prior to
November 19, 1998. In September 1999, the U.S. District Court for the Western
District of Texas entered an order and judgment dismissing the plaintiff's
lawsuit. The plaintiff noticed an appeal of that decision on September 29, 1999.
Although no assurances can be given, the Company believes it has meritorious
defenses to this action and intends to defend itself vigorously.
The Company is cooperating with the Federal Trade Commission's ("FTC")
Bureau of Consumer Protection ("BCP") regarding BCP staff requests for industry
and customer specific information from the Company relating primarily to the
alleged cramming of charges for non-regulated telecommunications services by
certain of its customers. Cramming is the addition of charges to a telephone
bill for programs, products or services the consumer did not knowingly
authorize. In connection with the Company's responses to the ongoing
informational requests, the BCP staff has proposed a complaint against the
Company. The BCP staff alleges that it can impose a variety of civil remedies on
the Company, including consumer redress or other equitable relief as well as
restrictions on the way the Company processes charges for enhanced services. The
Company disputes the BCP staff's alleged basis for liability and is reviewing
the BCP staff's allegations to ensure that corrective action has already been
taken. BCC has and will continue to cooperate and engage the BCP staff in good
faith negotiations. The Company is unable to predict what action, if any, the
FTC will take regarding the BCP staff's proposed complaint or what, if any,
financial impact would result.
The Company is involved in various other 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, litigation
or proceedings to which the Company is a party, including those described above,
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 occurs.
10
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. BUSINESS SEGMENTS
The Company conducts operations in three principal segments - Transaction
Processing (formerly known as LEC Billing), Software and Internet. Information
as to the operations of the Company in different business segments is set forth
below based on the nature of the products and services offered. The Company
evaluates performance based on several factors, of which the primary financial
measures are segment revenues and operating income.
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues:
Transaction Processing .............. $ 28,843 $ 31,673 $ 85,776 $ 102,534
Software ............................ 7,231 11,719 25,124 34,605
Internet ............................ 188 -- 445 --
--------- --------- --------- ---------
Total operating revenues .......... $ 36,262 $ 43,392 $ 111,345 $ 137,139
Income (loss) from operations:
Transaction Processing .............. $ 3,157 $ 5,291 $ 14,587 $ 25,706
Software ............................ (7,723) 2,011 (18,070) 6,523
Internet ............................ (2,064) -- (9,936) --
Corporate Overhead .................. (3,674) (4,450) (11,234) (10,923)
--------- --------- --------- ---------
Total income (loss) from operations $ (10,304) $ 2,852 $ (24,653) $ 21,306
Income (loss) before income taxes:
Income (loss) from operations ....... $ (10,304) $ 2,852 $ (24,653) $ 21,306
Interest income, net ................ 1,923 1,318 4,916 4,625
Equity in net loss of investees ..... (3,567) (438) (6,288) (1,208)
In-process research and
development of investees .......... -- -- (4,965) --
Other, net .......................... 2 (14) (321) (106)
--------- --------- --------- ---------
Income (loss) before income taxes . $ (11,946) $ 3,718 $ (31,311) $ 24,617
Interest income (expense), net:
Transaction Processing .............. $ 1,917 $ 1,298 $ 4,887 $ 4,616
Software ............................ -- 20 19 25
Internet ............................ 6 -- 9 --
Corporate Overhead .................. -- -- 1 (16)
--------- --------- --------- ---------
Total interest income, net ........ $ 1,923 $ 1,318 $ 4,916 $ 4,625
Depreciation and amortization:
Transaction Processing .............. $ 1,513 $ 1,249 $ 4,582 $ 3,764
Software ............................ 821 576 2,321 1,597
Internet ............................ 443 -- 1,154 --
Corporate Overhead .................. 501 487 1,515 1,443
--------- --------- --------- ---------
Total depreciation and amortization $ 3,278 $ 2,312 $ 9,572 $ 6,804
Total assets:
Transaction Processing .............. $ 174,060 $ 199,741
Software ............................ 21,483 25,307
Internet ............................ 46,839 --
Corporate ........................... 7,397 22,252
--------- ---------
Total assets ...................... $ 249,779 $ 247,300
</TABLE>
11
<PAGE>
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS
From time to time, the Company has made advances to or was owed amounts
from certain officers of the Company. The highest aggregate amount outstanding
of advances to officers during the nine months ended June 30, 2000 was $252,000.
The Company had an aggregate of $54,000 in notes receivable bearing interest at
10.0% annually from a certain officer of the Company at June 30, 2000. On
January 4, 2000, the Company forgave a certain note receivable from an officer
of the Company with a principal balance and accrued interest totaling
approximately $70,000, in lieu of a cash bonus. On April 4, 2000, the Company
forgave a certain note receivable from an officer of the Company with a
principal balance and accrued interest totaling approximately $133,000, in lieu
of a cash bonus.
On April 5, 2000, the Board of Directors of the Company approved a
restricted stock grant to the Chief Executive Officer of the Company. The
restricted stock consists of 400,000 shares of Princeton common stock, which
vests on April 30, 2003. The Company expenses the fair market value of the
restricted stock grant over the three-year period ended April 30, 2003. The
Company recognized $0.2 million during the third quarter of 2000 as compensation
expense related to the stock grant.
NOTE 9. SPECIAL CHARGES
During the nine months ended June 30, 2000, the Company recognized special
charges in the amount of $2.9 million. Severance related costs of $1.2 million
were recorded during the second quarter of 2000. In addition, the Company
recognized a $1.7 million charge during the first quarter of 2000 for the
in-process research and development costs acquired in connection with the
acquisition of FIData (see Note 5).
The Company recorded a third quarter 2000 charge of $3.5 million related
to the Software division. The charge is a result of the narrowing of various
software product offerings, the refocusing of software development efforts, and
a reserve associated with a significant account.
12
<PAGE>
ITEM 2.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN "FORWARD-LOOKING"
STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 AND INFORMATION RELATING TO THE COMPANY AND ITS SUBSIDIARIES THAT
ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE
BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED IN
THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND
"INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY
OR ITS SUBSIDIARIES OR COMPANY MANAGEMENT, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT RISKS,
UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN FACTORS INCLUDING, WITHOUT
LIMITATIONS, COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER
RELATIONS, RELATIONSHIPS WITH VENDORS, THE INTEREST RATE ENVIRONMENT,
GOVERNMENTAL REGULATION AND SUPERVISION, SEASONALITY, DISTRIBUTION NETWORKS,
PRODUCT INTRODUCTIONS AND ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY
PRACTICES, ONETIME EVENTS AND OTHER FACTORS DESCRIBED HEREIN AND IN OTHER
FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. BASED
UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED,
BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE COMPANY DOES NOT INTEND TO UPDATE
THESE FORWARD-LOOKING STATEMENTS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is a discussion of the consolidated financial condition and
results of operations for Billing Concepts Corp. ("BCC") and subsidiaries
(collectively referred to as the "Company"), as of and for the quarter and nine
months ended June 30, 2000 and 1999. It should be read in conjunction with the
Unaudited Interim Condensed Consolidated Financial Statements of the Company,
the notes thereto and other financial information included elsewhere in this
report, and the Company's Annual Report on Form 10-K for the year ended
September 30, 1999. For purposes of the following discussion, references to year
periods refer to the Company's fiscal year ended September 30 and references to
quarterly periods refer to the Company's fiscal quarter ended June 30.
RESULTS OF OPERATIONS - CONSOLIDATED
The following table presents certain items in the Company's Condensed
Consolidated Statements of Operations as a percentage of total revenues:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Operating revenues ......................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ........................... 72.4 61.4 68.7 60.3
----- ----- ----- -----
Gross profit ............................... 27.6 38.6 31.3 39.7
Selling, general and administrative expenses 31.0 22.6 26.8 18.0
Bad debt expense ........................... 11.1 1.0 5.2 0.4
Research and development ................... 5.9 3.3 11.6 2.4
Advance funding program income, net ........ (1.0) (2.0) (1.3) (2.2)
Depreciation and amortization expense ...... 9.0 5.3 8.6 5.0
Special charges ............................ 0.0 1.9 2.6 0.6
----- ----- ----- -----
Income (loss) from operations .............. (28.4) 6.5 (22.2) 15.5
Other (expense) income, net ................ (4.5) 2.0 (6.0) 2.4
----- ----- ----- -----
Income (loss) before income taxes .......... (32.9) 8.5 (28.2) 17.9
Benefit (provision) for income taxes ....... 8.0 (3.3) 4.2 (6.9)
----- ----- ----- -----
Net income (loss) .......................... (24.9)% 5.2% (24.0)% 11.0%
===== ===== ===== =====
</TABLE>
13
<PAGE>
The Company's revenues are derived primarily from the provision of billing
clearinghouse and information management services to telecommunications services
providers through Local Exchange Carrier billing ("LEC billing") by its
transaction processing services division ("Transaction Processing"), formerly
known as the LEC billing division. During the third quarter of 2000, the Company
completed the acquisition of Operator Service Company ("OSC"), which provides
inbound directory assistance, interactive voice response and customer
relationship management. Through its subsidiary, Aptis, Inc., the Company also
operates a Software division ("Software") that develops, markets and supports
convergent billing and customer care software applications for
telecommunications and Internet services providers and provides direct billing
outsourcing services. In addition, the Company has an Internet division
("Internet") which includes an equity interest in Princeton eCom Corporation
("Princeton"), which offers electronic bill presentment and payment services via
the Internet. During the first quarter of 2000, the Company completed the
acquisition of FIData, Inc. ("FIData"), which provides automated loan approval
products via the Internet. During the second quarter of 2000, the Company
purchased an additional equity interest in Princeton and an equity interest in
COREINTELLECT, Inc ("CORE"), which provides Internet-based business-to-business
products for the acquisition, classification, retention and dissemination of
business-critical knowledge and information.
Total revenues for the quarter ended June 30, 2000 were $36.3 million, a
decrease of 16.4% from $43.4 million in the comparable prior year quarter.
During the first nine months of 2000, total revenues decreased 18.7% to $111.3
million from $137.1 million during the comparable period of 1999. The decrease
in total revenues from the prior year quarter was primarily due to the 38.5%
decrease in Software revenues to $7.2 million in the third quarter of 2000 from
$11.7 million in the third quarter of 1999. In addition, Transaction Processing
revenues decreased 9.1% to $28.8 million in the third quarter of 2000 from $31.7
million in the third quarter of 1999. The gross profit margin of 27.6% reported
for the third quarter of 2000 compares to 38.6% achieved in the comparable
quarter of 1999. During the first nine months of 2000, gross profit margin
decreased from 39.7% in 1999 to 31.3% in 2000. The decrease in gross margins
from the first quarter of the prior year periods is primarily attributable to
the decrease in the gross margin achieved by the Transaction Processing division
as a result of higher billing and collection costs charged by the LECs. In
addition, the decrease in software license fee revenues generated by the
Software division contributed to the lower consolidated gross margin.
Selling, general and administrative ("SG&A") expenses are comprised of all
selling, marketing and administrative costs incurred in direct support of the
business operations of the Company. SG&A expenses for the third quarter of 2000
were $11.2 million, or 31.0% of revenues, compared to $9.8 million, or 22.6% of
revenues, in the third quarter of 1999. SG&A expenses for the first nine months
of 2000 were $29.8 million, or 26.8% of revenues, compared to $24.7 million, or
18.0% of revenues, in the first nine months of 1999. SG&A expenses increased
from the prior year periods primarily due to the Company's Internet operations,
which began during the fourth quarter of 1999. Internet operations incurred $1.6
million and $4.0 million of SG&A expenses during the third quarter and nine
months ended June 30, 2000, respectively.
Bad debt expense for the third quarter of 2000 was $4.0 million compared
to $0.4 million in the third quarter of 1999. Bad debt expense for the first
nine months of 2000 was $5.8 million compared to $0.5 million in the first nine
months of 1999. Bad debt expense increased from the prior year periods primarily
due to a $3.5 million charge taken in the third quarter of 2000. Related to the
Software division, this charge is a result of the narrowing of various software
product offerings, the refocusing of software development efforts, and a reserve
associated with a significant account.
Research and development ("R&D") expenses are comprised of the salaries
and benefits of the employees involved in development and related expenses. R&D
expenses increased to $2.2 million in the third quarter of 2000 from $1.5
million in the prior year quarter. During the first nine months of 2000, R&D
expenses increased to $12.9 million from $3.3 million in the comparable period
in 1999. The increase is attributable to the growth of such expenses incurred by
the Software and Internet divisions to facilitate the development of new and
enhanced products.
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. Depreciation and
amortization expenses were $3.3 million in the third quarter of 2000 compared to
$2.3 million in the third quarter of 1999. During the nine months ended June 30,
2000 and 1999,
14
<PAGE>
depreciation and amortization expenses were $9.6 million and $6.8 million,
respectively. The increase in depreciation and amortization expenses from the
prior year periods is attributable to capital expenditures as well as the
amortization of intangibles acquired in connection with the acquisition of
FIData in November 1999 and OSC in April 2000.
Net other expense of $1.6 million in the third quarter of 2000 compares to
net other income of $0.9 million in 1999. During the nine months ended June 30,
2000 and 1999, the Company reported net other expense of $6.7 million and net
other income of $3.3 million, respectively. The decrease in net other expense
from the prior year periods was primarily due to the Company's equity in the net
loss of Princeton and CORE of $3.6 million for the third quarter of 2000 and
$6.3 million for the nine months ended June 30, 2000. The net other expense for
the nine months ended June 30, 2000 also includes special charges of $5.0
million of in-process research and development costs acquired in connection with
the March 2000 equity investments in Princeton and CORE.
The Company's effective tax rate was 24.2% in the third quarter of 2000
and 38.5% in the third quarter of 1999. For the nine months ended June 30, 2000
and 1999, the Company's effective tax rate was 15.1% and 38.5%, respectively.
Excluding its Internet operations and special charges, the Company's effective
tax rate would have been 37.1% and 34.4% in the third quarter of 2000 and 1999,
respectively.
The Company reported a net loss of $9.1 million for the third quarter of
2000 compared to net income of $2.3 million in the third quarter of 1999. During
the first nine months of 2000, the Company reported a net loss of $26.6 million
compared to net income of $15.1 million in the first nine months of 1999.
Excluding the Internet division, special charges, and the $3.5 million Software
charge, the Company recorded a net loss of $3.2 million, or $0.08 per share, for
the nine months ended June 30, 2000. The net loss for the nine months ended June
30, 2000 includes special charges of $1.2 million in severance related costs and
$1.7 million in in-process research and development. The decrease in the net
loss, exclusive of special charges, from the prior year periods is primarily
attributable to margin pressures experienced by the Transaction Processing
division, lower than anticipated revenues from the Software division, and the
$3.5 million Software charge.
RESULTS OF OPERATIONS - TRANSACTION PROCESSING
The following table presents the operating results of the Company's
Transaction Processing division and as a percentage of related revenues for each
period:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
---------------------------------------- ---------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 2000 1999 2000 1999
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues ......................... $ 28,843 100.0% $ 31,673 100.0% $ 85,776 100.0% $ 102,534 100.0%
Cost of revenues ........................... 20,473 71.0 21,575 68.1 57,841 67.4 66,211 64.6
--------- ----- --------- ----- --------- ----- --------- -----
Gross profit ............................... 8,370 29.0 10,098 31.9 27,935 32.6 36,323 35.4
Selling, general and administrative expenses 3,553 12.3 4,167 13.2 8,655 10.1 9,001 8.8
Research and development ................... 524 1.8 269 0.8 1,563 1.8 913 0.9
Advance funding program income, net ........ (377) (1.3) (878) (2.8) (1,452) (1.7) (3,061) (3.0)
Depreciation and amortization expense ...... 1,513 5.2 1,249 3.9 4,582 5.3 3,764 3.7
--------- ----- --------- ----- --------- ----- --------- -----
Income from operations ................... $ 3,157 11.0% $ 5,291 16.8% $ 14,587 17.1% $ 25,706 25.0%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
OPERATING REVENUES
Transaction processing 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.
15
<PAGE>
Transaction Processing service revenues decreased $2.8 million, or 8.9%,
in the third quarter of 2000 from the prior year quarter. During the first nine
months, revenues decreased $16.8 million, or 16.3%, from the comparable prior
year period. The decrease in revenue from the prior periods was attributable to
an overall decrease in the number of call records processed. The number of call
records processed for billing during the third quarter of 2000 continues to be
negatively impacted by market pressures that have occurred in the long distance
industry. Management is continuing to take actions in order to mitigate the
effects of "slamming and cramming" issues on the call record volumes of its
current customer base. Consequently, the number of call records processed for
billing decreased from the prior year periods. Telephone call record volumes
were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED NINE MONTHS ENDED
JUNE 30, MARCH 31, JUNE 30,
---------------- ---------------- ----------------
2000 1999 2000 1999 2000 1999
----- ----- ----- ----- ----- -----
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Direct dial long distance services 112.2 148.4 115.9 152.1 352.6 452.7
Operator services ................ 18.1 24.0 18.5 23.4 57.1 71.9
Enhanced billing services ........ 1.0 1.2 0.9 1.0 2.9 3.6
Billing management services ...... 54.6 59.1 42.0 60.6 144.0 172.9
</TABLE>
Additionally, revenues were adversely affected by the loss of certain
customers now using direct billing methods, versus LEC billing through the
Company. The Company has addressed the need for a direct billing solution and
has recently launched its own related product that is offered via a service
bureau environment.
COST OF REVENUES
Cost of revenues includes billing and collection fees charged by local
exchange carriers 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 exchange carriers 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.
The gross profit margin for the quarter and nine months ended June 30,
2000, was 29.0% and 32.6%, respectively, compared to 31.9% and 35.4% achieved in
the respective prior year periods. The decrease in the gross profit margin from
the prior year period is primarily attributable to higher billing and collection
costs charged to the Company by the local exchange carriers.
SELLING, GENERAL AND ADMINISTRATIVE
Excluding a $1.8 million charge for a legal judgment in the third quarter
of 1999, SG&A expenses for the third quarter of 2000 were $3.6 million, or 12.3%
of revenues, compared to $2.4 million, or 7.5% of revenues, for the third
quarter of 1999. During the nine months ended June 30, 2000, the SG&A expenses
were $8.7 million, or 10.1% of revenues, compared to $7.2 million, or 7.0% of
revenues, in the prior year period. The increase in SG&A as a percentage of
revenue in 2000 was primarily due to the overall decrease in Transaction
Processing revenues. Expenses related to certain corporate functions, such as
treasury, financial reporting, investor relations, legal, payroll, human
resources and management information systems, have not been fully charged to
Transaction Processing, but are included in the consolidated results of
operations as general corporate expenses.
RESEARCH AND DEVELOPMENT
R&D expenses are comprised of the salaries and benefits of the employees
involved in software development and related expenses. The Company internally
funds R&D activities with respect to efforts associated with creating new and
enhanced Transaction Processing services products. R&D expenses in the quarter
and nine months ended June 30, 2000,
16
<PAGE>
were $0.5 million and $1.6 million, respectively, compared to $0.3 million and
$0.9 million in the respective prior year periods. The Transaction Processing
division intends to continue its R&D efforts in the future and anticipates
spending approximately $2.1 million during fiscal year 2000 for such expenses.
ADVANCE FUNDING PROGRAM INCOME AND EXPENSE
Net advance funding program income was $0.4 million in the third quarter
of 2000 compared with $0.9 million in the third quarter of 1999. Net advance
funding program income was $1.5 million in the first nine months of 2000
compared with $3.1 million in the first nine months of 1999. The decrease from
the third quarter of 1999 was primarily the result of a lower level of customer
receivables financed under the Company's advance funding program. The quarterly
average balances of purchased receivables were $21.8 million and $50.7 million
for the nine months ended June 30, 2000 and 1999, respectively. The Company
financed all customer receivables during 2000 and 1999 with internally generated
funds rather than with funds borrowed through the Company's revolving credit
facility. The advance funding program expense recognized during both 2000 and
1999 represents unused credit facility fees and is the minimum expense that the
Company could have incurred during these periods.
INCOME FROM OPERATIONS
Income from operations in the third quarter of 2000 was $3.2 million, or
11.0% of revenues, compared to income from operations of $5.3 million, or 16.8%
of revenues, in the third quarter of 1999. During the first nine months of 2000,
income from operations was $14.6 million, or 17.1% of revenues, compared to
$25.7 million, or 25.0% of revenues, during the first nine months of 1999. The
decrease in income from operations as a percentage of revenues from the prior
year periods is attributable to a lower gross profit margin, as well as higher
operating expenses and lower net advance funding program income as percentages
of revenues.
RESULTS OF OPERATIONS - SOFTWARE
The following table presents the operating results of the Company's
Software division and as a percentage of related revenues for each period:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------------------ -----------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 2000 1999 2000 1999
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Software license fee revenues ..... $ 165 2.3% $ 5,224 44.6% $ 4,413 17.5% $ 12,864 37.2%
Services revenues ................. 5,951 82.3 5,566 47.5 17,579 70.0 16,208 46.8
Hardware revenues ................. 1,115 15.4 929 7.9 3,132 12.5 5,533 16.0
-------- ----- -------- ----- -------- ----- -------- -----
Total operating revenues .......... 7,231 100.0 11,719 100.0 25,124 100.0 34,605 100.0
Cost of revenues .................. 5,679 78.5 5,047 43.1 18,381 73.2 16,503 47.7
-------- ----- -------- ----- -------- ----- -------- -----
Gross profit ...................... 1,552 21.5 6,672 56.9 6,743 26.8 18,102 52.3
Selling, general and administrative
expenses......................... 2,889 40.0 2,478 21.1 7,547 30.0 7,074 20.4
Bad debt expense .................. 3,984 55.1 423 3.6 5,730 22.8 543 1.6
Research and development .......... 1,581 21.9 1,184 10.1 8,082 32.2 2,365 6.8
Depreciation and amortization
expense ......................... 821 11.4 576 4.9 2,321 9.2 1,597 4.6
Special Charges ................... -- -- -- -- 1,133 4.5 -- --
-------- ----- -------- ----- -------- ----- -------- -----
Income (loss) from operations ... $ (7,723) (106.9)% $ 2,011 17.2% $(18,070) (71.9)% $ 6,523 18.9%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
OPERATING REVENUES
In addition to license and maintenance fees charged by Software for the
use of its billing software applications, fees are charged on a time and
materials basis for software customization and professional services. Software
revenues also include retail sales of third-party computer hardware and
software.
17
<PAGE>
Software revenues decreased $4.5 million, or 38.3%, and $9.5 million, or
27.4%, in the quarter and nine months ended June 30, 2000, respectively, from
the comparable periods of 1999. The decrease in revenues from the prior year
periods was primarily attributable to lower sales of billing systems in 2000,
which corresponded to a decrease in software license fees.
COST OF REVENUES
Cost of revenues includes the cost of third-party computer hardware and
software sold, and the salaries and benefits of software support, technical and
professional service personnel who generate revenue from contracted services.
Gross profit margin of 21.5% reported for the third quarter of 2000
compares to 56.9% achieved in the third quarter of 1999. Gross profit margin of
26.8% reported for the first nine months of 2000 compares to 52.3% achieved in
the respective prior year period. This is attributable to lower Software license
fees as a percentage of total Software division revenues in 2000. This decrease
in Software license revenues resulted in a lower overall gross margin due to the
higher margins associated with such revenues.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A expenses for the third quarter of 2000 were $2.9 million, or 40.0% of
revenues, compared to $2.5 million, or 21.1% of revenues, in the third quarter
of 1999. SG&A expenses for the first nine months of 2000 were $7.5 million, or
30.0% of revenues, compared to $7.1 million, or 20.4% of revenues, during the
first nine months of 1999. The increase in SG&A expenses as a percentage of
revenues from the prior year periods is attributable to a decrease in operating
revenues. Expenses related to certain corporate functions, such as treasury,
financial reporting, investor relations, legal, payroll, human resources and
management information systems, have not been fully charged to the Software
division, but are included in the consolidated results of operations as general
corporate expenses.
BAD DEBT
Bad debt expense for the third quarter of 2000 was $4.0 million compared
to $0.4 million in the third quarter of 1999. Bad debt expense for the first
nine months of 2000 was $5.7 million compared to $0.5 million during the first
nine months of 1999. Bad debt expense increased from the prior year periods
primarily due to a $3.5 million charge taken in the third quarter of 2000.
Related to the Software division, this charge is a result of the narrowing of
various software product offerings, the refocusing of software development
efforts, and a reserve associated with a significant account.
RESEARCH AND DEVELOPMENT
R&D expenses are comprised of the salaries and benefits of the employees
involved in software development and related expenses. The Software division is
actively involved in ongoing R&D efforts associated with creating new and
enhanced products related to its convergent billing software platform for both
telecommunications and Internet service providers. R&D expenses in the third
quarter of 2000 increased to $1.6 million from $1.2 million in the third quarter
of 1999. R&D expenses in the first nine months of 2000 were $8.1 million
compared to $2.4 million in the comparable prior year period. This increase is
primarily due to an increase in the number of R&D personnel necessary to support
the efforts to expand the features and functionality of the Company's Aptis ICP
and TotalBill products. The Company intends to continue its R&D efforts in the
future and anticipates spending a total of approximately $9.5 million during
fiscal year 2000 for such expenses.
INCOME (LOSS) FROM OPERATIONS
In the quarter and nine months ended June 30, 2000, the Software division
incurred a loss from operations of $7.7 million and $18.1 million, compared to
income from operations of $2.0 million and $6.5 million in the respective prior
year periods. The loss from operations in 2000 reflected lower revenues and
higher SG&A and R&D expenses. During the second quarter of 2000, the Company
recorded a special charge of $1.1 million related to severance for the Software
division.
18
<PAGE>
RESULTS OF OPERATIONS - INTERNET
The Company entered the Internet business with its initial equity
investment in Princeton in September 1998. During the third quarter of 2000, in
addition to recording its equity in the net loss of Princeton of $3.4 million
and its equity in the net loss of CORE of $0.2 million, which are included in
Other income (expense), the Company recorded $2.1 million of operating expenses
related to its Internet division. During the first nine months of 2000, the
Company recorded its equity in the net loss of Princeton of $6.1 million, its
equity in the net loss of CORE of $0.2 million, and $8.2 million of operating
expenses. These expenses included the operating results of FIData, a company
that provides Internet-based automated loan approval products to the financial
services industries, since its acquisition effective November 1, 1999, as well
as expenses incurred by efforts to develop a financial services Website focused
on the credit union industry and its members. The Company has since narrowed its
credit union efforts to focus on FIData only and correspondingly expects
operating expenses for the Internet division to decrease for the remaining three
months of fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance decreased to $96.3 million at June 30, 2000
from $134.0 million at September 30, 1999. This decrease is primarily related to
the cash investments of $33.5 million in Princeton and $6.0 million in CORE and
the $5.0 million advance to Princeton. The large fluctuations in daily cash
balances are normal due to the large amount of customer receivables that the
Company collects on behalf of its LEC billing customers. The Company's working
capital position decreased to $15.7 million at June 30, 2000, from $73.6 million
at September 30, 1999, and its current ratio was 1.1 and 1.5 at June 30, 2000
and September 30, 1999, respectively. The decrease in the working capital was
primarily attributable to the decrease in the cash balance and a decrease in the
level of customer receivables financed under the Company's advance funding
program. Net cash used in operating activities was $2.9 million in the first
nine months of 2000 as compared to net cash provided by operating activities of
$13.7 million in the first nine months of 1999 and primarily reflected the
change in net income (loss) from the prior year quarter, exclusive of special
charges.
In December 1996, the Company secured 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 exchange
carriers. This credit facility terminated on March 20, 2000. Although the
Company does not currently anticipate the need to draw on a credit facility due
to its significant cash resources, the Company is negotiating a new credit
facility with various lenders.
Capital expenditures amounted to approximately $4.8 million in the first
nine months of 2000 and related primarily to the purchase of computer equipment
and software. The Company anticipates capital expenditures before acquisitions,
if any, of approximately $0.8 million in the next three months of 2000, largely
related to expenditures for furniture, fixtures, leasehold improvements,
computer software and hardware upgrades. 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.
In November 1999, the Company completed the acquisition of FIData, a
company located in San Antonio, Texas that provides Internet-based automated
loan approval products to the financial services industries. The total
consideration for the acquisition was approximately $4.2 million in cash and
debt assumption and 1,100,000 shares of the Company's common stock. This
acquisition has been accounted for as a purchase. Accordingly, the results of
operations for FIData 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
(loss) per common share since the date of acquisition. Approximately $7.4
million was recorded as goodwill and other intangibles and is included in Other
assets. During the first quarter of 2000, the Company expensed $1.7 million of
in-process R&D costs acquired in connection with this acquisition.
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In March 2000, the Company increased its ownership in Princeton to
approximately 51% with an additional $33.5 million equity investment, which
consisted of $27.0 million of convertible preferred stock and $6.5 million of
common stock. In connection with this investment, the Company expensed $2.5
million of in-process R&D costs during the second quarter. In June 2000, under
the terms of a Convertible Promissory Note due July 15, 2001, the Company
advanced $5.0 million to Princeton. The Convertible Promissory Note may be
converted into shares of Princeton's preferred stock, which is convertible into
1,111,111 shares of Princeton Common Stock.
In March 2000, the Company completed the purchase of a voting preferred
stock investment of $6.0 million in CORE, a Dallas, Texas-based company that
develops and markets Internet-based business-to-business products for the
acquisition, classification, retention and dissemination of business-critical
knowledge and information. During the second quarter, the Company expensed $2.5
million of in-process R&D costs acquired in connection with this equity
investment. The Company will continue to review additional strategic Internet
acquisition opportunities that will complement or enhance its existing
operations.
In April 2000, the Company completed the acquisition of Operator Service
Company ("OSC"), a Lubbock, Texas-based provider of inbound directory
assistance, interactive voice response and customer relationship management
services to the telecommunications and consumer products industries. The
Company acquired OSC through the issuance of 3.077 million shares of common
stock. This acquisition is accounted for under the purchase method of
accounting. Accordingly, the results of operations for OSC 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 (loss) per common share since the date of
acquisition. A portion of the total purchase price of $19.2 million has been
allocated to assets acquired and liabilities assumed based on estimated fair
market value at the date of acquisition. The additional balance of $17.1 million
was recorded as goodwill and is being amortized over twenty years on a
straight-line basis.
The Company's operating cash requirements consist principally of working
capital requirements, requirements under its advance funding program 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, will be sufficient to fund capital expenditures,
advance funding requirements and working capital needs for the foreseeable
future.
YEAR 2000
As of August 10, 2000, the Year 2000 date change has not posed a
significant 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
have provided 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 date change if it or
unrelated parties failed to successfully address this issue.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
portfolio of cash equivalents and short-term marketable securities. The Company
does not believe that it has significant exposure to market risks associated
with changing interest rates as of June 30, 2000 because the Company's intention
is to maintain a liquid portfolio to take advantage of investment opportunities.
The Company does not use derivative financial instruments in its operations.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A lawsuit was filed on December 31, 1998, in the United States District
Court in San Antonio, Texas by an alleged stockholder of the Company against the
Company and various of its officers and directors, alleging unspecified damages
as a result of alleged false statements in various press releases prior to
November 19, 1998. In September 1999, the U.S. District Court for the Western
District of Texas entered an order and judgment dismissing the plaintiff's
lawsuit. The plaintiff noticed an appeal of that decision on September 29, 1999.
Although no assurances can be given, the Company believes it has meritorious
defenses to this action and intends to defend itself vigorously.
The Company is cooperating with the Federal Trade Commission's ("FTC")
Bureau of Consumer Protection ("BCP") regarding BCP staff requests for industry
and customer specific information from the Company relating primarily to the
alleged cramming of charges for non-regulated telecommunications services by
certain of its customers. Cramming is the addition of charges to a telephone
bill for programs, products or services the consumer did not knowingly
authorize. In connection with the Company's responses to the ongoing
informational requests, the BCP staff has proposed a complaint against the
Company. The BCP staff alleges that it can impose a variety of civil remedies on
the Company, including consumer redress or other equitable relief as well as
restrictions on the way the Company processes charges for enhanced services. The
Company disputes the BCP staff's alleged basis for liability and is reviewing
the BCP staff's allegations to ensure that corrective action has already been
taken. BCC has and will continue to cooperate and engage the BCP staff in good
faith negotiations. The Company is unable to predict what action, if any, the
FTC will take regarding the BCP staff's proposed complaint or what, if any,
financial impact would result.
The Company is involved in various other 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, litigation
or proceedings to which the Company is a party, including those described above,
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 occurs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed below are filed as part of or incorporated by
reference in this report. Where such filing is made by incorporation
by reference to a previously filed document, such document is
identified in parentheses.
EXHIBIT
NUMBER DESCRIPTION
10.1 Restricted Stock Agreement dated April 5, 2000
by and between Billing Concepts Corp. and
Parris H. Holmes, Jr. (filed herewith)
21.1 Amended List of Subsidiaries (filed herewith)
27.1 Financial Data Schedule as of June 30, 2000
(filed herewith)
(b) Current Reports on Form 8-K:
Form 8-K dated April 4, 2000, and filed April 10, 2000, announcing
the execution of a definitive agreement to acquire Operator Service
Company.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
BILLING CONCEPTS CORP.
(Registrant)
Date: August 10, 2000 By: /s/ DAVID P. TUSA
David P. Tusa
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Duly authorized and
principal financial officer)
