FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,September 30, 1997
OR
[_][ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)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,7887 EAST BELLEVIEW, SUITE 625
ENGLEWOOD, COLORADO1000
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 May 9,November 12, 1997: 25,483,385.
125,475,032
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31,SEPTEMBER 30, 1997
INDEX
PAGE NO.
------------------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of March 31,September 30, 1997
and December 31, 1996...............................................1996................................................. 3
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended March 31,September 30, 1997 and 1996................................1996.............................. 4
Condensed Consolidated Statements of Cash Flows for the ThreeNine Months
Ended March 31,September 30, 1997 and 1996.......................................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............................................... 8 - 11Operations................................................. 9
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................... 12
Signatures.......................................................... 138-K...................................... 16
Signatures............................................................ 17
Index to Exhibits................................................... 14Exhibits..................................................... 18
2
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31,September 30, December 31,
1997 1996
----------- ------------------------ ------------
ASSETS (unaudited)
------
ASSETS (unaudited)
------
Current Assets:
Cash and cash equivalents.............................................................equivalents............................................................... $ 5,79225,948 $ 6,134
Accounts receivable-
Trade-
Billed, net of allowance of $841$893 and $819........................................ 32,417$819........................................... 41,807 33,141
Unbilled......................................................................... 2,221Unbilled............................................................................ 3,307 5,220
Other................................................................................ 1,629Other................................................................................. 1,900 1,342
Deferred income taxes................................................................. 114taxes................................................................... 225 45
Other current assets.................................................................. 2,849assets.................................................................... 3,003 2,574
----------- ------------------- --------
Total current assets................................................................. 45,02276,190 48,456
----------- ------------------- --------
Property and equipment, net of depreciation of $13,028$13,420 and $10,664.................... 14,138$10,664........................ 15,856 13,093
Investment in discontinued operations.................................................operations..................................................... - 732
732Investment in SUMMITrak assets............................................................ 106,226 -
Software, net of amortization of $25,904$32,004 and $22,924.................................. 13,845$22,924...................................... 14,345 13,629
Noncompete agreements and goodwill, net of amortization
of $14,289$17,742 and $12,572........ 23,814$12,572.................................................................. 20,304 25,730
Client contracts and related intangibles, net of amortization
of $9,551$11,598 and $8,528.... 8,729$8,528................................................................... 6,682 9,752
Deferred income taxes................................................................. 2,182taxes..................................................................... 4,993 1,356
Other assets.......................................................................... 2,419assets.............................................................................. 4,801 2,162
----------- ------------------- --------
Total assets........................................................................ $ 110,881 $ 114,910
=========== ===========assets......................................................................... $249,397 $114,910
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt..................................................debt.................................................... $ 10,0005,000 $ 10,000
Customer deposits..................................................................... 6,605deposits....................................................................... 6,878 6,450
Trade accounts payable................................................................ 10,884payable.................................................................. 7,905 12,620
Accrued liabilities................................................................... 5,391liabilities..................................................................... 11,045 8,177
Deferred revenue...................................................................... 5,998revenue........................................................................ 4,300 5,384
Accrued income taxes.................................................................. 568taxes.................................................................... 2,058 945
Other current liabilities............................................................. 419liabilities............................................................... 469 450
----------- ------------------- --------
Total current liabilities............................................................ 39,86537,655 44,026
----------- ------------------- --------
Long-term debt, net of current maturities.............................................. 20,000maturities............................................... 145,000 22,500
Deferred revenue....................................................................... 8,148revenue........................................................................ 11,157 6,420
Stockholders' equity:Equity:
Preferred stock, par value $.01 per share; 10,000,000 shares
authorized; zero shares issued and outstanding...................................................outstanding...................................... - -
Common stock, par value $.01 per share; 100,000,000 shares authorized;
25,492,33225,520,248 shares and 25,488,876 shares issued and outstanding.......................outstanding...................... 255 255
Additional paid-in capital............................................................ 111,440111,942 111,367
Deferred employee compensation........................................................ (997)(810) (1,207)
Notes receivable from employee stockholders........................................... (861) (861)
Accumulated translation adjustments................................................... 30(131) 573
Accumulated deficit................................................................... (66,999)(54,810) (68,163)
----------- ------------------- --------
Total stockholders' equity........................................................... 42,86855,585 41,964
----------- ------------------- --------
Total liabilities and stockholders' equity........................................... $ 110,881 $ 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 - UNAUDITED
(in thousands, except share and per share amounts)
Three months ended
--------------------------
March 31, March 31,
1997 1996
---------- ----------
Total revenues................................................ $ 38,582 $ 26,757
Expenses:
Cost of revenues:
Direct costs................................................ 18,581 12,831
Amortization of acquired software........................... 2,884 2,750
Amortization of client contracts and related intangibles.... 1,023 1,023
---------- ----------
Total cost of revenues.................................. 22,488 16,604
---------- ----------
Gross margin.................................................. 16,094 10,153
---------- ----------
Operating expenses:
Research and development.................................... 4,855 4,556
Selling and marketing....................................... 2,341 1,420
General and administrative:
General and administrative................................. 4,129 3,282
Amortization of noncompete agreements and goodwill......... 1,731 1,420
Stock-based employee compensation.......................... 202 3,277
Depreciation................................................ 1,509 1,190
---------- ----------
Total operating expenses................................ 14,767 15,145
---------- ----------
Operating income (loss)....................................... 1,327 (4,992)
---------- ----------
Other income (expense):
Interest expense............................................ (641) (1,740)
Interest income............................................. 211 229
Other....................................................... 267 -
---------- ----------
Total other............................................. (163) (1,511)
---------- ----------
Income (loss) before income taxes and extraordinary item...... 1,164 (6,503)
Income tax (provision) benefit............................... - -
---------- ----------
Income (loss) before extraordinary item....................... 1,164 (6,503)
Extraordinary loss from early extinguishment of debt......... - (1,260)
---------- ----------
Net income (loss)............................................. $ 1,164 $ (7,763)
========== ==========
Net income (loss) per common and equivalent share:
Income (loss) before extraordinary item...................... $ 0.05 $ (0.28)
Extraordinary loss from early extinguishment of debt......... - (0.05)
---------- ----------
Net income (loss)............................................ $ 0.05 $ (0.33)
========== ==========
Weighted average common and equivalent shares................. 25,489,258 23,448,833
========== ==========$249,397 $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 - UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Quarter ended Nine months ended
------------------------------ ----------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------------- ------------- ------------- -------------
Total revenues....................................................... $ 43,278 $ 35,320 $ 122,890 $ 92,508
Expenses:
Cost of revenues:
Direct costs....................................................... 18,128 15,824 54,962 43,024
Amortization of acquired software.................................. 2,892 2,751 8,668 8,252
Amortization of client contracts and related intangibles........... 1,023 1,023 3,069 3,069
---------- ---------- ---------- ---------
Total cost of revenues......................................... 22,043 19,598 66,699 54,345
---------- ---------- ---------- ---------
Gross margin......................................................... 21,235 15,722 56,191 38,163
---------- ---------- ---------- ---------
Operating expenses:
Research and development........................................... 5,677 5,514 16,331 14,862
Selling and marketing.............................................. 2,776 2,015 7,877 5,005
General and administrative:
General and administrative........................................ 5,394 3,549 14,181 9,977
Amortization of noncompete agreements and goodwill................ 1,731 1,723 5,194 4,662
Stock-based employee compensation................................. 86 98 373 3,472
Depreciation....................................................... 1,831 1,282 5,051 3,718
---------- ---------- ---------- ---------
Total operating expenses....................................... 17,495 14,181 49,007 41,696
---------- ---------- ---------- ---------
Operating income (loss)............................................... 3,740 1,541 7,184 (3,533)
---------- ---------- ---------- ---------
Other income (expense):
Interest expense................................................... (938) (780) (2,195) (3,390)
Interest income.................................................... 290 187 667 672
Other.............................................................. 21 - 352 -
---------- ---------- ---------- ---------
Total other.................................................... (627) (593) (1,176) (2,718)
---------- ---------- ---------- ---------
Income (loss) before income taxes, extraordinary item and
discontinued operations............................................ 3,113 948 6,008 (6,251)
Income tax (provision) benefit....................................... - - - -
---------- ---------- ---------- ---------
Income (loss) before extraordinary item and discontinued operations... 3,113 948 6,008 (6,251)
Extraordinary loss from early extinguishment of debt................. (577) - (577) (1,260)
---------- ---------- ---------- ---------
Income (loss) from continuing operations.............................. 2,536 948 5,431 (7,511)
Gain from disposition of discontinued operations..................... 7,922 - 7,922 -
---------- ---------- ---------- ---------
Net income (loss)..................................................... $ 10,458 $ 948 $ 13,353 $ (7,511)
========== ========== ========== =========
Primary net income (loss) per common and equivalent share:
Income (loss) before extraordinary item and discontinued operations.. $ 0.12 $ 0.04 $ 0.23 $ (0.25)
Extraordinary loss from early extinguishment of debt................. (0.02) - (0.02) (0.05)
Gain from disposition of discontinued operations..................... 0.30 - 0.31 -
---------- ---------- ---------- ---------
Net income (loss).................................................... $ 0.40 $ 0.04 $ 0.52 $ (0.30)
========== ========== ========== =========
Weighted average common and equivalent shares used in primary
calculation......................................................... 26,285,581 25,486,383 25,755,833 24,822,720
========== ========== ========== ==========
Fully diluted net income (loss) per common and equivalent share:
Income (loss) before extraordinary item and discontinued operations.. $ 0.11 $ 0.04 $ 0.23 $ (0.25)
Extraordinary loss from early extinguishment of debt................. (0.02) - (0.02) (0.05)
Gain from disposition of discontinued operations..................... 0.30 - 0.31 -
---------- ---------- ---------- ----------
Net income (loss).................................................... $ 0.39 $ 0.04 $ 0.52 $ (0.30)
========== ========== ========== ==========
Weighted average common and equivalent shares used in fully
diluted calculation................................................. 26,544,842 25,486,383 25,842,253 24,822,720
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands, except share amounts)(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three months ended
--------------------
March 31, March 31,NINE MONTHS ENDED
------------- -------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------- -------------------- -------------
Cash flows from operating activities:
Net income (loss)....................................................................................................... $ 1,164 $(7,763)13,353 $(7,511)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation...................................................... 1,509 1,190
Amortization...................................................... 5,758 5,384Depreciation....................................................... 5,051 3,718
Amortization....................................................... 17,720 16,525
Stock-based employee compensation................................. 202 3,277compensation.................................. 373 3,472
Extraordinary loss from early extinguishment of debt..............debt............... 577 1,260
Gain from disposition of discontinued operations................... (7,922) - 1,260
Changes in operating assets and liabilities:
Trade accounts receivable, net................................... 3,566 (773)net.................................... (6,861) (6,220)
Other receivables................................................ (287) 1,153receivables................................................. (558) 717
Deferred income taxes............................................ (895) (613)taxes............................................. (3,817) (2,327)
Other current and noncurrent assets.............................. (653) (397)assets............................... (819) (2,509)
Customer deposits................................................ 155 448deposits................................................. 428 499
Trade accounts payable and accrued liabilities................... (4,887) 1,923liabilities.................... (606) 5,752
Deferred revenue................................................. 2,449 2,977revenue.................................................. 3,668 4,749
Other current liabilities........................................ (31) (51)liabilities......................................... 19 (6)
--------- -------- -------
Net cash provided by operating activities....................... 8,050 8,015activities........................ 20,606 18,119
--------- -------- -------
Cash flows from investing activities:
Purchases of property and equipment, net............................ (2,540) (732)net............................. (7,892) (3,662)
Acquisition of SUMMITrak assets...................................... (106,226) -
Acquisition of businesses, net of cash acquired...................... - (3,518)
Additions to software............................................... (3,196) -
Net investment insoftware................................................ (9,796) (1,048)
Proceeds from disposition of discontinued operations........................... -operations................. 8,654 2,000
--------- -------- -------
Net cash provided by (used in)used in investing activities............. (5,736) 1,268activities............................ (115,260) (6,228)
--------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock.............................. 87 44,794stock............................... 623 44,804
Purchase and cancellation of common stock........................... (6) (8)stock............................ (24) (23)
Payment of dividends for redeemable convertible preferred stock.....stock...... - (4,497)
Proceeds from long-term debt......................................... 150,000 -
Payments on long-term debt.......................................... (2,500) (45,024)debt........................................... (32,500) (50,068)
Payment of deferred financing costs.................................. (3,181) -
--------- -------- -------
Net cash used inprovided by (used in) financing activities........................... (2,419) (4,735)activities.............. 114,918 (9,784)
--------- -------- -------
Effect of exchange rate fluctuations on cash......................... (237) -cash.......................... (450) (4)
--------- --------
-------
Net increase (decrease) in cash and cash equivalents................. (342) 4,548equivalents............................. 19,814 2,103
Cash and cash equivalents, beginning of period.......................period........................ 6,134 3,603
--------- -------- -------
Cash and cash equivalents, end of period.............................period.............................. $ 5,79225,948 $ 8,1515,706
========= ======== =======
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for-
Interest...........................................................Interest............................................................ $ 5321,878 $ 1,7373,294
Income taxes.......................................................taxes........................................................ $ 1,2722,678 $ (854)(586)
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 March 31,September 30, 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 10-K for the year ended December 31, 1996, filed with the
Securities and Exchange Commission. The results of operations for the three and
nine months ended March
31,September 30, 1997, are not necessarily indicative of the
results for the entire year ending December 31, 1997.
2. STOCKHOLDERS' EQUITY
Effective September 19, 1997, the Company acquired certain SUMMITrak assets from
Tele-Communications Inc. (TCI) affiliates (Note 5). As part of the acquisition,
the Company granted warrants to TCI affiliates to purchase up to 1.5 million
shares of the Company's common stock at $24 per share. The right to exercise
the warrants is contingent upon the achievement of certain milestones by TCI
specified in the SUMMITrak asset purchase agreement. None of the warrants are
exercisable as of September 30, 1997. The warrants expire September 19, 2002.
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.
3. NET INCOME PER SHARE
NetPrimary and fully diluted income per common and equivalent share is based oncalculated
by dividing net income by the weighted average
number of shares of common stock and common
equivalent shares. For the quarter ended September 30, 1997, common equivalent
shares outstanding, which
includesconsist of stock options. Stock options are excluded from common
equivalent shares for the first and second quarters of 1997 as the dilutive
effect was not significant. The 1.5 million common stock warrants discussed in
Note 2 above are excluded from common equivalent shares as the events necessary
to allow the exercise of the warrants had not been satisfied as of September 30,
1997.
For the nine months ended September 30, 1996, common equivalent shares include
redeemable convertible Series A Preferred Stock, prior to the conversion into
common stock in March 1996. Common equivalent shares related to stock options
have beenduring 1996 were excluded from the weighted average number of shares as the
dilutive effect iswas not significant.
6
4. EXTRAORDINARY LOSS
TheIn September 1997, the Company retired it's outstanding bank indebtedness of
$27.5 million in conjunction with financing for the SUMMITrak asset acquisition
(Note 5). Upon repayment of the outstanding debt, the Company recorded an
extraordinary loss of $0.6 million for the write-off of deferred financing
costs.
In March 1996, the Company used $40.3 million of the IPO proceeds to repay a portion
of outstanding bank indebtedness (the Indebtedness).indebtedness. Upon repayment of the Indebtedness,indebtedness, the
Company recorded an extraordinary loss of $1.3 million for the write-off of
deferred financing costs.
5. SUMMITRAK ASSET PURCHASE
On August 10, 1997, the Company signed a 15-year exclusive contract with a TCI
affiliate to consolidate 13 million TCI subscribers onto the Company's customer
care and billing systems (the 15-Year Contract). TCI also purchased certain
software products of the Company under the 15-Year Contract. On August 10,
1997, the Company also entered into an agreement with TCI affiliates to acquire
certain SUMMITrak assets, a client/server, open systems, in-house customer care
and billing system developed by TCI. The SUMMITrak assets purchased consisted
primarily of software, hardware, people and intellectual property. Both the
SUMMITrak asset purchase agreement and the 15-Year Contract closed and became
effective September 19, 1997.
The purchase price for the SUMMITrak assets was $106 million in cash at closing,
up to $26 million in various contingent payments, and warrants to purchase up to
1.5 million shares of the Company's common stock, with the contingent payments
and the right to exercise the warrants based upon the achievement of certain
milestones by TCI specified in the SUMMITrak asset purchase agreement. The
milestones are based principally upon the timing of conversions and the number
of TCI subscribers processed on the Company's customer care and billing systems.
The contingent payments due as of September 30, 1997, are not significant. None
of the warrants are exercisable as of September 30, 1997.
The financial statements at September 30, 1997, reflect only the $106 million
cash payment and related transaction costs on a preliminary basis as the total
purchase price and the allocation of the purchase price have not been finalized.
The Company is evaluating whether the initial purchase price should include the
$26 million contingent payments, the value of the warrants granted and certain
operating costs related to the SUMMITrak assets acquired. In conjunction with
this evaluation, the Company has engaged an independent party to assist in the
allocation of the purchase price to the assets acquired. This independent
valuation and the Company's internal analysis are expected to be completed in
the fourth quarter of 1997, at which time the total purchase price and the
appropriate allocation of the purchase price will be reflected in the Company's
financial statements. The Company expects that a significant portion of the
purchase price will be allocated to in-process research and development (R&D),
and accordingly, expensed in the fourth quarter of 1997. The amount to be
allocated to in-process R&D is uncertain at this time and is subject to the
completion of the valuation currently being performed. It is expected that the
excess of the purchase price not allocated to in-process R&D will be allocated
to assets that will be amortized over lives ranging from 5 to 15 years.
6. DEBT
The SUMMITrak asset acquisition was funded with a $190.0 million debt facility
with a bank, which consists of a $150.0 million term facility and a $40.0
million revolving facility. The proceeds from the term facility were used to
pay the $106 million purchase price at closing, retire the Company's existing
debt of $27.5 million, and pay transaction costs of $3.4 million. The remaining
proceeds will be used for general corporate purposes. No amounts were drawn on
the revolving facility for the period ended September 30, 1997.
Transaction costs include $3.2 million of financing costs, which will amortized
over the life of the loan using a method which approximates the effective
interest rate method. The new loan agreement requires maintenence of certain
financial ratios and contains other restrictive covenants. As of September 30,
1997, the Company was in compliance with all covenants. The loan agreement also
restricts the payment of dividends or other types of distributions on any class
of the Company's stock unless the Company's leverage ratio, as defined in the
loan agreement, is under 1.50. As of September 30, 1997, the leverage ratio
was 3.59.
Interest expense under the new loan agreement is based on the LIBOR rate or the
prime rate, plus an additional percentage spread, with the spread dependent upon
the Company's leverage ratio. The scheduled maturities of the new loan agreement
for each of the years ending December 31 are (in thousands):
1997.............................. $ -
1998.............................. 7,500
1999.............................. 21,250
2000.............................. 32,500
2001.............................. 38,750
2002.............................. 50,000
--------
$150,000
========
7
7. DISCONTINUED OPERATIONS
In September 1997, the Company sold its remaining ownership interest in Anasazi
Inc., which consisted of convertible preferred stock and stock warrants, for
approximately $8.6 million in cash. The carrying value of the Company's
investment in Anasazi Inc. was $0.7 million, resulting in a gain on the
disposition of $7.9 million.
8. BYTEL ACQUISITION
In June 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 in
the United Kingdom. The acquisition was accounted for using the purchase method
of accounting. The Company's condensed consolidated financial statements
include Bytel's results of operations since the acquisition date.
6
6.9. 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.
78
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 forsince the three months ended March 31, 1997,acquisition are included in the following table and
considered in the discussion of the Company's operations that follow:
THREE MONTHS ENDED MARCH 31,
----------------------------------------------Quarter ended September 30, Nine Months ended September 30,
---------------------------------------- ----------------------------------------
1997 1996 1997 1996
------------------ ------------------- ---------------------------------------- ------------------
% OFof % OF
AMOUNT REVENUE AMOUNT REVENUEof % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
-------- ------- -------- ------- -------- ------- -------- -------
Total revenues.................................................... $38,582 100.0% $26,757 100.0%revenues............................ $ 43,278 100.0 % $35,320 100.0 % $122,890 100.0 % $92,508 100.0 %
Expenses:
Cost of revenues:
Direct costs................................................... 18,581 48.2 12,831 48.0costs........................... 18,128 41.9 % 15,824 44.8 % 54,962 44.7 % 43,024 46.5 %
Amortization of acquired software.............................. 2,884 7.5 2,750 10.3software...... 2,892 6.7 % 2,751 7.8 % 8,668 7.1 % 8,252 8.9 %
Amortization of client contracts and
related intangibles.......intangibles.................. 1,023 2.72.4 % 1,023 3.82.9 % 3,069 2.5 % 3,069 3.3 %
-------- ----- ------- ----- -------- ----- ------- ------- ------------
Total cost of revenues.................................... 22,488 58.4 16,604 62.1revenues............ 22,043 51.0 % 19,598 55.5 % 66,699 54.3 % 54,345 58.7 %
-------- ----- ------- ----- -------- ----- ------- -----
Gross margin............................. 21,235 49.0 % 15,722 44.5 % 56,191 45.7 % 38,163 41.3 %
-------- ----- ------- ----- -------- ----- ------- Gross margin...................................................... 16,094 41.6 10,153 37.9
------- ------- ------- ------------
Operating expenses:
Research and development........................................ 4,855 12.6 4,556 17.0development................ 5,677 13.1 % 5,514 15.6 % 16,331 13.3 % 14,862 16.1 %
Selling and marketing........................................... 2,341 6.1 1,420 5.3marketing................... 2,776 6.4 % 2,015 5.7 % 7,877 6.4 % 5,005 5.4 %
General and administrative:
General and administrative .................................... 4,129 10.7 3,282 12.3............ 5,394 12.5 % 3,549 10.0 % 14,181 11.6 % 9,977 10.8 %
Amortization of noncompete agreements
and goodwill.............goodwill.......................... 1,731 4.5 1,420 5.34.0 % 1,723 4.9 % 5,194 4.2 % 4,662 5.0 %
Stock-based employee compensation.............................. 202 0.5 3,277 12.2
Depreciation.................................................... 1,509 3.9 1,190 4.4compensation...... 86 0.2 % 98 0.3 % 373 0.3 % 3,472 3.8 %
Depreciation............................ 1,831 4.2 % 1,282 3.6 % 5,051 4.1 % 3,718 4.0 %
-------- ----- ------- ----- -------- ----- ------- ------- ------------
Total operating expenses....................................... 14,767 38.3 15,145 56.5expenses............... 17,495 40.4 % 14,181 40.1 % 49,007 39.9 % 41,696 45.1 %
-------- ----- ------- ----- -------- ----- ------- ------- ------------
Operating income (loss)............................................. 1,327 3.3 (4,992) (18.6)................... 3,740 8.6 % 1,541 4.4 % 7,184 5.8 % (3,533) (3.8)%
-------- ----- ------- ----- -------- ----- ------- ------- ------------
Other income (expense):
Interest expense................................................ (641) (1.7) (1,740) (6.5)expense........................ (938) (2.1)% (780) (2.2)% (2,195) (1.8)% (3,390) (3.7)%
Interest income................................................. 211income......................... 290 0.7 % 187 0.5 229 0.9
Other........................................................... 267% 667 0.6 % 672 0.7 %
Other................................... 21 - - - 352 0.3 % - -
-------- ----- ------- ----- -------- ----- ------- -----
Total other............................ (627) (1.4)% (593) (1.7)% (1,176) (0.9)% (2,718) (3.0)%
-------- ----- ------- ----- -------- ----- ------- Total other.................................................... (163) (0.5) (1,511) (5.6)
------- ------- ------- ------------
Income (loss) before income taxes,
extraordinary item and extraordinary item............ 1,164 2.8 (6,503) (24.2)discontinued
operations............................... 3,113 7.2 % 948 2.7 % 6,008 4.9 % (6,251) (6.8)%
Income tax (provision) benefit...................................benefit........... - - - - - - - -
-------- ----- ------- ----- -------- ----- ------- ------- ------------
Income (loss) before extraordinary item............................. 1,164 2.8 (6,503) (24.2)item
and discontinued operations.............. 3,113 7.2 % 948 2.7 % 6,008 4.9 % (6,251) (6.8)%
Extraordinary loss from early
extinguishment of debt.............debt................... (577) (1.3)% - - (577) (0.5)% (1,260) (4.7)(1.4)%
-------- ----- ------- ----- -------- ----- ------- -----
Income (loss) from continuing operations... 2,536 5.9 % 948 2.7 % 5,431 4.4 % (7,511) (8.2)%
Gain from disposition of discontinued
operations............................. 7,922 18.3 % - - 7,922 6.5 % - -
-------- ----- ------- ----- -------- ----- ------- -----
Net income (loss)............................................................................. $ 1,164 2.8% $(7,763) (28.9)10,458 24.2 % $ 948 2.7 % $ 13,353 10.9 % $(7,511) (8.2)%
======== ===== ======= ===== ======== ===== ======= ======= ============
89
THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,SEPTEMBER
30, 1996
Revenues. Total revenues for the three months ended March 31,September 30, 1997,
increased 44.2%22.5% to $38.6$43.3 million, from $26.8$35.3 million for the three months ended
March 31,September 30, 1996, due primarily to i) increased revenuerevenues from the Company's processing and
related services, and ii) increased revenuerevenues from the Company's software and related product sales
and professional consulting services.
Revenues from processing and related services for the three months ended
March
31,September 30, 1997, increased 15.1%11.8% to $30.7$32.8 million, from $26.7$29.3 million for the
three months ended March 31,September 30, 1996. This increase is due primarily to an
increase in the number of customers of the Company's clients which were serviced
by the Company, and to a lesser degree, increased revenue per customer.
Customers serviced as of March 31,September 30, 1997, and 1996, respectively, were 19.620.7
million and 18.518.6 million, an increase of 6.2%11.2%. The increase in the number of
customers was due primarily to internal customer growth experienced by existing clients
and the addition of new clients.
Revenue per customer increased due to price increases included in client
contracts and increased usage of ancillary services by clients.
Revenues from software and related product sales and professional consulting
services for the three months ended March 31,September 30, 1997, were $7.9$10.5 million,
compared to $0.1$6.0 million for the three months ended March 31,September 30, 1996. This
increase relates to the introduction of the Company's new software products and
professional consulting services in early 1996 with continued expansiongrowth experienced
throughout 1996 and the inclusion of revenues from Bytel's operations for the
three months ended March 31, 1997, with no comparable amounts included for Bytel
for the first quarter of 1996.1997.
Gross Margin. Gross margin for the three months ended March 31,September 30, 1997,
increased 58.5%35.1% to $16.1$21.2 million, from $10.2$15.7 million for the three months ended
March 31,September 30, 1996, due primarily to revenue growth. The gross margin
percentage increased to 41.6%49.0% for the three months ended March 31,September 30, 1997,
compared to 37.9%44.5% for the three months ended March 31,September 30, 1996. The overall
increase in the gross margin percentage is due primarily to i) a favorable
change in the sales mix to include more higher-margined software products, ii)
the increase 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 controlsiii) the improvement in delivering the Company'sgross margin from processing
and related services, due primarily to the increase in revenue per customer
while controlling the cost of delivering such services.
Research and Development Expense. Research and development (R&D) expense for
the three months ended March 31,September 30, 1997, increased 6.6%3.0% to $4.9$5.7 million, from
$4.6$5.5 million for the three months ended March 31,September 30, 1996. As a percentage of
total revenues, R&D expense decreased to 12.6%13.1% for the three months ended
March 31,September 30, 1997, from 17.0%15.6% for the three months ended March 31,September 30, 1996.
The Company capitalized software development costs, related to CSG Phoenix(TM),
of approximately $3.1$2.9 million during the three months ended March 31,September 30, 1997,
which consisted of $2.8 million of internal development costs of $2.8 million and $0.3$0.1 million
of purchased software. NoThe Company capitalized internal software development
costs were capitalized duringof approximately $1.0 million in the three months ended March 31, 1996.September 30,
1996, related primarily to ACSR Telephony and enhancements to CSG
VantagePoint(TM). 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,September 30, 1997, and 1996, were $7.7$8.5 million, or 19.9%19.6% of total
revenues, and $4.6$6.6 million, or 17.0%18.6% of total revenues, respectively. The
overall increase in the R&D expenditures is due primarily to i) continued
efforts on several products which are in development, principally CSG Phoenix,
and toii) enhancements of the
Company's existing products.products, and iii) costs of $0.7 million related to SUMMITrak
development subsequent to the acquisition of the assets on September 19, 1997.
The increased R&D expenditures consist primarily of increases in salaries,
benefits, and other programming-related expenses.
Selling and Marketing Expense. Selling and marketing expense for the three
months ended March 31,September 30, 1997, increased 64.9%37.8% to $2.3$2.8 million, from $1.4$2.0
million for the three months ended March 31,September 30, 1996. As a percentage of total
revenues, selling and marketing expense increased to 6.1%6.4% for the three months
ended March
31,September 30, 1997, from 5.3%5.7% for the three months ended March 31,September 30,
1996. The increase in expense is due primarily to continued growth of the
Company's direct sales force. The Company began building a new direct sales
force in mid-1995 and has continued to expand its sales force since that time.
9
General and Administrative Expense. General and administrative (G&A) expense
for the three months ended March 31,September 30, 1997, increased 25.8%52.0% to $4.1$5.4 million,
from $3.3$3.5 million for the three months ended March 31,September 30, 1996. As a
percentage of total revenues, G&A expense decreasedincreased to 10.7%12.5% for the three
months ended March
31,September 30, 1997, from 12.3%10.0% for the three months ended March 31,September
30, 1996. The increase in expense relates primarily to i) the
10
continued development of the Company's management team and related
administrative staff, added throughout 1996 and during the first threenine months of
1997, to support the Company's growth.overall growth, ii) an increase in facility costs
to support employee growth, and iii) one-time expenses of $0.7 million related
to the closing of the TCI 15-Year Contract and SUMMITrak asset purchase
agreement, as discussed in Note 5 to the financial statements.
Depreciation Expense. Depreciation expense for the three months ended September
30, 1997, increased 42.8% to $1.8 million, from $1.3 million for the three
months ended September 30, 1996. The decreaseincrease in G&A expense as a percentagerelates to capital
expenditures made throughout 1996 and the first nine months of revenue1997 in support
of the overall growth of the Company.
Operating Income. Operating income for the three months ended September 30,
1997, was $3.7 million, compared to $1.5 million for the three months ended
September 30, 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 September 30, 1997, and 1996, excluding Acquisition Charges of $5.4
million and $5.3 million, was $9.1 million or 21.2% of total revenues, and $6.8
million or 19.3% 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, 1996, for additional discussion regarding the Acquisition
Charges and the impact of such charges on operations.
Interest Expense. Interest expense for the three months ended September 30,
1997, increased 20.3% to $0.9 million, from $0.8 million for the three months
ended September 30, 1996, with the increase attributable to the financing of
the Company's acquisition of the SUMMITrak assets. See Note 6 to the Company's
financial statements for additional discussion of the new debt.
Under the new debt agreement, interest expense for the fourth quarter of 1997,
including the amortization of deferred financing costs, is expected to be
approximately $3.0 million, assuming no fluctuations in the base interest rates
and no prepayments of principal.
Extraordinary Loss From Early Extinguishment Of Debt. In September 1997, the
Company retired it's outstanding bank indebtedness of $27.5 million in
conjunction with financing for the SUMMITrak asset acquisition. Upon repayment
of the outstanding debt, the Company recorded an extraordinary loss of $0.6
million for the write-off of deferred financing costs.
Gain From Disposition of Discontinued Operations. The gain from disposition of
discontinued operations of $7.9 million relates to the Company's divestiture of
it's remaining investment in Anasazi Inc. in September 1997 for $8.6 million in
cash.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Revenues. Total revenues for the nine months ended September 30, 1997,
increased 32.8% to $122.9 million, from $92.5 million for the nine months ended
September 30, 1996, due to increased revenues from the Company's processing and
related services, and increased revenues from software and related product sales
and professional consulting services.
11
Revenues from processing and related services for the nine months ended
September 30, 1997, increased 14.5% to $95.8 million, from $83.6 million for the
nine months ended September 30, 1996. This increase is due primarily to an
increase in the number of customers of the Company's clients which were serviced
by the Company, and to a lesser degree, increased revenues.revenue per customer. The
increase in the number of customers was due to internal customer growth
experienced by existing clients and the addition of new clients. Revenue per
customer increased due primarily to price increases included in client contracts
and increased usage of ancillary services by clients.
Revenues from software and related product sales and professional consulting
services for the nine months ended September 30, 1997, were $27.1 million,
compared to $8.9 million for the nine months ended September 30, 1996. This
increase relates to the introduction of the Company's new software products and
professional consulting services in early 1996 with continued expansion
throughout 1996 and 1997, and the inclusion of revenues from Bytel's operations
for the nine months ended September 30, 1997, compared to three months of
revenues included for Bytel for the nine months ended September 30, 1996.
Gross Margin. Gross margin for the nine months ended September 30, 1997,
increased 47.2% to $56.2 million, from $38.2 million for the nine months ended
September 30, 1996, due primarily to revenue growth. The gross margin
percentage increased to 45.7% for the nine months ended September 30, 1997,
compared to 41.3% for the nine months ended September 30, 1996. The overall
increase in the gross margin percentage is due primarily i) a favorable change
in the sales mix to include more higher-margined software products, ii) the
increase in revenues while the amount of amortization of acquired software and
amortization of client contracts and related intangibles remained approximately
the same, and iii) the improvement in gross margin from processing and related
services, due primarily to the increase in revenue per customer while
controlling the cost of delivering such services.
Research and Development Expense. Research and development (R&D) expense for
the nine months ended September 30, 1997, increased 9.9% to $16.3 million, from
$14.9 million for the nine months ended September 30, 1996. As a percentage of
total revenues, R&D expense decreased to 13.3% for the nine months ended
September 30, 1997, from 16.1% for the nine months ended September 30, 1996.
The Company capitalized software development costs, related to CSG Phoenix, of
approximately $9.7 million during the nine months ended September 30, 1997,
which consisted of $8.4 million of internal development costs and $1.3 million
of purchased software. The Company capitalized internal software development
costs of approximately $1.0 million in the nine months ended September 30, 1996,
related to primarily to ACSR Telephony and enhancements to CSG VantagePoint.
As a result, total R&D expenditures (i.e., the total R&D costs expensed, plus
the capitalized internal development costs) for the nine months ended September
30, 1997, and 1996, were $24.7 million, or 20.1% of total revenues, and $15.9
million, or 17.2% of total revenues, respectively. The overall increase in the
R&D expenditures is due primarily to i) continued efforts on several products
which are in development, ii) enhancements of the Company's existing products,
and iii) costs of $0.7 million related to SUMMITrak development subsequent to
the acquisition of the assets on September 19, 1997. The increased R&D
expenditures consist primarily of increases in salaries, benefits, and other
programming-related expenses.
Selling and Marketing Expense. Selling and marketing expense for the nine
months ended September 30, 1997, increased 57.4% to $7.9 million, from $5.0
million for the nine months ended September 30, 1996. As a percentage of total
revenues, selling and marketing expense increased to 6.4% for the nine months
ended September 30, 1997, from 5.4% for the nine months ended September 30,
1996. The increase in expense is due primarily to continued growth of the
Company's direct sales force. The Company began building a new direct sales
force in mid-1995 and has continued to expand its sales force since that time.
General and Administrative Expense. General and administrative (G&A) expense
for the nine months ended September 30, 1997, increased 42.1% to $14.2 million,
from $10.0 million for the nine months ended September 30, 1996. As a
percentage of total revenues, G&A expense increased to 11.6% for the nine months
ended September 30, 1997, from 10.8% for the nine months ended September 30,
1996. The increase in expense relates primarily to i) the continued development
of the Company's management team and related administrative staff, added
12
throughout 1996 and during the first nine months of 1997, to support the
Company's overall growth, ii) an increase in facility costs to support employee
growth, including the cost of relocating the Company's corporate headquarters
from Englewood to Denver, Colorado, iii) one-time expenses of $0.7 million
related to the closing of the TCI 15-Year Contract and SUMMITrak asset purchase
agreement, and iv) the inclusion of G&A expenses from Bytel's operations for the
nine months ended September 30, 1997, compared to three months of G&A expenses
included for Bytel for the nine months ended September 30, 1996.
Amortization of Noncompete Agreements and Goodwill. Amortization of noncompete
agreements and goodwill for the threenine months ended March 31,September 30, 1997, increased
21.9%11.4% to $1.7$5.2 million, from $1.4$4.7 million for the threenine months ended March 31,September 30,
1996. The increase in expense relates to amortization of goodwill from the
Bytel acquisition and amortization of an additional noncompete agreement
acquired in April 1996.
Stock-Based Employee Compensation. Stock-based employee compensation of $3.3$3.5
million in the threenine months ended March 31,September 30, 1996, relates to purchases of the
Company's common stock through performance stock purchase agreements with
executive officers and key employees. During 1995 and 1994, the Company sold
common stock to executive officers and key employees pursuant to 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 date. The
fair value of the stock was estimated by the Company to be $2.75 per share at
that date. Prior to the completion of the 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 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 decreased to 20% annually over a five-year period,
commencing on the later of an employee's hire date or November 30, 1994. As a
result, approximately $3.2 million of stock-based employee compensation expense
was recorded when the IPO was completed in March 1996. The scheduled
amortization of the stock-based deferred compensation subsequent to March 31,September
30, 1997, is approximately $0.1 million per quarter.
Depreciation Expense. Depreciation expense for the threenine months ended March 31,September
30, 1997, increased 26.8%35.9% to $1.5$5.1 million, from $1.2$3.7 million for the threenine months
ended March 31,September 30, 1996. The increase in expense relates to capital
expenditures made throughout 1996 and the first threenine months of 1997 in support
of the overall growth of the Company.
Operating Income. Operating income for the threenine months ended March 31,September 30,
1997, was $1.3$7.2 million, compared to an operating loss of $5.0$3.5 million for the
threenine months ended March 31,September 30, 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 threenine months ended March 31,September 30, 1997, and 1996,
excluding Acquisition Charges of $5.5$16.4 million and $8.5$19.1 million, was $6.8$23.6
million or 17.8%19.2% of total revenues, and $3.5$15.6 million or 13.0%16.8% 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, 1996, for additional
discussion regarding the Acquisition Charges and the impact of such charges on
operations.
Interest Expense. Interest expense for the threenine months ended March 31,September 30,
1997, decreased 63.2%35.3% to $0.6$2.2 million, from $1.7$3.4 million for the threenine months
ended March 31,September 30, 1996, with the decrease attributable to i) scheduled
principal payments on the Company's long-term debt, ii) the retirement of $40.3
million of long-term debt with proceeds from the IPO in March 1996, and iii) a
decrease in interest rates as a result of the Company favorably amending its
long-term credit facility with its bank in April 1996. These decreases were
offset by an increase in interest expense with the increase attributable to the
financing of the Company's acquisition of the SUMMITrak assets. See Note 6 to
the Company's financial statements for additional discussion of the new debt. As
discussed above, the Company expects interest expense to increase as a result of
the new financing.
Extraordinary Loss From Early Extinguishment Of Debt. In September 1997, the
Company retired it's outstanding bank indebtedness of $27.5 million in
conjunction with financing for the SUMMITrak asset acquisition. Upon the repayment
of the $40.3outstanding debt, the Company recorded an extraordinary loss of $0.6
million for the write-off of long-term debt with IPO proceeds,deferred financing costs. In March 1996, the
Company recorded an extraordinary charge of $1.3 million in March 1996, for the write-off of
deferred financing costs attributablerelated to repayment of $40.3 million of long-term debt
with IPO proceeds.
13
Gain From Disposition of Discontinued Operations. The gain from disposition of
discontinued operations of $7.9 million relates to the portionCompany's divestiture of
the long-term debt
repaid.
10
it's remaining investment in Anasazi Inc. in September 1997 for $8.6 million in
cash.
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 existingoperations. On August 10, 1997,
the Company signed a 15-year exclusive contract with a TCI for its cable television operations, which
was scheduledaffiliate to
expire December 31, 1996, has been extended automatically by it
terms for one year.consolidate 13 million TCI has announced it is developingsubscribers onto the Company's customer care and
billing systems (the 15-Year Contract). TCI also purchased certain software
products of the Company under the 15-Year Contract. On August 10, 1997, the
Company also entered into an agreement with TCI affiliates to acquire certain
SUMMITrak assets, a client/server, open systems, in-house customer care and
billing system for use in its cable television operations,developed by TCI. The SUMMITrak assets purchased consisted
primarily of software, hardware, people and intellectual property. Both the
SUMMITrak asset purchase agreement and the 15-Year Contract closed and became
effective September 19, 1997.
Currently, the Company expectshas approximately 4 million of TCI's in-house systemsubscribers on its
systems. Under the 15-Year Contract, the Company and TCI plan to replaceconsolidate the
additional 9 million subscribers under an agreed upon conversion schedule.
Converting multiple sites under an aggressive time schedule poses certain risks.
Factors affecting the conversion schedule include the frequency and severity of
database discrepancies, installation of compatible hardware, network and
software products, as well as the availability and cooperation of qualified
personnel from all the parties involved in the conversion. TCI's minimum
financial commitments under the 15-Year Contract are subject to certain
performance criteria by the Company.
The purchase price for the SUMMITrak assets was $106 million in cash at closing,
up to $26 million in various contingent payments, and warrants to purchase up to
1.5 million shares of the Company's systemcommon stock, with the contingent payments
and the right to exercise the warrants based upon the achievement of certain
milestones by TCI specified in the future.SUMMITrak asset purchase agreement. The
Company
cannot estimate when TCI's in-house billing solution will be available ormilestones are based principally upon the timing of significant conversions fromand the number
of TCI subscribers processed on the Company's system to TCI's in-housecustomer care and billing solution. In December 1996, CSG signedsystems.
The contingent payments due as of September 30, 1997 are not significant. None
of the warrants are exercisable as of September 30, 1997.
The financial statements at September 30, 1997, reflect only the $106 million
cash payment and related transaction costs on a new contract with TCI
Satellite Entertainment, Inc.preliminary basis as their exclusive providerthe total
purchase price and the allocation of customer management
services including the purchase of CSG Phoenix and CSG VantagePoint(TM).price have not been finalized.
The Company delivered Version 1.1is evaluating whether the initial purchase price should include the
$26 million contingent payments, the value of CSG Phoenix, its next-generation customer
management system for the converging communications industries, on March 31,
1997, for testingwarrants granted and integration at customer sites. Thecertain
operating costs related to the SUMMITrak assets acquired. In conjunction with
this evaluation, the Company presently
expects a beta sitehas engaged an independent party to assist in the
allocation of the purchase price to the assets acquired. This independent
valuation and the Company's internal analysis are expected to be installedcompleted in
the thirdfourth quarter of 1997, utilizing
Version 1.2at which time the total purchase price and the
appropriate allocation of CSG Phoenix, which is scheduled tothe purchase price will be released to a beta customerreflected in the secondCompany's
financial statements. The Company expects that a significant portion of the
purchase price will be allocated to in-process research and development (R&D),
and accordingly, expensed in the fourth quarter of 1997. The amount to be
allocated to in-process R&D is uncertain at this time and is subject to the
completion of the valuation currently being performed. It is expected that the
excess of the purchase price not allocated to in-process R&D will be allocated
to assets that will be amortized over lives ranging from 5 to 15 years.
As previously reported, the Company continues to work with its CSG Phoenix
system is being developed on a
three-tier client/server, object-oriented architecture and is designed to enable
clients to quickly deploytest, identify and resolve incident reports and configuration issues.
The Company continues to examine the size and magnitude of these issues, and
will have an estimated date for when CSG Phoenix will go into production when
that analysis is completed. The Company is in the process of working with its
Phoenix clients to coordinate the next steps for both the testing of the
product, as well as rescheduling the new, convergence services such as voice, video and
data, and to support large customer service sites. Theestimated production date. Any
statements regarding development and timing of the Company's release of Version 1.2 ofdates on which CSG Phoenix
in the second
quarter of 1997 and the installation of a betawill go into production at any particular client site in the third quarter of 1997 are forward-looking
statements. The actual timing is subject to delay due to the variety of factors
14
inherent in the development and initial implementation of a new, large and
complex software system. Installation is also subject to factors relating to the
integration of the new system with the client's existing systems.
The Company is evaluating its investment in its various technology assets,
including CCS(TM), CSG Phoenix, SUMMITrak, and Bytel's SMS systems, to determine
which platform, or combination of platforms, is best equipped to support new
products and entrance into new markets.
Income Taxes
- ------------
At March 31,September 30, 1997, management of 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
asset of $2.3$5.2 million. The Company has recorded a valuation allowance of
approximately $23.6$19.0 million against the remaining net deferred tax assets since
realization of these future benefits is not sufficiently assured as of March 31,September
30, 1997.
The Company intends to analyze the realizability of the net deferred tax assets
at each future quarterly reporting period. The current quarterly results of
operations, as well as the Company's projected results of operations, will
determine the required valuation allowance at the end of each quarter. Based on
its current projections of operating results for 1997 and 1998, the Company
expects to realize additional deferred tax assets in 1997. As a result, the
Company does not expect income tax expense for 1997 to be significant. Due
primarily to differences in the timing of recognition of the amortization of
intangible assets for financial reporting and tax purposes, the Company expects
to pay income taxes in 1997.
Liquidity and Capital Resources
- -------------------------------
As of March 31,September 30, 1997, the Company's principal sources of liquidity included
cash and cash equivalents of $5.8$25.9 million. The Company also has a revolving
bank line of credit in the amount of $5.0$40.0 million of which there were no
borrowings outstanding. The line of credit expires November 30, 2001.September 18, 2002.
During the threenine months ended March 31,September 30, 1997, the Company generated $8.1$20.6
million in net cash flow from operating activities.activities and received $8.6 million
from the divestiture of the Company's remaining investment in Anasazi Inc. Cash
generated from these sources was used primarily used to fund capital expenditures of
$2.5$7.9 million, additions to software of $3.2$9.8 million, and to repay scheduled
long-term debt of $2.5$5.0 million.
The SUMMITrak asset acquisition was funded with a $190.0 million debt facility
with a bank, which consisted of a $150.0 million term facility and a $40.0
million revolving facility. The proceeds from the term facility were used to
pay the $106 million purchase price at closing, retire the Company's existing
debt of $27.5 million, and pay transaction costs of $3.4 million. The remaining
proceeds will be used for general corporate purposes. No amounts were drawn on
the revolving facility at closing. See Note 6 to the Company's financial
statements for additional discussion of the new debt.
The new loan agreement restricts, among other things, the payment of dividends
or other types of distributions on any class of the Company's stock unless the
Company's leverage ratio, as defined in the new loan agreement, is under 1.50.
As of September 30, 1997, the leverage ratio was 3.59.
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 capital expenditures through the
next twelve months.
11for both its
short and long-term purposes.
15
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Items 1 - 5.Item 1-5. None.
Item 6. Exhibits and Reports on Form 8-K8-K.
(a) Exhibits
11.01 Statement re: Computation of Net Income Per Share EarningsCommon and Equivalent
Share.
2.19(1)* Restated and Amended CSG Master Subscriber Management
System Agreement between CSG Systems, Inc. and TCI
Cable Management Corporation, dated August 10, 1997.
2.20(1) Asset Purchase Agreement between CSG Systems
International, Inc. and TCI SUMMITrak of Texas, Inc.,
TCI SUMMITrak, L.L.C., and TCI Technology Ventures,
Inc., dated August 10, 1997.
2.21(1) Contingent Warrant to Purchase Common Stock between CSG
Systems International, Inc. and TCI Technology
Ventures, Inc., dated September 19, 1997.
2.22(1) Royalty Warrant to Purchase Common Stock between CSG
Systems International, Inc. and TCI Technology
Ventures, Inc., dated September 19, 1997.
2.23(1) Registration Rights Agreement between CSG Systems
International, Inc. and TCI Technology Ventures,
Inc., dated September 19, 1997.
2.24(1) Loan Agreement among CSG Systems, Inc. and CSG Systems
International, Inc. as co-borrowers, and certain
lenders and Banque Paribas, as Agent, dated September
18, 1997.
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
------------------------
(1) Incorporated by reference to the exhibit of the same
number to the Registrant's Current Report on Form 8-K
dated October 6, 1997.
* Portions of the exhibit have been omitted pursuant to
an application for confidential treatment, and the
omitted portions have been filed separately with the
Commission.
(b) Reports on Form 8-K
None
1216
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: May 13,November 14, 1997
CSG SYSTEMS INTERNATIONAL, INC.
/s/ Neal C. Hansen
-------------------------------------------------------------------------------------
Neal C. Hansen
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Greg A. Parker
-------------------------------------------------------------------------------------
Greg A. Parker
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Randy R. Wiese
-------------------------------------------
Randy R. Wiese
Controller and Principal Accounting Officer
(Principal Accounting Officer)
1317
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- --------------- -----------
11.01 Statement re: Computation of Net Income Per Share EarningsCommon and Equivalent Share.
2.19(1)* Restated and Amended CSG Master Subscriber Management System Agreement
between CSG Systems, Inc. and TCI Cable Management Corporation, dated
August 10, 1997.
2.20(1) Asset Purchase Agreement between CSG Systems International, Inc. and
TCI SUMMITrak of Texas, Inc., TCI SUMMITrak, L.L.C., and TCI
Technology Ventures, Inc., dated August 10, 1997.
2.21(1) Contingent Warrant to Purchase Common Stock between CSG Systems
International, Inc. and TCI Technology Ventures, Inc., dated September
19, 1997.
2.22(1) Royalty Warrant to Purchase Common Stock between CSG Systems
International, Inc. and TCI Technology Ventures, Inc., dated September
19, 1997.
2.23(1) Registration Rights Agreement between CSG Systems International, Inc.
and TCI Technology Ventures, Inc., dated September 19, 1997.
2.24(1) Loan Agreement among CSG Systems, Inc. and CSG Systems International,
Inc. as co-borrowers, and certain lenders and Banque Paribas, as
Agent, dated September 18, 1997.
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-Certain Cautionary Statements
and Risk Factors
14__________________
(1) Incorporated by reference to the exhibit of the same number to the
Registrant's Current Report on
Form 8-K dated October 6, 1997.
* Portions of the exhibit have been omitted pursuant to an application for
confidential treatment, and the omitted portions have been filed separately
with the Commission.
18