FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996March 31, 1997
OR
[ ][_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________________ to __________________________
Commission file number 0-27512
CSG SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0783182
(State or other jurisdiction of (I.R.S. Employer
of
incorporation or organization) Identification No.)
5251 DTC PARKWAY, SUITE 625
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices, including zip code)
(303) 796-2850
(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.
YES X NO
---- ------- ---
Shares of common stock outstanding at October 31, 1996: 25,483,002.May 9, 1997: 25,483,385.
1
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996MARCH 31, 1997
INDEX
PAGE NO.
------------------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of September 30, 1996March 31, 1997
and December 31, 1995...................................................1996............................................... 3
Condensed Consolidated Statements of Operations for the Quarter and NineThree
Months Ended September 30, 1996March 31, 1997 and 1995................................1996................................ 4
Condensed Consolidated Statements of Cash Flows for the NineThree Months
Ended September 30, 1996March 31, 1997 and 1995.......................................1996....................................... 5
Notes to Condensed Consolidated Financial Statements....................Statements................ 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................Operations............................................... 8 - 1211
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................8-K.................................... 12
Signatures.......................................................... 13
Signatures.............................................................. 14
Index to Exhibits....................................................... 15Exhibits................................................... 14
2
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
SEPTEMBER 30, DECEMBERMarch 31, December 31,
1997 1996
1995
------------- ------------
(UNAUDITED)----------- -----------
ASSETS (unaudited)
------
Current Assets:
Cash and cash equivalents.................................................................equivalents............................................................. $ 5,7065,792 $ 3,6036,134
Accounts receivable-
Trade-
Billed, net of allowance of $677$841 and $521............................................ 28,674 22,400
Unbilled............................................................................. 3,052 803$819........................................ 32,417 33,141
Unbilled......................................................................... 2,221 5,220
Other................................................................................ 1,208 1,9251,629 1,342
Deferred income taxes..................................................................... 168 -taxes................................................................. 114 45
Other current assets...................................................................... 1,612 585
------------- ------------assets.................................................................. 2,849 2,574
----------- -----------
Total current assets..................................................................... 40,420 29,316
------------- ------------
Equipmentassets................................................................. 45,022 48,456
----------- -----------
Property and furniture,equipment, net of depreciation of $9,483$13,028 and $5,759......................... 9,980 9,881$10,664.................... 14,138 13,093
Investment in discontinued operations.....................................................operations................................................. 732 2,732732
Software, net of amortization of $20,167$25,904 and $11,917...................................... 13,881 21,083$22,924.................................. 13,845 13,629
Noncompete agreements and goodwill, net of amortization of $10,820$14,289 and $6,154............. 27,080 25,657$12,572........ 23,814 25,730
Client contracts and related intangibles, net of amortization of $7,504$9,551 and $4,433........ 10,776 13,846$8,528.... 8,729 9,752
Deferred income taxes..................................................................... 2,159 -taxes................................................................. 2,182 1,356
Other assets.............................................................................. 2,809 3,038
------------- ------------assets.......................................................................... 2,419 2,162
----------- -----------
Total assets............................................................................assets........................................................................ $ 107,837110,881 $ 105,553
============= ============114,910
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt......................................................debt.................................................. $ 10,000 $ 10,000
Customer deposits......................................................................... 6,004 5,505deposits..................................................................... 6,605 6,450
Trade accounts payable.................................................................... 11,123 6,110payable................................................................ 10,884 12,620
Accrued liabilities....................................................................... 8,288 4,421liabilities................................................................... 5,391 8,177
Deferred revenue.......................................................................... 2,610 622revenue...................................................................... 5,998 5,384
Accrued income taxes...................................................................... 1,856 -taxes.................................................................. 568 945
Other current liabilities................................................................. 293 299
-------------liabilities............................................................. 419 450
----------- -----------
Total current liabilities................................................................ 40,174 26,957
-------------liabilities............................................................ 39,865 44,026
----------- -----------
Long-term debt, net of current maturities................................................. 25,000 75,068maturities.............................................. 20,000 22,500
Deferred revenue.......................................................................... 5,292 2,531
Redeemable convertible preferred stock, par value $.01 per share; zero shares and
9,500,000 shares authorized; zero shares and 8,999,999 shares issued and outstanding...... - 62,985revenue....................................................................... 8,148 6,420
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000 shares and zero shares
authorized;
zero shares issued and outstanding...........................................outstanding................................................... - -
Common stock, par value $.01 per share; 100,000,000 shares and 50,000,000 shares
authorized;
25,483,00225,492,332 shares and 4,243,00025,488,876 shares issued and outstanding................outstanding....................... 255 42255
Additional paid-in capital................................................................ 111,288 7,720capital............................................................ 111,440 111,367
Deferred employee compensation............................................................ (1,303) (4,968)compensation........................................................ (997) (1,207)
Notes receivable from employee stockholders............................................... (971) (976)stockholders........................................... (861) (861)
Accumulated translation adjustments....................................................... 40 -adjustments................................................... 30 573
Accumulated deficit....................................................................... (71,938) (63,806)
-------------deficit................................................................... (66,999) (68,163)
----------- -----------
Total stockholders' equity (deficit)..................................................... 37,371 (61,988)
-------------equity........................................................... 42,868 41,964
----------- -----------
Total liabilities and stockholders' equity...............................................equity........................................... $ 107,837110,881 $ 105,553
=============114,910
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS-UNAUDITEDOPERATIONS - UNAUDITED
(in thousands, except share and per share amounts)
Quarter ended NineThree months ended
--------------------------
----------------------------
September 30, September 30 September 30, September 30,March 31, March 31,
1997 1996
1995 1996 1995
------------ ------------ ------------- ----------------------- ----------
Total revenues...........................................revenues................................................ $ 35,32038,582 $ 23,789 $ 92,508 $ 70,72526,757
Expenses:
Cost of revenues:
Cost of services....................................... 15,824 11,383 43,024 34,300Direct costs................................................ 18,581 12,831
Amortization of acquired software...................... 2,751software........................... 2,884 2,750 8,252 8,250
Amortization of client contracts and related intangibles.................................intangibles.... 1,023 1,023
3,069 3,069
------------ ------------ ------------ ----------------------- ----------
Total cost of revenues.............................. 19,598 15,156 54,345 45,619
------------ ------------ ------------ -------------revenues.................................. 22,488 16,604
---------- ----------
Gross margin............................................. 15,722 8,633 38,163 25,106
------------ ------------ ------------ -------------margin.................................................. 16,094 10,153
---------- ----------
Operating expenses:
Research and development............................... 5,514 3,607 14,862 10,073development.................................... 4,855 4,556
Selling and marketing.................................. 2,015 897 5,005 2,328marketing....................................... 2,341 1,420
General and administrative:
General and administrative ........................... 3,549 2,995 9,977 7,975administrative................................. 4,129 3,282
Amortization of noncompete agreements and goodwill.... 1,723goodwill......... 1,731 1,420 4,662 4,260
Stock-based employee compensation..................... 98 401 3,472 435
Depreciation........................................... 1,282 1,473 3,718 4,149
------------ ------------ ------------ ------------compensation.......................... 202 3,277
Depreciation................................................ 1,509 1,190
---------- ----------
Total operating expenses........................... 14,181 10,793 41,696 29,220
------------ ------------ ------------ ------------expenses................................ 14,767 15,145
---------- ----------
Operating income (loss).................................. 1,541 (2,160) (3,533) (4,114)
------------ ------------ ------------ ------------....................................... 1,327 (4,992)
---------- ----------
Other income (expense):
Interest expense....................................... (780) (2,227) (3,390) (6,904)expense............................................ (641) (1,740)
Interest income........................................ 187 151 672 470
------------ ------------ ------------ ------------income............................................. 211 229
Other....................................................... 267 -
---------- ----------
Total other........................................ (593) (2,076) (2,718) (6,434)
------------ ------------ ------------ ------------other............................................. (163) (1,511)
---------- ----------
Income (loss) before income taxes and extraordinary item and discontinued operations....................... 948 (4,236) (6,251) (10,548)item...... 1,164 (6,503)
Income tax (provision) benefit..........................benefit............................... - -
- -
------------ ------------ ------------ ---------------------- ----------
Income (loss) before extraordinary item and
discontinued operations................................ 948 (4,236) (6,251) (10,548)item....................... 1,164 (6,503)
Extraordinary loss from early extinguishment of debt..... -debt......... - (1,260)
-
------------ ------------ ------------ ------------
Income (loss) from continuing operations................. 948 (4,236) (7,511) (10,548)
------------ ------------ ------------ ------------
Discontinued operations:
Loss from operations.................................... - (1,003) - (3,093)
Loss from disposition................................... - (660) - (660)
------------ ------------ ------------ ------------
Total loss from discontinued operations............ - (1,663) - (3,753)
------------ ------------ ------------ ---------------------- ----------
Net income (loss)..................................................................................... $ 9481,164 $ (5,899) $ (7,511) $ (14,301)
============ ============ ============ ============(7,763)
========== ==========
Net income (loss) per common and equivalent share:
Income (loss) before extraordinary item
and discontinued operations...........................item...................... $ 0.040.05 $ (0.19) $ (0.25) $ (0.47)(0.28)
Extraordinary loss from early extinguishment of debt.... -debt......... - (0.05)
-
Loss from discontinued operations....................... - (0.07) - (0.17)
------------ ------------ ------------ ---------------------- ----------
Net income (loss)................................................................................... $ 0.040.05 $ (0.26) $ (0.30) $ (0.64)
============ ============ ============ ============(0.33)
========== ==========
Weighted average common shares and equivalents...........25,486,383 22,494,748 24,822,720 22,494,748equivalent shares................. 25,489,258 23,448,833
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITEDFLOWS - UNAUDITED
(in thousands, except share amounts)
NineThree months ended
---------------------------
September 30, September 30,--------------------
March 31, March 31,
1997 1996
1995
----------- --------------------- --------
Cash flows from operating activities:
Net loss............................................................income (loss)................................................... $ (7,511) $ (14,301)1,164 $(7,763)
Adjustments to reconcile net lossincome (loss) to net cash
provided by operating activities-
Depreciation...................................................... 3,718 4,1491,509 1,190
Amortization...................................................... 16,525 16,2745,758 5,384
Stock-based employee compensation................................. 3,472 435202 3,277
Extraordinary loss from early extinguishment of debt.............. 1,260 - Loss from discontinued operations................................. - 3,7531,260
Changes in operating assets and liabilities:
Trade accounts receivable, net................................... (6,220) (4,347)3,566 (773)
Other receivables................................................ 717 191(287) 1,153
Deferred income taxes............................................ (2,327) -(895) (613)
Other current assets and noncurrent assets....................... (2,509) (40)assets.............................. (653) (397)
Customer deposits................................................ 499 788155 448
Trade accounts payable and accrued liabilities................... 5,752 (2,432)(4,887) 1,923
Deferred revenue................................................. 4,749 2,8502,449 2,977
Other current liabilities........................................ (6) 125
----------- -------------(31) (51)
-------- -------
Net cash provided by operating activities....................... 18,119 7,445
----------- -------------8,050 8,015
-------- -------
Cash flows from investing activities:
Purchases of property and equipment, and furniture, net........................... (3,662) (4,713)net............................ (2,540) (732)
Additions to software............................................... (1,048) -
Acquisition of businesses, net of cash acquired..................... (3,518)(3,196) -
Net investment in discontinued operations........................... - 2,000
(92)
----------- --------------------- -------
Net cash used inprovided by (used in) investing activities........................... (6,228) (4,805)
----------- -------------activities............. (5,736) 1,268
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.............................. 44,804 36787 44,794
Purchase and cancellation of common stock........................... (23) -(6) (8)
Payment of dividends for redeemable convertible preferred stock..... - (4,497) -
Payments on long-term debt.......................................... (50,068) (8,057)
----------- -------------(2,500) (45,024)
-------- -------
Net cash used in financing activities........................... (9,784) (7,690)
----------- -------------(2,419) (4,735)
-------- -------
Effect of exchange rate fluctuations on cash......................... (4)(237) -
----------- --------------------- -------
Net increase (decrease) in cash and cash equivalents................. 2,103 (5,050)(342) 4,548
Cash and cash equivalents, beginning of period....................... 6,134 3,603
6,650
----------- --------------------- -------
Cash and cash equivalents, end of period............................. $ 5,7065,792 $ 1,600
========== ============8,151
======== =======
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for-
Interest........................................................... $ 3,294532 $ 6,4091,737
Income taxes....................................................... $ (586)1,272 $ 1,176(854)
Supplemental disclosure of noncash financing activities:
During March 1996, the Company converted 8,999,999 shares of redeemable convertible preferred stock
into 17,999,998 shares of common stock.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements at September 30, 1996March 31, 1997, and for the
three and nine months then ended are unaudited and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim period. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's Annual Report on
Form S-1 Registration Statement10-K for the year ended December 31, 1996, filed with the Securities and
Exchange Commission (Registration No. 333-244).Commission. The results of operations for the three and nine months ended September 30, 1996March
31, 1997, are not necessarily indicative of the results for the entire year
ending December 31, 1996.1997.
2. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS
Certain December 31, 1995 amounts have been reclassified to conform with the
September 30, 1996 presentation.
3. STOCKHOLDERS' EQUITY
The Company completed an initial public offering (IPO) of its common stock in
March 1996. The Company sold 3,335,000 shares of common stock at an initial
public offering price of $15 per share, resulting in net proceeds to the
Company, after deducting underwriting discounts and offering expenses, of
approximately $44,794,000. As of the closing of the IPO, all of the 8,999,999
outstanding shares of redeemable convertible Series A Preferred Stock were
automatically converted into 17,999,998 shares of common stock.
4.3. NET INCOME (LOSS) PER SHARE
Net income (loss) per common and equivalent share for the three and nine months
ended September 30, 1996, is based on the weighted average
number of shares of common stock and common equivalent shares related tooutstanding, which
includes redeemable convertible Series A Preferred Stock.Stock prior to the conversion
into common stock in March 1996. Common equivalent shares related to stock
options have been excluded from the weighted average number of shares. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, all shares and options
issued duringas the
twelve-month period prior to the Company's IPO have been
treated as if they were outstanding for all periods presented, including periods
in which thedilutive effect is antidilutive.
5.not significant.
4. EXTRAORDINARY LOSS
The Company used $40.3 million of the IPO proceeds to repay a portion of
outstanding bank indebtedness (the Indebtedness). Upon repayment of the
Indebtedness, the Company recorded an extraordinary loss of $1.3 million for the
write-off of deferred financing costs.
6
6.5. BYTEL ACQUISITION
OnIn June 28, 1996, the Company acquired all of the outstanding capital stock of Bytel
Limited (Bytel), a United Kingdom-based company which provides customer
management software systems to the cable and telecommunications industries. The total purchase
price was approximately $4.7 million consisting of cash payments of
approximately $3.1 million and assumption of certain payables to one ofindustries in
the sellers of approximately $1.6 million. The cash portion of the purchase price
was paid out of corporate funds.United Kingdom. The acquisition was accounted for underusing the purchase method.method
of accounting. The Company's condensed consolidated financial statements
include Bytel's results of operations since the acquisition date.
6
6. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128),
which specifies the computation, presentation and disclosure requirements for
earnings per share (EPS). SFAS No. 128 is effective for periods ending after
December 15, 1997, and requires retroactive restatement of EPS for all prior
periods presented. The statement replaces the current "primary earnings per
share" computation with a "basic earnings per share" and redefines the "dilutive
earnings per share" computation. Adoption of the statement is not expected to
have a significant effect on the Company's reported EPS.
7
CSG SYSTEMS INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated (in thousands). The
Company acquired Bytel Limited (Bytel) on June 28, 1996. The results of Bytel's
operations for the three months ended September 30, 1996March 31, 1997, are included in the
following table and considered in the discussion of the Company's operations
that follow:
Quarter ended September 30, Nine Months ended September 30,
------------------------------------- -------------------------------------THREE MONTHS ENDED MARCH 31,
----------------------------------------------
1997 1996
1995 1996 1995
------------------------------------- -------------------------------------------------------- ---------------------
% ofOF % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
------- ------- ------- -------OF
AMOUNT REVENUE AMOUNT REVENUE
------- ------- ------- -------
Total revenues....................... $35,320revenues.................................................... $38,582 100.0% $23,789 100.0% $92,508 100.0% $70,725$26,757 100.0%
Expenses:
Cost of revenues:
Cost of services................... 15,824 44.8% 11,383 47.8% 43,024 46.5% 34,300 48.5%Direct costs................................................... 18,581 48.2 12,831 48.0
Amortization of acquired software.......................... 2,751 7.8%software.............................. 2,884 7.5 2,750 11.6% 8,252 8.9% 8,250 11.7%10.3
Amortization of client contracts and related intangibles...........intangibles....... 1,023 2.9%2.7 1,023 4.3% 3,069 3.3% 3,069 4.3%
------- ------- ------- -------3.8
------- ------- ------- -------
Total cost of revenues........... 19,598 55.5% 15,156 63.7% 54,345 58.7% 45,619 64.5%
------- ------- ------- -------revenues.................................... 22,488 58.4 16,604 62.1
------- ------- ------- -------
Gross margin........................ 15,722 44.5% 8,633 36.3% 38,163 41.3% 25,106 35.5%
------- ------- ------- -------margin...................................................... 16,094 41.6 10,153 37.9
------- ------- ------- -------
Operating expenses:
Research and development........... 5,514 15.6% 3,607 15.2% 14,862 16.1% 10,073 14.2%development........................................ 4,855 12.6 4,556 17.0
Selling and marketing.............. 2,015 5.7% 897 3.8% 5,005 5.4% 2,328 3.3%marketing........................................... 2,341 6.1 1,420 5.3
General and administrative:
General and administrative ....... 3,549 10.0% 2,995 12.6% 9,977 10.8% 7,975 11.3%.................................... 4,129 10.7 3,282 12.3
Amortization of noncompete agreements and goodwill.......... 1,723 4.9%goodwill............. 1,731 4.5 1,420 6.0% 4,662 5.0% 4,260 6.0%5.3
Stock-based employee compensation..................... 98 0.3% 401 1.7% 3,472 3.8% 435 0.6%
Depreciation....................... 1,282 3.6% 1,473 6.2% 3,718 4.0% 4,149 5.9%
------- ------- ------- -------compensation.............................. 202 0.5 3,277 12.2
Depreciation.................................................... 1,509 3.9 1,190 4.4
------- ------- ------- -------
Total operating expenses......... 14,181 40.1% 10,793 45.5% 41,696 45.1% 29,220 41.3%
------- ------- ------- -------expenses....................................... 14,767 38.3 15,145 56.5
------- ------- ------- -------
Operating income (loss).............. 1,541 4.4% (2,160) (9.2)% (3,533) (3.8)% (4,114) (5.8)%
------- ------- ------- -------............................................. 1,327 3.3 (4,992) (18.6)
------- ------- ------- -------
Other income (expense):
Interest expense................... (780) (2.2)% (2,227) (9.4)% (3,390) (3.7)% (6,904) (9.8)%expense................................................ (641) (1.7) (1,740) (6.5)
Interest income.................... 187 0.5% 151 0.6% 672 0.7% 470 0.7%
------- ------- ------- -------income................................................. 211 0.5 229 0.9
Other........................................................... 267 0.7 - -
------- ------- ------- -------
Total other...................... (593) (1.7)% (2,076) (8.8)% (2,718) (3.0)% (6,434) (9.1)%
------- ------- ------- -------other.................................................... (163) (0.5) (1,511) (5.6)
------- ------- ------- -------
Income (loss) before income taxes and extraordinary item and
discontinued operations............ 948 2.7% (4,236) (18.0)% (6,251) (6.8)% (10,548) (14.9)%item............ 1,164 2.8 (6,503) (24.2)
Income tax (provision) benefit.... - - - -benefit................................... - - - -
------- ------- ------- -------
------- ------- ------- -------
Income (loss) before extraordinary item and discontinued operations... 948 2.7% (4,236) (18.0)% (6,251) (6.8)% (10,548) (14.9)%item............................. 1,164 2.8 (6,503) (24.2)
Extraordinary loss from early extinguishment of debt............. - - - - (1,260) (1.4)% - -
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations........................ 948 2.7% (4,236) (18.0)% (7,511) (8.2)% (10,548) (14.9)%
------- ------- ------- ------- ------- ------- ------- -------
Discontinued operations:
Loss from operations................ - - (1,003) (4.2)% - - (3,093) (4.4)%
Loss from disposition............... - - (660) (2.8)% - - (660) (0.9)%
------- ------- ------- ------- ------- ------- ------- -------
Total loss from discontinued
operations..................... - - (1,663) (7.0)% - - (3,753) (5.3)%
------- ------- ------- -------(4.7)
------- ------- ------- -------
Net income (loss)....................................................................... $ 948 2.7% $(5,899) (25.0)1,164 2.8% $(7,763) (28.9)% $(7,511) (8.2)% $(14,301) (20.2)%
======= ======= ======= =======
======= ======= ======= =======
8
THREE MONTHS ENDED SEPTEMBER 30, 1996MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1995MARCH 31, 1996
Revenues. Revenues increased 48.5% from $23.8 million inTotal revenues for the three months ended September 30, 1995,March 31, 1997, increased
44.2% to $35.3$38.6 million, infrom $26.8 million for the three months ended September 30,March 31,
1996, due primarily to i) increased revenue from the Company's existing processing and
related ancillary services, and toii) increased revenue from newthe Company's software productsand
related product sales and professional consulting services.
The increase in revenueRevenues from processing and related ancillary services for the three months ended March
31, 1997, increased 15.1% to $30.7 million, from $26.7 million for the three
months ended March 31, 1996. This increase is due primarily to an increasedincrease in
the number of customers of the Company's clients which were serviced by the
Company and increased revenue per customer. Customers serviced as of September 30, 1995March 31,
1997, and 1996, respectively, were 17.419.6 million and 18.618.5 million, respectively.an increase of
6.2%. The increase in the number of customers serviced was due primarily to internal
customer growth experienced by existing clients and the addition of new clients.
Revenue per customer increased due to annual price increases included in client
contracts and increased usage of ancillary services by existing clients.
NewRevenues from software products, consisting
primarily of license fees from Advanced Customer Service Representative
(ACSR(TM)) and CSG Vantage Point(TM) (the Company's data warehouse product),related product sales and professional consulting
services generated $3.6 million of revenue for the three months ended September 30, 1996. Revenue from Bytel was $2.4March 31, 1997, were $7.9 million, incompared
to $0.1 million for the three months ended September 30,March 31, 1996. Cost of Services. Cost of services increased 39.0% from $11.4 million in the
three months ended September 30, 1995, to $15.8 million in the three months
ended September 30, 1996, due primarilyThis increase
relates to the increased number of customersintroduction of the Company's clients serviced by the Company with its existing processing and
related ancillary services and the cost to provide the new software products and
professional services.
As a percentageconsulting services in early 1996 with continued expansion
throughout 1996, and the inclusion of revenues cost of services decreased from 47.8% inBytel's operations for the
three months ended September 30, 1995, to 44.8% inMarch 31, 1997, with no comparable amounts included for Bytel
for the first quarter of 1996.
Gross Margin. Gross margin for the three months ended September
30,March 31, 1997, increased
58.5% to $16.1 million, from $10.2 million for the three months ended March 31,
1996, due primarily to revenue growth. The gross margin percentage increased to
41.6% for the three months ended March 31, 1997, compared to 37.9% for the three
months ended March 31, 1996. The decreaseoverall increase in cost of services as athe gross margin
percentage of revenue is due primarily to 1)i) the increased gross margin per customer for existingincrease in revenues while the amount of
amortization of acquired software and amortization of client contracts and
related intangibles remained approximately the same, and ii) cost controls in
delivering the Company's processing and related ancillary services, which resulted primarily from annual price
increases included in customer contracts exceeding the corresponding cost to
provide such services and increased usage of ancillary services by existing
customers, and 2) the favorable change in sales mix to include more higher-
margined new software products during the three months ended September 30, 1996.services.
Research and Development Expense. Research and development (R&D) expense increased
52.9% from $3.6 million infor
the three months ended September 30, 1995,March 31, 1997, increased 6.6% to $5.5$4.9 million, infrom $4.6
million for the three months ended September 30,March 31, 1996. As a percentage of total
revenues, R&D expense decreased to 12.6% for the three months ended March 31,
1997, from 17.0% for the three months ended March 31, 1996. The Company
capitalized software development costs, related to CSG Phoenix(TM), of
approximately $3.1 million during the three months ended March 31, 1997, which
consisted of $2.8 million of internal development costs and $0.3 million of
purchased software. No software development costs were capitalized during the
three months ended March 31, 1996. As a result, total R&D expenditures (i.e.,
the total R&D costs expensed, plus the capitalized internal development costs)
for the three months ended March 31, 1997, and 1996, were $7.7 million, or 19.9%
of total revenues, and $4.6 million, or 17.0% of total revenues, respectively.
The overall increase in the R&D expenditures is due primarily to continued
efforts on several products which are in development, principally CSG Phoenix(TM),Phoenix,
and to enhancements of the Company's existing products. The increase in expense consistsincreased R&D
expenditures consist primarily of increases in salaries, benefits, and other
programming-related expenses.
The Company intends to continue to increase
its research and development expenditures. The Company capitalized software
development costs of approximately $1.0 million in the three months ended
September 30, 1996, related to CSG Telephony (the Company's telephony billing
solution product), CSG.web(TM), and enhancements to CSG Vantage Point(TM). No
software development costs were capitalized during 1995.
Selling and Marketing Expense. Selling and marketing expense increased 124.6%
from $0.9 million infor the three
months ended September 30, 1995,March 31, 1997, increased 64.9% to $2.0$2.3 million, infrom $1.4 million
for the three months ended September 30,March 31, 1996. As a percentage of total revenues,
selling and marketing expense increased from 3.8% into 6.1% for the three months ended September 30, 1995, to 5.7% inMarch
31, 1997, from 5.3% for the three months ended September 30,March 31, 1996. The increase in
expense is due primarily to a realignmentcontinued growth of the Company's direct sales
force. Following the change of ownership of the Company in late 1994, a
substantial portion of the previous sales force was terminated during the three
months ended March 31, 1995, and senior management focused on sales
responsibilities in 1995. The Company began building a new direct sales force in mid-1995 and has
added additional staffcontinued to expand its sales force since that time.
9
General and Administrative Expense. General and administrative (G&A) expense
increased 18.5% from $3.0 million infor the three months ended September 30, 1995,March 31, 1997, increased 25.8% to $3.5$4.1 million, infrom
$3.3 million for the three months ended September 30,March 31, 1996. As a percentage of
total revenues, G&A expense decreased from 12.6% into 10.7% for the three months ended September 30, 1995, to 10.0% inMarch
31, 1997, from 12.3% for the three months ended September 30,March 31, 1996. The increase in
expense relates primarily to the continued development of the Company's
management team and to related administrative staff, added throughout 1996 and
during 1995 and the first ninethree months of 19961997, to support the Company's growth. The
decrease in G&A expense as a percentage of revenue is due primarily to increased
leverage from
the larger revenue base in relation to the level of G&A expenses incurred during
the three months ended September 30, 1996.revenues.
Amortization of Noncompete Agreements and Goodwill. Amortization of noncompete
agreements and goodwill increased 21.3% from $1.4 million infor the three months ended September 30, 1995,March 31, 1997, increased
21.9% to $1.7 million, infrom $1.4 million for the three months ended September
9
30,March 31,
1996. The increase in expense relates to amortization of goodwill from the
Bytel acquisition and amortization of an additional noncompete agreement
obtained in April 1996.
Interest Expense. Interest expense decreased by 65.0% from $2.2 million in the
three months ended September 30, 1995, to $0.8 million in the three months ended
September 30, 1996, with the decrease attributable primarily to scheduled
principal payments on the Company's long-term debt, the retirement of $40.3
million of long-term debt with proceeds from the IPO in March 1996, and a
decrease in interest rates as a result of the Company favorably amending its
long-term credit facility with its banks in April 1996 in conjunction with the
$40.3 million retirement of long-term debt.
Discontinued Operations. The loss of $1.7 million in the three months ended
September 30, 1995, relates to the Company's investment in Anasazi Inc., which
was disposed of during the third quarter of 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
Revenues. Revenues increased 30.8% from $70.7 million in the nine months ended
September 30, 1995, to $92.5 million in the nine months ended September 30,
1996, due primarily to increased revenue from the Company's existing processing
and related ancillary services and to increased revenue from new software
products and professional services. The increase in processing and related
ancillary services is due primarily to an increased number of customers of the
Company's clients which were serviced by the Company and increased revenue per
customer. The increase in the number of customers serviced was due primarily to
internal customer growth experienced by existing clients and the addition of new
clients. Revenue per customer increased due to annual price increases included
in client contracts and increased usage of ancillary services by existing
clients. New software products, consisting primarily of license fees from
ACSR(TM) and CSG Vantage Point(TM) (the Company's data warehouse product), and
professional services generated $6.5 million of revenue for the nine months
ended September 30, 1996. Revenue from Bytel was $2.4 million in the nine months
ended September 30, 1996.
Cost of Services. Cost of services increased 25.4% from $34.3 million in the
nine months ended September 30, 1995, to $43.0 million in the nine months ended
September 30, 1996, due primarily to the increased number of customers of the
Company's clients serviced by the Company with its existing processing and
related ancillary services and the cost to provide the new software products and
professional services.
As a percentage of revenues, cost of services decreased from 48.5% in the nine
months ended September 30, 1995, to 46.5% in the nine months ended September 30,
1996. The decrease in cost of services as a percentage of revenue is due
primarily to the increased gross margin per customer for existing processing and
related ancillary services, which resulted primarily from annual price increases
included in customer contracts exceeding the corresponding cost to provide such
services and increased usage of ancillary services by existing customers.
Research and Development Expense. Research and development expense increased
47.5% from $10.1 million in the nine months ended September 30, 1995, to $14.9
million in the nine months ended September 30, 1996, due primarily to continued
efforts on several products which are in development, principally CSG
Phoenix(TM), and to enhancements of the Company's existing products. The
increase in expense consists primarily of increases in salaries, benefits, and
other programming-related expenses. The Company intends to continue to increase
its research and development expenditures. The Company capitalized software
development costs of approximately $1.0 million in the nine months ended
September 30, 1996, related to CSG Telephony (the Company's telephony billing
solution product), CSG.web(TM), and enhancements to CSG Vantage Point(TM). No
software development costs were capitalized during 1995.
Selling and Marketing Expense. Selling and marketing expense increased 115.0%
from $2.3 million in the nine months ended September 30, 1995, to $5.0 million
in the nine months ended September 30, 1996. As a percentage of revenues,
selling and marketing expense increased from 3.3% in the nine months ended
September 30, 1995, to 5.4% in the nine months ended September 30, 1996. The
increase in expense is due primarily to a realignment of the Company's sales
force. Following the change of ownership of the Company in late 1994, a
substantial portion of the previous sales force was terminated during the three
months ended March 31, 1995, and senior management focused on sales
responsibilities in 1995. The Company began building a new direct sales force
in mid-1995 and has added additional staff since that time.
10
General and Administrative Expense. General and administrative (G&A) expense
increased 25.1% from $8.0 million in the nine months ended September 30, 1995,
to $10.0 million in the nine months ended September 30, 1996. As a percentage
of revenues, G&A expense decreased from 11.3% in the nine months ended September
30, 1995, to 10.8% in the nine months ended September 30, 1996. The increase in
expense relates primarily to the development of the Company's management team
and to related administrative staff added during 1995 and the first nine months
of 1996 to support the Company's growth. The decrease in G&A expense as a
percentage of revenue is due primarily to increased leverage from the larger
revenue base in relation to the level of G&A expenses incurred during the nine
months ended September 30, 1996.
Amortization of Noncompete Agreements and Goodwill. Amortization of noncompete
agreements and goodwill increased 9.4% from $4.3 million in the nine months
ended September 30, 1995, to $4.7 million in the nine months ended September 30,
1996. The increase in expense relates to amortization of goodwill from the
Bytel acquisition and amortization of an additional noncompete agreement
obtainedacquired in April 1996.
Stock-Based Employee Compensation. Stock-based employee compensation of $3.5$3.3
million in the ninethree months ended September 30,March 31, 1996, relates to purchases of the
Company's common stock through performance stock purchase agreements with
executive officers and key employees. TheDuring 1995 and 1994, the Company has the optionsold
common stock to repurchase
the shares upon the occurrence of certain events, principally termination of
employment with the Company. The shares wereexecutive officers and key employees pursuant to be released from the repurchase
option on November 30, 2001.performance
stock agreements. The structure of the performance stock agreements required
"variable" accounting for the related shares until the performance conditions
were removed on October 19, 1995, thereby establishing a measurement datedate. The
fair value of October 19,
1995. At that date,the stock was estimated by the Company recorded total deferred compensationto be $2.75 per share at
that date. Prior to the completion of $5.8
million. Thethe Company's initial public offering
(IPO), the deferred compensation was being recognized as stock-based employee
compensation expense on a straight-line basis from the time the shares were
purchased through November 30, 2001. Upon the completion of the Company's initial public offering (IPO) of its common
stock in March 1996,IPO, shares
owned by certain executive officers of the Company were no longer subject to the
repurchase option. In addition, the repurchase option for the remaining
performance stock shares decreasesdecreased to 20% annually over a five-year period,
commencing on the later of thean employee's employmenthire date or November 30, 1994. As a
result, approximately $3.2 million of stock-based employee compensation expense
was recorded in the monthwhen the IPO was completed. Annualcompleted in March 1996. The scheduled
amortization of the stock-based employeedeferred compensation expense related to these shares subsequent to March 31,
1997, is approximately $0.1 million per quarter.
Depreciation Expense. Depreciation expense for the IPO will be approximately $0.4three months ended March 31,
1997, increased 26.8% to $1.5 million, untilfrom $1.2 million for the three months
ended March 31, 1996. The increase in expense relates to capital expenditures
made throughout 1996 and the first three months of 1997 in support of the
overall growth of the Company.
Operating Income. Operating income for the three months ended March 31, 1997,
was $1.3 million, compared to an operating loss of $5.0 million for the three
months ended March 31, 1996. The increase between years relates to the factors
discussed above.
The Company incurred certain one-time or acquisition-related charges
(Acquisition Charges) in connection with its leveraged buy-out of CSG Systems,
Inc. in November 1994. The Acquisition Charges include amortization of acquired
software, client contracts and related intangibles, noncompete agreement,
goodwill, and stock-based compensation. Operating income for the three months
ended March 31, 1997, and 1996, excluding Acquisition Charges of $5.5 million
and $8.5 million, was $6.8 million or 17.8% of total revenues, and $3.5 million
or 13.0% of total revenues, respectively. See the Company's "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.1996, for additional discussion regarding the Acquisition Charges
and the impact of such charges on operations.
Interest Expense. Interest expense decreased by 50.9% from $6.9 million infor the ninethree months ended September 30, 1995,March 31, 1997,
decreased 63.2% to $3.4$0.6 million, infrom $1.7 million for the ninethree months ended
September 30,March 31, 1996, with the decrease attributable to scheduled principal payments
on the Company's long-term debt, the retirement of $40.3 million of long-term
debt with proceeds from the IPO in March 1996, and a decrease in interest rates
as a result of the Company favorably amending its long-term credit facility with
its banksbank in April 1996 in conjunction with the $40.3
million retirement of long-term debt.1996.
Extraordinary Loss From Early Extinguishment Of Debt. Upon the repayment of the
$40.3 million of long-term debt with IPO proceeds, the Company recorded an
extraordinary charge of $1.3 million in March 1996, for the write-off of
deferred financing costs attributable to the portion of the long-term debt
repaid.
Discontinued Operations. The loss of $3.8 million in the nine months ended
September 30, 1995, relates to the Company's investment in Anasazi Inc., which
was disposed of during the third quarter of 1995.10
General
- -------
The Company generates a significant amount of its revenues from Tele-
Communications, Inc.'s (TCI) cable television operations and Primestar direct
broadcast satellite operations (i.e., TCI Satellite Entertainment, Inc.). The
Company's existing contract with Tele-Communications, Inc. (TCI),TCI for its cable television operations, which
was scheduled to expire December 31, 1996, has been extended automatically by itsit
terms for one additional year. TCI a significant client,has announced it is developing an in-
housein-house billing
system for use in its cable television operations, and the Company expects TCI's
in-house system to replace the Company's system in the future. The first deliveryCompany
cannot estimate when TCI's in-house billing solution will be available or the
timing of significant conversions from the Company's system to TCI's in-house
billing solution. In December 1996, CSG signed a new contract with TCI
Satellite Entertainment, Inc. as their exclusive provider of customer management
services including the purchase of CSG Phoenix(TM), which is the Company's next generationPhoenix and CSG VantagePoint(TM).
The Company delivered Version 1.1 of CSG Phoenix, its next-generation customer
care and billingmanagement system for the converging communications markets,
is scheduled in the fourth quarter of 1996.industries, on March 31,
1997, for testing and integration at customer sites. The Company presently
expects to install a beta site to be installed in the firstthird quarter of 1997, utilizing
Version 1.2 of CSG Phoenix, which is scheduled to be released to a beta customer
in the second quarter of 1997. The CSG Phoenix(TM)Phoenix system is being developed on a
three-tier client/server, object-oriented architecture. The
systemarchitecture and is being developeddesigned to enable
clients to quickly deploy new convergence services such as voice, video and
data, and to support large customer service sites. The statements regarding
timing of the Company's deliveryrelease of Version 1.2 of CSG Phoenix(TM)Phoenix in the second
quarter of 1997 and the installation of a beta site in the firstthird quarter of 1997
are forward-looking statements. The actual timing is subject to delay due to
the variety of factors inherent in the development and initial implementation of
a new, complex 11
software system. Installation is also subject to factors
relating to the integration of the new system with the client's existing
systems.
Income Taxes
- ------------
AsAt March 31, 1997, management of September 30, 1996,the Company evaluated its previous operating
results, as well as projections for 1997 and 1998, and concluded that it was
more likely than not that certain of the Company's deferred tax assets would be
realized. Accordingly, the Company has recognized a net deferred tax assetsasset of
approximately $24.6$2.3 million. Based on the Company's history of operating
losses, theThe Company has recorded a valuation allowance of approximately
$22.3$23.6 million primarily foragainst the remaining net deferred tax assets related to future deductible
temporary differences since realization of
these future benefits is not sufficiently assured as of September 30, 1996.March 31, 1997.
The Company expects a net loss for 1996 and anticipates recognizing a deferred
tax benefit for this and prior operating losses and otherintends to analyze the realizability of the net deferred tax assets
toat each future quarterly reporting period. The current quarterly results of
operations, as well as the extentCompany's projected results of operations, will
determine the Company has arequired valuation allowance at the end of each quarter. Based on
its current tax provision. Thus, the
Company anticipates no income tax expense will be recognized in 1996. Althoughprojections of operating results for 1997 and 1998, the Company
expects to incurrealize additional deferred tax assets in 1997. As a net loss in 1996,result, the
Company expectsdoes not expect income tax expense for 1997 to pay
income taxes in 1996, duebe significant. Due
primarily to differences in the timing of recognition of the amortization of
intangible assets for financial reporting and tax purposes.
Thepurposes, the Company intendsexpects
to analyze the realizability of the net deferred tax assets
at each future reporting period. Such analysis may indicate that the
realization of various deferred tax benefits is more likely than not and,
therefore, the amount of deferred tax assets recognized may be increased.pay income taxes in 1997.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1996,March 31, 1997, the Company's principal sources of liquidity included cash
and cash equivalents of $5.7$5.8 million. The Company also has a revolving bank
line of credit in the amount of $5.0 million of which there were no borrowings
outstanding. The line of credit expires December 31, 2000.November 30, 2001.
During the ninethree months ended September 30, 1996,March 31, 1997, the Company generated $18.1$8.1 million
in net cash flow from operating activities and received a $2.0 million
principal payment on a note receivable from Anasazi Inc.activities. Cash generated from these sources
was primarily used to fund capital expenditures of $3.7$2.5 million, additions to
software of $1.0 million, acquisitions of $3.5$3.2 million, and to repay long-term debt of $9.8$2.5 million. Also, in March 1996, the Company sold 3,335,000 shares of
common stock at an initial public offering price of $15 per share, resulting in
net proceeds to the Company, after deducting underwriting discounts and offering
expenses, of approximately $44.8 million. The net proceeds from the IPO were
used to repay long-term debt of $40.3 million and to pay accrued dividends of
$4.5 million on redeemable convertible Series A Preferred Stock. In conjunction
with the $40.3 million repayment of long-term debt, the Company decreased the
interest rates on its long-term debt by favorably amending its credit facility
with its banks in April 1996. As of the closing of the IPO, all of the
8,999,999 outstanding shares of redeemable convertible Series A Preferred Stock
were automatically converted into 17,999,998 shares of common stock, at which
time the accrued dividends became payable.
Although the Company expects to incur a net loss in 1996, the Company expects to
pay income taxes in 1996, due primarily to differences in the timing of
recognition of the amortization of intangible assets for financial reporting and
tax purposes.
The Company believes that cash generated from operations and the amount
available under the revolving bank line of credit will be sufficient to meet its
anticipated cash requirements for operations (including research and development
expenditures), income taxes, debt service, and
anticipated capital expenditures through the
next twelve months.
1211
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Items 1 - 5. None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.18 First Amendment and Limited Waiver, dated August 14, 1996,
to the Amended and Restated Loan Agreement among CSG
Systems, Inc., certain lenders and Banque Paribas, as Agent
10.38 CSG Systems, Inc. Wealth Accumulation Plan
11.01 Statement re: Computation of Per Share Earnings
27.01 Financial Data Schedule (EDGAR Version Only)
99.01 Safe Harbor for Forward-Looking Statements Under the
Private Securities Litigation Reform Act of 1995 - Certain1995-Certain
Cautionary Statements and Risk Factors.Factors
(b) Reports on Form 8-K
Form 8-K dated July 9, 1996, as amended by Form 8-K(A) filed on
September 9, 1996, and Form 8-K(A) Amendment No. 2 filed on
September 25, 1996, under Item 2, Acquisition or Disposition of
Assets, was filed with the Securities and Exchange Commission
reporting the acquisition of the capital stock of Bytel Limited.
The financial statements included in Form 8-K (A) were as follows:
Financial statements for Bytel Limited as at and for the year
ended 30 April 1996.
Pro forma combined financial statements for CSG Systems
International, Inc. and Bytel Limited for the year and six
months ended December 31, 1995 and June 30, 1996,
respectively.
13None
12
SIGNATURES
- ----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 11, 1996May 13, 1997
CSG SYSTEMS INTERNATIONAL, INC.
/s/ NEALNeal C. HANSEN
------------------------------Hansen
-------------------------------------------
Neal C. Hansen
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ DAVID I. BRENNER
------------------------------
David I. Brenner
ExecutiveGreg A. Parker
-------------------------------------------
Greg A. Parker
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ RANDYRandy R. WIESE
------------------------------Wiese
-------------------------------------------
Randy R. Wiese
Controller and Principal Accounting Officer
(Principal Accounting Officer)
1413
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.18 First Amendment and Limited Waiver, dated August 14, 1996, to the
Amended and Restated Loan Agreement among CSG Systems, Inc.,
certain lenders and Banque Paribas, as Agent
10.38 CSG Systems, Inc. Wealth Accumulation Plan
11.01 Statement re: Computation of Per Share Earnings
27.01 Financial Data Schedule (EDGAR Version Only)
99.01 Safe Harbor for Forward-Looking Statements Under the Private
Securities Litigation Reform Act of 1995 - Certain1995-Certain Cautionary
Statements and Risk Factors.
15
Factors
14