UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-28536
-----------
BILLING CONCEPTS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2781950
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
7411 JOHN SMITH DRIVE, SUITE 200
SAN ANTONIO, TEXAS 78229
(Address of principal executive offices) (Zip code)
(210) 949-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicated below is the number of shares outstanding of the registrant's
only class of common stock at May 8, 2000:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
-------------- ----------------
Common Stock, $.01 par value 42,330,876
BILLING CONCEPTS CORP. AND SUBSIDIARIES
INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2000 and September 30,
1999..................................................................... 3
Condensed Consolidated Statements of Operations - For the Quarter and Six
Months Ended March 31, 2000 and 1999..................................... 4
Condensed Consolidated Statements of Cash Flows - For the Six Months Ended
March 31, 2000 and 1999.................................................. 5
Notes to Interim Condensed Consolidated Financial Statements............... 6
Management's Discussion and Analysis of Financial Condition and Results of
Item 2. Operations............................................................... 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk.................. 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................... 20
SIGNATURE........................................................................... 21
2
PART I FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
MARCH 31, SEPT. 30,
2000 1999
--------- ---------
Current assets:
Cash and cash equivalents ....................................................................... $ 92,511 $ 134,007
Accounts receivable, net ........................................................................ 44,868 44,053
Purchased receivables ........................................................................... 21,242 31,375
Prepaids and other .............................................................................. 3,754 3,776
--------- ---------
Total current assets .......................................................................... 162,375 213,211
Property and equipment, net ...................................................................... 24,419 25,868
Other assets, net ................................................................................ 15,041 8,470
Investment in equity affiliates .................................................................. 39,350 7,530
--------- ---------
Total assets .................................................................................. $ 241,185 $ 255,079
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ......................................................................... $ 14,554 $ 21,397
Accounts payable - billing customers ........................................................... 99,527 90,089
Accrued liabilities ............................................................................ 23,796 28,172
--------- ---------
Total current liabilities ..................................................................... 137,877 139,658
Deferred income taxes ............................................................................ 1,806 1,971
Other liabilities ................................................................................ 1,489 1,315
--------- ---------
Total liabilities ............................................................................. 141,172 142,944
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; no shares issued or
outstanding at March 31 or September 30 ........................................................ -- --
Common stock, $0.01 par value, 75,000,000 shares authorized; 38,597,993 shares
issued and outstanding at March 31; 37,378,216 shares issued and outstanding
at September 30 ................................................................................ 386 374
Additional paid-in capital ....................................................................... 70,120 63,771
Retained earnings ................................................................................ 30,680 48,213
Deferred compensation ............................................................................ (741) (223)
Treasury stock, at cost .......................................................................... (432) --
--------- ---------
Total stockholders' equity .................................................................... 100,013 112,135
--------- ---------
Total liabilities and stockholders' equity ................................................. $ 241,185 $ 255,079
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Operating revenues ......................................... $ 37,111 $ 45,818 $ 75,083 $ 93,747
Cost of revenues ........................................... 26,352 27,406 50,185 56,092
-------- -------- -------- --------
Gross profit ............................................... 10,759 18,412 24,898 37,655
Selling, general and administrative expenses ............... 10,334 7,495 20,291 15,067
Research and development ................................... 6,567 1,051 10,787 1,825
Advance funding program income, net ........................ (482) (975) (1,075) (2,183)
Depreciation and amortization expense ...................... 3,339 2,264 6,294 4,492
Special charges ............................................ 6,215 -- 7,915 --
-------- -------- -------- --------
Income (loss) from operations .............................. (15,214) 8,577 (19,314) 18,454
Other income (expense):
Interest income (expense), net ............................ 1,609 1,525 2,993 3,307
Equity in net loss of investee ............................ (1,703) (570) (2,721) (770)
Other, net ................................................ (149) (21) (323) (92)
-------- -------- -------- --------
Total other income (expense), net ........................ (243) 934 (51) 2,445
-------- -------- -------- --------
Income (loss) before income taxes .......................... (15,457) 9,511 (19,365) 20,899
Benefit (provision) for income taxes ....................... 1,584 (3,660) 1,832 (8,044)
-------- -------- -------- --------
Net income (loss) .......................................... $(13,873) $ 5,851 $(17,533) $ 12,855
======== ======== ======== ========
Basic:
Net income (loss) per common share ......................... $ (0.36) $ 0.16 $ (0.46) $ 0.35
Weighted average common shares outstanding ................. 38,579 37,060 38,320 36,962
Diluted:
Net income (loss) per common share and
common share equivalents ................................. $ (0.36) $ 0.16 $ (0.46) $ 0.34
Weighted average common shares and
common share equivalents outstanding ..................... 38,579 37,586 38,320 37,663
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
--------- ---------
Cash flows from operating activities:
Net income (loss) ........................................................................... $ (17,533) $ 12,855
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization ............................................................. 6,294 4,492
Equity in net loss of investee ............................................................ 2,721 770
Noncash special charges ................................................................... 6,665 --
Changes in operating assets and liabilities:
Increase in accounts receivable ......................................................... (815) (3,619)
Decrease in prepaids and other .......................................................... 22 255
Decrease in accounts payable ............................................................ (6,922) (2,024)
Decrease in accrued liabilities ......................................................... (631) (1,463)
Increase (decrease) in other liabilities and other noncash items ........................ 828 (603)
--------- ---------
Net cash (used in) provided by operating activities .......................................... (9,371) 10,663
Cash flows from investing activities:
Purchases of property and equipment ......................................................... (4,110) (3,322)
Purchase of Internet companies, net of cash acquired ........................................ (4,264) (539)
Investments in net assets of equity affiliates .............................................. (39,500) --
Collections of purchased receivables from billing customers, net ............................ 10,133 11,139
Collections of proceeds due (payments made) to billing customers, net ....................... 9,438 (20,795)
Payments for sales taxes due on behalf of billing customers, net ............................ (3,713) (7,608)
Other investing activities .................................................................. (361) (443)
--------- ---------
Net cash used in investing activities ........................................................ (32,377) (21,568)
Cash flows from financing activities:
Payments on long-term debt .................................................................. -- (3,187)
Payments on capital leases .................................................................. -- (252)
Proceeds from issuance of common stock ...................................................... 684 1,774
Purchases of treasury stock ................................................................. (432) --
--------- ---------
Net cash provided by (used in) financing activities .......................................... 252 (1,665)
--------- ---------
Net decrease in cash and cash equivalents .................................................... (41,496) (12,570)
Cash and cash equivalents, beginning of period ............................................... 134,007 120,972
--------- ---------
Cash and cash equivalents, end of period ..................................................... $ 92,511 $ 108,402
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim condensed consolidated financial statements included herein
have been prepared by Billing Concepts Corp. ("BCC") and subsidiaries
(collectively referred to as the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
the Company's management, the accompanying interim condensed consolidated
financial statements reflect all adjustments that are necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for such periods. All such adjustments are of a normal recurring nature.
It is recommended that these interim condensed consolidated financial statements
be read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1999. Results of operations for interim periods are not
necessarily indicative of results that may be expected for any other interim
periods or the full fiscal year. Certain prior period amounts have been
reclassified for comparative purposes.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," established standards for computing and presenting earnings per
share ("EPS") for entities with publicly held common stock or potential common
stock. SFAS No. 128 requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
Basic EPS excludes dilution and is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in earnings
of the Company. As the Company had a net loss for the quarter and six months
ended March 31, 2000, diluted EPS equals basic EPS, as potentially dilutive
common stock equivalents are antidilutive in loss periods. If the Company would
have had net income for the quarter and six months ended March 31, 2000, the
denominator (weighted average number of common shares and common share
equivalents outstanding) in the diluted EPS calculation would have been
increased, through application of the treasury stock method, for each class of
options for which the average market price per share of the Company's common
stock exceeded the common stock equivalent's exercise price. For the quarter
ended March 31, 2000, certain options to purchase 5,278,000 shares of common
stock at prices ranging from $6.88 to $29.00 per share would not have been
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares. There were
additional options to purchase 2,653,000 shares of common stock at prices
ranging from $1.98 to $6.19 per share which were excluded as they were
antidilutive for the loss incurred for the quarter ended March 31, 2000. For the
six months ended March 31, 2000, certain options to purchase 5,454,000 shares of
common stock at prices ranging from $5.71 to $29.00 per share would not have
been included in the computation of diluted EPS. Additionally, options to
purchase 2,704,000 shares of common stock at prices ranging from $1.98 to $5.25
per share were excluded as they were antidilutive for the loss incurred for the
six months ended March 31, 2000.
6
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a reconciliation of the numerators and the denominators
of the basic and diluted per-share computations for net income.
FOR THE QUARTER ENDED MARCH 31, 1999
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
BASIC EPS
Net income available to common stockholders ....................................... $ 5,851,000 37,060,000 $ 0.16
===========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Stock options ..................................................................... 526,000
-----------
DILUTED EPS
Net income available to common stockholders
including assumed conversions .................................................. $ 5,851,000 37,586,000 $ 0.16
=========== =========== ===========
FOR THE SIX MONTHS ENDED MARCH 31, 1999
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ----------- -----------
BASIC EPS
Net income available to common stockholders ....................................... $12,855,000 36,962,000 $ 0.35
===========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Stock options ..................................................................... 701,000
-----------
DILUTED EPS
Net income available to common stockholders
including assumed conversions .................................................. $12,855,000 37,663,000 $ 0.34
=========== =========== ===========
Certain options to purchase 2,745,000 shares of common stock at prices
ranging from $10.19 to $29.00 per share were outstanding for a portion of the
quarter and six months ended March 31, 1999. They were not included in the
computation of the diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
NOTE 3. ACQUISITIONS
In March 2000, the Company completed the purchase of a voting preferred
stock investment of $6 million in privately-held COREINTELLECT, Inc. ("CORE"),
giving the Company a 22% equity ownership stake, assuming conversion of the
voting preferred stock. This investment is accounted for under the equity
method. Based in Dallas, Texas, CORE is an application service provider that
develops and markets Internet-based business-to-business products for the
acquisition, classification, retention and dissemination of business-critical
knowledge and information. CORE's product is expected to be launched
commercially by September 30, 2000. The Company expensed $2.5 million of the
consideration for the purchase of in-process research and development in
connection with this equity investment (see Note 7).
In March 2000, the Company invested an additional $33.5 million through
the purchase of $27.0 million of convertible preferred stock and $6.5 million of
common stock in privately-held Princeton eCom Corporation ("Princeton"),
increasing its ownership stake to approximately 51%, assuming conversion of the
preferred stock, from approximately 24%.
7
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company accounts for this investment under the equity method because it
considers its voting control to be temporary and also because the Company does
not have majority control of the board of directors. The Company expects its
interest in Princeton to be less than 50% by September 30, 2000. The Company
expensed $2.5 million of in-process research and development in connection with
this additional equity investment (see Note 7).
In November 1999, the Company completed the acquisition of FIData, Inc.
("FIData"), a San Antonio, Texas-based company that provides Internet-based
automated loan approval products to the financial services industries. In
conjunction with the FIData transaction, the Company also completed the
acquisition of the remaining 40% of an Internet company located in Austin, Texas
that is developing an Internet-based financial services Website focused on the
credit union industry and its members. This acquisition has been accounted for
as a purchase. Accordingly, the results of operations for FIData have been
included in the Company's consolidated financial statements, and the shares
related to the acquisition have been included in the weighted average shares
outstanding for purposes of calculating net income (loss) per common share since
the date of acquisition. The total consideration for the acquisition of FIData
and the remaining 40% of the Austin, Texas-based Internet company was
approximately $4.2 million in cash and debt assumption and 1,100,000 shares of
the Company's common stock. The excess of the purchase price over the fair value
of net tangible assets acquired amounted to approximately $9.1 million, of which
approximately $7.4 million was recorded as goodwill and other intangibles and is
being amortized on a straight-line basis over five years. The remaining balance
of $1.7 million was expensed as acquired in-process research and development
(see Note 7).
In connection with these acquisitions, the Company acquired certain
intangible assets, including goodwill and in-process research and development.
In connection with these allocations, the Company expensed approximately $2.5
million of each of its equity investments in CORE and Princeton and $1.7 million
of the purchase price for FIData as in-process research and development. In
performing these allocations, the Company considered, among other factors, the
respective company's research and development projects in-process at the date of
acquisition. With regard to the in-process research and development projects,
the Company considered factors such as the stage of development of the
technology at the time of investment, the importance of each project to the
overall development plan, alternative future use of the technology and the
projected incremental cash flows from the projects when completed and any
associated risks.
The in-process research and development purchased from CORE focused on
next generation Internet-based acquisition, classification, retention and
dissemination of business-critical knowledge and information. The in-process
research and development purchased from Princeton focused on next generation
Internet-based bill publishing and payment systems and solutions. The in-process
research and development purchased from FIData focused on next generation
Internet-based automated loan approval products and banking systems and
solutions. Due to their specialized nature, the in-process research and
development projects had no alternative future use, either for re-deployment
elsewhere in the business or in liquidation, in the event the projects failed.
The Income Approach was the primary technique utilized in valuing the
purchased research and development. The valuation technique employed in the
appraisals was designed to properly reflect all intellectual property rights in
the intangible assets, including core technology. The value of the developed
technology was derived from direct sales of existing products, including their
contribution to in-process research and development. In this way, value was
properly attributed to the engineering know-how embedded in the existing product
that will be used in developmental products. The appraisals also considered the
fact that the existing know-how diminishes in value over time as new
technologies are developed and changes in market conditions render current
products and methodologies obsolete. The assumptions underlying the cash flow
projections used were derived primarily from investment banking reports,
historical results, company records and discussions with management.
Revenue estimates for each in-process project were developed by management
and based on an assessment of the industry. Cost of goods sold for each project
are expected to be in line with historical industry accepted pricing. Due to the
technological and economic risks associated with the developmental projects,
discount rates of 40%, 25%, and 35%
8
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
were used to discount cash flows from the in-process projects for CORE,
Princeton, and FIData, respectively. The Company believes that the foregoing
assumptions used in the forecasts were reasonable at the time of the
acquisition. No assurance can be given, however, that the underlying assumptions
used to estimate sales, development costs or profitability, or the events
associated with such projects, will transpire as estimated. For these reasons,
actual results may vary from projected results. The most significant and
uncertain assumptions relating to the in-process projects relate to the
projected timing of completion and revenues attributable to each project.
NOTE 4. COMMITMENTS AND CONTINGENCIES
A lawsuit was filed on December 31, 1998, in the United States District
Court in San Antonio, Texas by an alleged stockholder of the Company against the
Company and various of its officers and directors, alleging unspecified damages
as a result of alleged false statements in various press releases prior to
November 19, 1998. In September 1999, the U.S. District Court for the Western
District of Texas entered an order and judgment dismissing the plaintiff's
lawsuit. The plaintiff noticed an appeal of that decision on September 29, 1999.
Although no assurances can be given, the Company believes it has meritorious
defenses to this action and intends to defend itself vigorously.
The Company is cooperating with the Federal Trade Commission's ("FTC")
Bureau of Consumer Protection ("BCP") regarding BCP staff requests for industry
and customer specific information from the Company relating primarily to the
alleged cramming of charges for non-regulated telecommunication services by
certain of its customers. Cramming is the addition of charges to a telephone
bill for programs, products or services the consumer did not knowingly
authorize. In connection with the Company's responses to the ongoing
informational requests, the BCP staff has proposed a complaint against the
Company. The BCP staff alleges that it can impose a variety of civil remedies on
the Company, including consumer redress or other equitable relief as well as
restrictions on the way the Company processes charges for enhanced services. The
Company disputes the BCP staff's alleged basis for liability and is reviewing
the BCP staff's allegations to ensure that corrective action has already been
taken. BCC has and will continue to cooperate and engage the BCP staff in good
faith negotiations. The Company is unable to predict what action, if any, the
FTC will take regarding the BCP staff's proposed complaint or what, if any,
financial impact would result.
The Company is involved in various other claims, legal actions and
regulatory proceedings arising in the ordinary course of business. The Company
believes it is unlikely that the final outcome of any of the claims, litigation
or proceedings to which the Company is a party, including those described above,
will have a material adverse effect on the Company's financial position or
results of operations; however, due to the inherent uncertainty of litigation,
there can be no assurance that the resolution of any particular claim or
proceeding would not have a material adverse effect on the Company's results of
operations for the fiscal period in which such resolution occurs.
9
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. BUSINESS SEGMENTS
The Company conducts operations in three principal segments - Transaction
Processing (formerly known as LEC Billing), Software and Internet. Information
as to the operations of the Company in different business segments is set forth
below based on the nature of the products and services offered. The Company
evaluates performance based on several factors, of which the primary financial
measures are segment revenues and operating income.
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
Operating revenues:
Transaction Processing ................................. $ 27,818 $ 34,782 $ 56,933 $ 70,861
Software ............................................... 9,087 11,036 17,893 22,886
Internet ............................................... 206 -- 257 --
--------- --------- --------- ---------
Total operating revenues ............................. $ 37,111 $ 45,818 $ 75,083 $ 93,747
Income (loss) from operations:
Transaction Processing ................................. $ 3,952 $ 9,728 $ 11,430 $ 20,415
Software ............................................... (6,578) 2,217 (10,347) 4,512
Internet ............................................... (8,756) -- (12,837) --
Corporate Overhead ..................................... (3,832) (3,368) (7,560) (6,473)
--------- --------- --------- ---------
Total income (loss) from operations .................. $ (15,214) $ 8,577 $ (19,314) $ 18,454
Income (loss) before income taxes:
Income (loss) from operations .......................... $ (15,214) $ 8,577 $ (19,314) $ 18,454
Interest income, net ................................... 1,609 1,525 2,993 3,307
Equity in net loss of investee ......................... (1,703) (570) (2,721) (770)
Other .................................................. (149) (21) (323) (92)
--------- --------- --------- ---------
Income (loss) before income taxes .................... $ (15,457) $ 9,511 $ (19,365) $ 20,899
Interest income (expense), net:
Transaction Processing ................................. $ 1,589 $ 1,526 $ 2,970 $ 3,318
Software ............................................... 19 (1) 19 5
Internet ............................................... -- -- 3 --
Corporate Overhead ..................................... 1 -- 1 (16)
--------- --------- --------- ---------
Total interest income, net ........................... $ 1,609 $ 1,525 $ 2,993 $ 3,307
Depreciation and amortization:
Transaction Processing ................................. $ 1,594 $ 1,274 $ 3,069 $ 2,515
Software ............................................... 788 530 1,500 1,021
Internet ............................................... 451 -- 711 --
Corporate Overhead ..................................... 506 460 1,014 956
--------- --------- --------- ---------
Total depreciation and amortization .................. $ 3,339 $ 2,264 $ 6,294 $ 4,492
Total assets:
Transaction Processing ................................. $ 159,511 $ 200,710
Software ............................................... 31,970 22,760
Internet ............................................... 46,821 7,769
Corporate .............................................. 2,883 14,276
--------- ---------
Total assets ......................................... $ 241,185 $ 245,515
10
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. RELATED PARTY TRANSACTIONS
From time to time, the Company has made advances to or was owed amounts
from certain officers of the Company. The highest aggregate amount outstanding
of advances to officers during the six months ended March 31, 2000 was $252,000.
The Company had an aggregate of $183,000 in notes receivable bearing interest at
rates ranging from 8.0% to 10.0% from certain officers of the Company at March
31, 2000. On January 4, 2000, the Company forgave a certain note receivable from
an officer of the Company with a principal balance and accrued interest totaling
approximately $70,000, in lieu of a cash bonus. On April 4, 2000, the Company
forgave a certain note receivable from an officer of the Company with a
principal balance and accrued interest totaling approximately $133,000, in lieu
of a cash bonus.
On April 5, 2000, the Board of Directors of the Company approved a
restricted stock grant to the Chief Executive Officer of the Company. The
restricted stock consists of 400,000 shares of Princeton common stock, which
vests on April 30, 2003. The Company will expense the fair market value of the
restricted stock grant over the three year period ended April 30, 2003.
NOTE 7. SPECIAL CHARGES
During the six months ended March 31, 2000, the Company recognized special
charges in the amount of $7.9 million. The special charges include $5.0 million
of in-process research and development associated with the March 2000 $33.5
million equity investment in Princeton and the March 2000 $6.0 million equity
investment in CORE (see Note 3). Severance related costs of $1.2 million were
also recorded during the second quarter of 2000. In addition, the Company
recognized a $1.7 million charge during the first quarter of 2000 for the
in-process research and development costs acquired in connection with the
acquisition of FIData (see Note 3).
NOTE 8. SUBSEQUENT EVENTS
In April 2000, the Company completed the acquisition of Operator Service
Company ("OSC"), a Lubbock, Texas-based leading provider of inbound directory
assistance, interactive voice response and customer relationship management
services to the telecommunications, car rental and consumer products industries.
The Company acquired OSC through the issuance of 3.846 million shares of common
stock, of which 0.769 million shares have been escrowed and will be released
subject to achievement of $4.11 million of EBITDA for calendar year 2000 by the
OSC operations. This acquisition will be accounted for under the purchase method
of accounting.
In December 1996, the Company obtained a $50.0 million revolving line of
credit facility with certain lenders primarily to draw upon to advance funds to
its billing customers prior to collection of the funds from the local exchange
carriers. This credit facility terminated on March 20, 2000. The Company secured
a new $50.0 million line of credit with similar terms that terminates on March
31, 2001. The Company is currently out of compliance with certain financial
covenants of the credit facility. The Company is currently renegotiating the
credit facility with its lender and expects a resolution of this matter by June
30, 2000. The Company does not currently anticipate any need to draw on the
credit facility and no amounts were outstanding at either March 31, 2000 or
September 30, 1999.
11
ITEM 2.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN "FORWARD-LOOKING"
STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 AND INFORMATION RELATING TO THE COMPANY AND ITS SUBSIDIARIES THAT
ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE
BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED IN
THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND
"INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY
OR ITS SUBSIDIARIES OR COMPANY MANAGEMENT, ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT RISKS,
UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN FACTORS INCLUDING, WITHOUT
LIMITATIONS, COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER
RELATIONS, RELATIONSHIPS WITH VENDORS, THE INTEREST RATE ENVIRONMENT,
GOVERNMENTAL REGULATION AND SUPERVISION, SEASONALITY, DISTRIBUTION NETWORKS,
PRODUCT INTRODUCTIONS AND ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY
PRACTICES, ONETIME EVENTS AND OTHER FACTORS DESCRIBED HEREIN AND IN OTHER
FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. BASED
UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED,
BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE COMPANY DOES NOT INTEND TO UPDATE
THESE FORWARD-LOOKING STATEMENTS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is a discussion of the consolidated financial condition and
results of operations for Billing Concepts Corp. ("BCC") and subsidiaries
(collectively referred to as the "Company"), as of and for the quarter and six
months ended March 31, 2000 and 1999. It should be read in conjunction with the
Unaudited Interim Condensed Consolidated Financial Statements of the Company,
the notes thereto and other financial information included elsewhere in this
report, and the Company's Annual Report on Form 10-K for the year ended
September 30, 1999. For purposes of the following discussion, references to year
periods refer to the Company's fiscal year ended September 30 and references to
quarterly periods refer to the Company's fiscal quarter ended March 31.
RESULTS OF OPERATIONS - CONSOLIDATED
The following table presents certain items in the Company's Condensed
Consolidated Statements of Operations as a percentage of total revenues:
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------- ---------------
2000 1999 2000 1999
----- ----- ----- -----
Operating revenues ....................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ......................... 71.0 59.8 66.8 59.8
----- ----- ----- -----
Gross profit ............................. 29.0 40.2 33.2 40.2
Selling, general and administrative
expenses ............................... 27.8 16.3 27.0 16.1
Research and development ................. 17.7 2.3 14.4 1.9
Advance funding program income, net ...... (1.3) (2.1) (1.4) (2.3)
Depreciation and amortization expense .... 9.0 4.9 8.4 4.8
Special charges .......................... 16.8 -- 10.5 --
----- ----- ----- -----
Income (loss) from operations ............ (41.0) 18.8 (25.7) 19.7
Other (expense) income, net .............. (0.7) 2.0 (0.1) 2.6
----- ----- ----- -----
Income (loss) before income taxes ........ (41.7) 20.8 (25.8) 22.3
Benefit (provision) for income taxes ..... 4.3 (8.0) 2.4 (8.6)
----- ----- ----- -----
Net income (loss) ........................ (37.4)% 12.8% (23.4)% 13.7%
===== ===== ===== =====
12
The Company's revenues are derived primarily from the provision of billing
clearinghouse and information management services to telecommunications services
providers through Local Exchange Carrier billing ("LEC billing") by its
transaction processing services division ("Transaction Processing"), formerly
known as the LEC billing division. Through its subsidiary, Aptis, Inc., the
Company also operates a Software division ("Software") that develops, markets
and supports convergent billing and customer care software applications for
telecommunications and Internet services providers and provides direct billing
outsourcing services. In addition, the Company has an Internet division
("Internet") with operations that include the development of a financial
services Website serving the credit union industry and its members and an equity
interest in Princeton eCom Corporation ("Princeton"), which offers electronic
bill presentment and payment services via the Internet. During the first quarter
of 2000, the Company also completed the acquisition of FIData, Inc. ("FIData"),
which provides automated loan approval products via the Internet. During the
second quarter of 2000, the Company purchased an additional equity interest in
Princeton and an equity interest in COREINTELLECT, Inc ("CORE"), which provides
Internet-based business-to-business products for the acquisition,
classification, retention and dissemination of business-critical knowledge and
information. Total revenues for the quarter ended March 31, 2000 were $37.1
million, a decrease of 19.0% from $45.8 million in the comparable prior year
quarter. During the first six months of 2000, total revenues decreased 19.9% to
$75.1 million from $93.7 million during the comparable quarter of 1999. The
decrease in total revenues from the prior year quarter was primarily due to the
20.0% decrease in Transaction Processing revenues to $27.8 million in the second
quarter of 2000 from $34.8 million in the second quarter of 1999. In addition,
Software revenues decreased 17.7% to $9.1 million in the second quarter of 2000
from $11.0 million in the second quarter of 1999. The gross profit margin of
29.0% reported for the second quarter of 2000 is 27.9% lower than the 40.2%
achieved in the comparable quarter of 1999. During the first six months of 2000,
gross profit margin decreased from 40.2% in 1999 to 33.2% in 2000. The decrease
in gross margins from 1999 is primarily attributable to the decrease in the
gross margin achieved by the Transaction Processing division as a result of
higher billing and collection costs charged by the LECs. In addition, the
decrease in software license fee revenues generated by the Software division
contributed to the lower consolidated gross margin.
Selling, general and administrative ("SG&A") expenses are comprised of all
selling, marketing and administrative costs incurred in direct support of the
business operations of the Company. SG&A expenses for the second quarter of 2000
were $10.3 million, or 27.8% of revenues, compared to $7.5 million, or 16.3% of
revenues, in the second quarter of 1999. SG&A expenses for the first six months
of 2000 were $20.3 million, or 27.0% of revenues, compared to $15.1 million, or
16.1% of revenues, in the first six months of 1999. SG&A expenses increased from
the prior year periods primarily due to increased expenditures to provide
additional development and infrastructure for the Software division. In
addition, the Company's Internet operations, which began during the fourth
quarter of 1999, incurred $1.5 million of SG&A expenses in the second quarter of
2000.
Research and development ("R&D") expenses are comprised of the salaries
and benefits of the employees involved in development and related expenses. R&D
expenses increased to $6.6 million in the second quarter of 2000 from $1.1
million in the prior year quarter. During the first six months of 2000, R&D
expenses increased to $10.8 million from $1.8 million in the comparable period
in 1999. The increase is attributable to the growth of such expenses incurred by
the Software and Internet divisions to facilitate the development of new and
enhanced products.
Depreciation and amortization expenses are incurred with respect to
certain assets, including computer hardware, software, office equipment,
furniture, leasehold improvements, costs incurred in securing contracts with
local telephone companies, goodwill and other intangibles. Depreciation and
amortization expenses were $3.3 million in the second quarter of 2000 compared
to $2.3 million in the second quarter of 1999. During the six months ended March
31, 2000 and 1999, depreciation and amortization expenses were $6.3 million and
$4.5 million, respectively. The increase in depreciation and amortization
expenses from the prior year periods is attributable to increased capital
expenditures as well as the amortization of intangibles acquired in connection
with the acquisition of FIData in November 1999.
The Company reported a loss from operations of $15.2 million for the
second quarter of 2000 compared to income from operations of $8.6 million in the
second quarter of 1999. During the first six months of 2000, the Company
reported a loss from operations of $19.3 million compared to income from
operations of $18.5 million in the first six months of 1999. Excluding the
Internet division and special charges, the Company recorded a net loss of $1.3
million, or $0.03 per share, for the six months ended March 31, 2000. The loss
from operations for the quarter ended March 31, 2000 includes special charges of
$6.2 million of in-process research and development costs acquired in connection
with the March 2000 equity investments in Princeton and CORE, and $1.2 million
in severance related costs. The decrease in operating margin,
13
exclusive of special charges, from the prior year periods is primarily
attributable to margin pressures experienced by the Transaction Processing
division, lower revenues from the Software division, and higher SG&A and R&D
expenses incurred by the Software and Internet divisions.
As a result of the streamlining of development efforts in the Software
division, the refocusing of credit union efforts in the Internet division and
other cost reduction initiatives, the Company recently reduced the total
employee and contractor headcount by 150. The Company anticipates the
corresponding cost savings to be realized beginning in the third quarter.
Net other expense of $0.2 million in the second quarter of 2000 compares
to net other income of $0.9 million in 1999. During the six months ended March
31, 2000 and 1999, the Company reported net other expense of $0.1 million and
net other income of $2.4 million, respectively. The decrease in net other income
from the prior year periods was primarily due to the Company's equity in the net
loss of Princeton of $1.7 million for the second quarter of 2000 and $2.7
million for the six months ended March 31, 2000.
The Company's effective tax rate was 10.2% in the second quarter of 2000
and 38.5% in the second quarter of 1999. For the six months ended March 31, 2000
and 1999, the Company's effective tax rate was 9.5% and 38.5%, respectively.
Excluding its Internet operations and special charges, the Company's effective
tax rate would have been 46.6% and 36.3% in the second quarter of 2000 and 1999,
respectively.
RESULTS OF OPERATIONS - TRANSACTION PROCESSING
The following table presents the operating results of the Company's
Transaction Processing division and as a percentage of related revenues for each
period:
QUARTER ENDED MARCH 31,
----------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 2000 1999
---------- ---------- ---------- ----------
Operating revenues ......................... $ 27,818 100.0% $ 34,782 100.0%
Cost of revenues ........................... 19,330 69.5 22,125 63.6
---------- ---------- ---------- ----------
Gross profit ............................... 8,488 30.5 12,657 36.4
Selling, general and administrative expenses 2,815 10.1 2,422 7.0
Research and development ................... 609 2.2 208 0.6
Advance funding program income, net ........ (482) (1.7) (975) (2.8)
Depreciation and amortization expense ...... 1,594 5.7 1,274 3.6
---------- ---------- ---------- ----------
Income from operations ................... $ 3,952 14.2% $ 9,728 28.0%
========== ========== ========== ==========
SIX MONTHS ENDED MARCH 31,
----------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 2000 1999
---------- ---------- ---------- ----------
Operating revenues ......................... $ 56,933 100.0% $ 70,861 100.0%
Cost of revenues ........................... 37,368 65.6 44,636 63.0
---------- ---------- ---------- ----------
Gross profit ............................... 19,565 34.4 26,225 37.0
Selling, general and administrative expenses 5,102 9.0 4,834 6.9
Research and development ................... 1,039 1.8 644 0.9
Advance funding program income, net ........ (1,075) (1.9) (2,183) (3.1)
Depreciation and amortization expense ...... 3,069 5.4 2,515 3.5
---------- ---------- ---------- ----------
Income from operations ................... $ 11,430 20.1% $ 20,415 28.8%
========== ========== ========== ==========
OPERATING REVENUES
Transaction processing fees charged by the Company include processing and
customer service inquiry fees. Processing fees are assessed to customers either
as a fee charged for each telephone call record or other transaction processed
or as a percentage of the customer's revenue that is submitted by the Company to
local telephone companies for billing and collection. Processing fees also
include any charges assessed to the Company by local telephone companies for
billing and collection services that are passed through to the customer.
Customer service inquiry fees are assessed to customers either as a fee charged
for each record processed by the Company or as a fee charged for each billing
inquiry made by end users.
Transaction Processing service revenues decreased $7.0 million, or 20.0%,
in the second quarter of 2000 from the prior year quarter. During the first six
months, revenues decreased $13.9 million, or 19.7% from the comparable prior
year period. The decrease in revenue from the prior periods was attributable to
an overall decrease in the number of call records processed. The number of call
records processed for billing during the second quarter of 2000 continues to be
negatively impacted by "slamming" and "cramming" issues that have occurred in
the long distance
14
industry. Management is continuing to take actions in order to mitigate the
effects of "slamming and cramming" issues on the call record volumes of its
current customer base. Consequently, the number of call records processed for
billing decreased from the prior year periods. Telephone call record volumes
were as follows:
QUARTER ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------- -------------
2000 1999 2000 1999
----- ----- ----- -----
(IN MILLIONS) (IN MILLIONS)
Direct dial long distance services ......... 115.9 152.1 240.4 304.3
Operator services .......................... 18.5 23.4 39.0 47.9
Enhanced billing services .................. 0.9 1.0 1.9 2.4
Billing management services ................ 42.0 60.6 89.4 113.8
Additionally, revenues were adversely affected by the loss of certain
customers now using direct billing methods, versus LEC billing through the
Company. The Company has addressed the need for a direct billing solution and
has recently launched its own related product to be offered via a service bureau
environment. Beginning in the third quarter, the Transaction Processing division
will include the revenues attributable to the acquisition of Operator Service
Company ("OSC") (see Note 8).
COST OF REVENUES
Cost of revenues includes billing and collection fees charged by local
exchange carriers and related transmission costs, as well as all costs
associated with the customer service organization, including staffing expenses
and costs associated with telecommunications services. Billing and collection
fees charged by the local exchange carriers include fees that are assessed for
each record submitted and for each bill rendered to its end-user customers. The
Company achieves discounted billing costs due to its aggregated volumes and can
pass these discounted costs on to its customers.
The gross profit margin for the quarter and six months ended March 31,
2000, was 30.5% and 34.4%, respectively, compared to 36.4% and 37.0% achieved in
the respective prior year periods. The decrease in the gross profit margin from
the prior year period is primarily attributable to higher billing and collection
costs charged to the Company by the local exchange carriers.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A expenses for the second quarter of 2000 were $2.8 million, or 10.1%
of revenues, compared to $2.4 million, or 7.0% of revenues, for the second
quarter of 1999. During the six months ended March 31, 2000, the SG&A expenses
were $5.1 million or 9.0%, compared to $4.8 million or 6.9% of revenues in the
prior year period. The increase in SG&A as a percentage of revenue in 2000 was
primarily due to the overall decrease in Transaction Processing revenues.
Expenses related to certain corporate functions, such as treasury, financial
reporting, investor relations, legal, payroll, human resources and management
information systems, have not been fully charged to Transaction Processing, but
are included in the consolidated results of operations as general corporate
expenses.
RESEARCH AND DEVELOPMENT
R&D expenses are comprised of the salaries and benefits of the employees
involved in software development and related expenses. The Company internally
funds R&D activities with respect to efforts associated with creating new and
enhanced Transaction Processing services products. R&D expenses in the quarter
and six months ended March 31, 2000, were $0.6 million and $1.0 million,
respectively, compared to $0.2 million and $0.6 million in the respective prior
year periods. The Transaction Processing division intends to continue its R&D
efforts in the future and anticipates spending approximately $2 million during
fiscal year 2000 for such expenses.
15
ADVANCE FUNDING PROGRAM INCOME AND EXPENSE
Advance funding program income was $0.5 million in the second quarter of
2000 compared with $1.0 million in the second quarter of 1999. Advance funding
program income was $1.1 million in the first six months of 2000 compared with
$2.2 million in the first six months of 1999. The decrease from the first
quarter of 1999 was primarily the result of a lower level of customer
receivables financed under the Company's advance funding program. The quarterly
average balances of purchased receivables were $24.3 million and $55.3 million
for the six months ended March 31, 2000 and 1999, respectively. The Company
financed all customer receivables during 2000 and 1999 with internally generated
funds rather than with funds borrowed through the Company's revolving credit
facility. The advance funding program expense recognized during both 2000 and
1999 represents unused credit facility fees and is the minimum expense that the
Company could have incurred during these periods.
INCOME FROM OPERATIONS
Income from operations in the second quarter of 2000 was $4.0 million, or
14.2% of revenues, compared to income from operations of $9.7 million, or 28.0%
of revenues, in the second quarter of 1999. During the first six months of 2000,
income from operations was $11.4 million, or 20.1% of revenues, compared to
$20.4 million, or 28.8% of revenues, during the first six months of 1999. The
decrease in income from operations as a percentage of revenues from the prior
year periods is attributable to a lower gross profit margin, as well as higher
operating expenses and lower net advance funding income as percentages of
revenues.
RESULTS OF OPERATIONS - SOFTWARE
The following table presents the operating results of the Company's
Software division and as a percentage of related revenues for each period:
QUARTER ENDED MARCH 31,
----------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 2000 1999
---------- ---------- ---------- ----------
Software license fee revenues .................. $ 2,680 29.5% $ 3,785 34.3%
Services revenues .............................. 5,606 61.7 5,357 48.5
Hardware revenues .............................. 801 8.8 1,894 17.2
---------- ---------- ---------- ----------
Total operating revenues ....................... 9,087 100.0 11,036 100.0
Cost of revenues ............................... 6,941 76.4 5,281 47.9
---------- ---------- ---------- ----------
Gross profit ................................... 2,146 23.6 5,755 52.1
Selling, general and administrative expenses ... 2,722 29.9 2,165 19.6
Research and development ....................... 4,081 44.9 843 7.6
Depreciation and amortization expense .......... 788 8.7 530 4.8
Special Charges ................................ 1,133 12.5 -- --
---------- ---------- ---------- ----------
Income (loss) from operations ................ $ (6,578) (72.4)% $ 2,217 20.1%
========== ========== ========== ==========
SIX MONTHS ENDED MARCH 31,
----------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 2000 1999
---------- ---------- ---------- ----------
Software license fee revenues .................. $ 4,223 23.6% $ 7,640 33.4%
Services revenues .............................. 11,653 65.1 10,642 46.5
Hardware revenues .............................. 2,017 11.3 4,604 20.1
---------- ---------- ---------- ----------
Total operating revenues ....................... 17,893 100.0 22,886 100.0
Cost of revenues ............................... 12,702 71.0 11,456 50.1
---------- ---------- ---------- ----------
Gross profit ................................... 5,191 29.0 11,430 49.9
Selling, general and administrative expenses ... 6,404 35.8 4,716 20.6
Research and development ....................... 6,501 36.3 1,181 5.2
Depreciation and amortization expense .......... 1,500 8.4 1,021 4.4
Special Charges ................................ 1,133 6.3 -- --
---------- ---------- ---------- ----------
Income (loss) from operations ................ $ (10,347) (57.8)% $ 4,512 19.7%
========== ========== ========== ==========
OPERATING REVENUES
In addition to license and maintenance fees charged by Software for the
use of its billing software applications, fees are charged on a time and
materials basis for software customization and professional services. Software
revenues also include retail sales of third-party computer hardware and
software.
Software revenues decreased $1.9 million, or 17.7%, and $5.0 million, or
21.8%, in the quarter and six months ended March 31, 2000, from the comparable
periods of 1999. The decrease in revenues from the prior year periods was
primarily attributable to lower sales of billing systems in 2000, which
corresponded to a decrease in software license fees and hardware revenues.
16
COST OF REVENUES
Cost of revenues includes the cost of third-party computer hardware and
software sold, and the salaries and benefits of software support, technical and
professional service personnel who generate revenue from contracted services.
Gross profit margin of 23.6% reported for the second quarter of 2000
compares to 52.1% achieved in the second quarter of 1999. Gross profit margin of
29.0% reported for the first six months of 2000 compares to 49.9% achieved in
the respective prior year period. This is attributable to lower Software license
fees as a percentage of total Software division revenues in 2000. This decrease
in Software license revenues resulted in a lower overall gross margin due to the
higher margins associated with such revenues.
SELLING, GENERAL AND ADMINISTRATIVE
SG&A expenses for the second quarter of 2000 were $2.7 million, or 29.9%
of revenues, compared to $2.2 million, or 19.6% of revenues, in the second
quarter of 1999. SG&A expenses for the first six months of 2000 were $6.4
million, or 35.8% of revenues, compared to $4.7 million, or 20.6% of revenues,
during the first six months of 1999. SG&A expenses increased from the prior year
periods due to an increase in expenditures to provide additional infrastructure
for the Software business. Additionally, the Company recorded a higher level of
bad debt expense in the first six months of 2000 versus the prior year period.
Expenses related to certain corporate functions, such as treasury, financial
reporting, investor relations, legal, payroll, human resources and management
information systems, have not been fully charged to the Software division, but
are included in the consolidated results of operations as general corporate
expenses.
RESEARCH AND DEVELOPMENT
R&D expenses are comprised of the salaries and benefits of the employees
involved in software development and related expenses. The Software division is
actively involved in ongoing R&D efforts associated with creating new and
enhanced products related to its convergent billing software platform for both
telecommunications and Internet service providers. R&D expenses in the second
quarter of 2000 increased to $4.1 million from $0.8 million in the second
quarter of 1999. R&D expenses in the first six months of 2000 were $6.5 million
compared to $1.2 million in the comparable prior year period. This increase is
primarily due to an increase in the number of R&D personnel necessary to support
the efforts to expand the features and functionality of the Company's Aptis ICP
and TotalBill products. The Company intends to continue its R&D efforts in the
future and anticipates spending a total of approximately $10 million during 2000
for such expenses.
INCOME (LOSS) FROM OPERATIONS
In the quarter and six months ended March 31, 2000, the Software division
incurred a loss from operations of $5.4 million and $9.2 million, compared to
income from operations of $2.2 million and $4.5 million in the respective prior
year periods. The loss from operations in 2000 reflected lower revenues and
higher SG&A and R&D expenses. During the second quarter of 2000, the Company
recorded a special charge of $1.1 million, related to severance for the Software
division.
RESULTS OF OPERATIONS - INTERNET
The Company entered the Internet industry with its initial equity
investment in Princeton in September 1998. During the second quarter of 2000, in
addition to recording its equity in the net loss of Princeton of $1.7 million,
which is included in "Other Income," the Company recorded $3.8 million of
operating expenses related to its Internet division. During the first six months
of 2000, the Company recorded its equity in the net loss of Princeton of $2.7
million and $6.1 million of operating expenses. These expenses included the
operating results of FIData, a company that provides Internet-based automated
loan approval products to the financial services industries, since its
acquisition effective November 1, 1999, as well as expenses incurred by efforts
to develop a financial services Website focused on the credit union industry and
its members. The Company has since narrowed its credit union efforts to focus on
FIData only and correspondingly expects operating expenses for the Internet
division to decrease for the remaining six months of fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
17
The Company's cash balance decreased to $92.5 million at March 31, 2000
from $134.0 million at September 30, 1999. This decrease is primarily related to
the $4.2 million consideration given for the acquisition of FIData, Inc., the
$33.5 million equity investment in Princeton, and the $6.0 million equity
investment in CORE. The large fluctuations in daily cash balances are normal due
to the large amount of customer receivables that the Company collects on behalf
of its LEC billing customers. The Company's working capital position decreased
to $24.4 million at March 31, 2000, from $73.6 million at September 30, 1999,
and its current ratio was 1.2 and 1.5 at March 31, 2000 and September 30, 1999,
respectively. The decrease in the working capital was primarily attributable to
the decrease in the cash balance and a decrease in the level of customer
receivables financed under the Company's advance funding program. Net cash used
in operating activities was $9.3 million in the first six months of 2000 as
compared to net cash provided by operating activities of $10.7 million in the
first six months of 1999 and primarily reflected the change in net income (loss)
from the prior year quarter, exclusive of special charges.
In December 1996, the Company obtained a $50.0 million revolving line of
credit facility with certain lenders primarily to draw upon to advance funds to
its billing customers prior to collection of the funds from the local exchange
carriers. This credit facility terminated on March 20, 2000. The Company secured
a new $50.0 million line of credit with similar terms that terminates on March
31, 2001. The Company is currently out of compliance with certain financial
covenants of the credit facility. The Company is currently renegotiating the
credit facility with its lender and expects resolution of this matter by June
30, 2000. The Company does not currently anticipate any need to draw on the
credit facility and no amounts were outstanding at either March 31, 2000 or
September 30, 1999.
Capital expenditures amounted to approximately $4.1 million in the first
six months of 2000 and related primarily to the purchase of computer equipment
and software. The Company anticipates capital expenditures before acquisitions,
if any, of approximately $2.5 million in the next six months of 2000 largely
related to expenditures for furniture, fixtures, leasehold improvements,
computer software and hardware upgrades. The Company believes that it will be
able to fund expenditures with internally generated funds and borrowings, but
there can be no assurance that such funds will be available or expended.
In November 1999, the Company completed the acquisition of FIData, a
company located in San Antonio, Texas that provides Internet-based automated
loan approval products to the financial services industries. In conjunction with
the FIData transaction, the Company also completed the acquisition of an
Internet company located in Austin, Texas that is developing an Internet-based
financial services Website focused on the credit union industry and its members.
The total consideration for the acquisition was approximately $4.2 million in
cash and debt assumption and 1,100,000 shares of the Company's common stock.
This acquisition has been accounted for as a purchase. Accordingly, the results
of operations for FIData have been included in the Company's consolidated
financial statements, and the shares related to the acquisition have been
included in the weighted average shares outstanding for purposes of calculating
net income per common share since the date of acquisition. Approximately $7.4
million was recorded as goodwill and other intangibles and is included in other
assets. During the first quarter of 2000, the Company expensed $1.7 million of
in-process R&D costs acquired in connection with this acquisition.
In March 2000, the Company increased its ownership in Princeton to 51%
with an additional $33.5 million equity investment, which consisted of $27.0
million of convertible preferred stock and $6.5 million of common stock. The
Company will continue to review additional strategic Internet acquisition
opportunities that will complement or enhance its existing operations. In
connection with this investment, the Company expensed $2.5 million of in-process
R&D costs during the second quarter.
In March 2000, the Company completed the purchase of a voting preferred
stock investment of $6.0 million in CORE, a Dallas, Texas based company that
develops and markets Internet-based business-to-business products for the
acquisition, classification, retention and dissemination of business-critical
knowledge and information. During the second quarter, the Company expensed $2.5
million of in-process R&D costs acquired in connection with this equity
investment.
18
The Company's operating cash requirements consist principally of working
capital requirements, requirements under its advance funding program and capital
expenditures. The Company believes that it has the ability to continue to secure
long-term equipment financing and that this ability, combined with cash flows
generated from operations, will be sufficient to fund capital expenditures,
advance funding requirements and working capital needs for the foreseeable
future.
YEAR 2000
As of May 8, 2000, the Year 2000 date change has not posed a significant
problem for the Company. However, because the Company's business relies on
processing date-sensitive telephone call records supplied by third parties, it
is possible that non-compliant third-party computer systems may not have
provided accurate data for processing through the Company's computer systems.
The Company's business, financial condition and results of operations could be
materially adversely affected by the Year 2000 date change if it or unrelated
parties failed to successfully address this issue.
The above Year 2000 disclosure constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act
(the "Act"), which was signed into law on October 19, 1998. The Act provides
added protection from liability for certain public and private statements
concerning a company's Year 2000 readiness.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
portfolio of cash equivalents and short-term marketable securities. The Company
does not believe that it has significant exposure to market risks associated
with changing interest rates as of March 31, 2000 because the Company's
intention is to maintain a liquid portfolio to take advantage of investment
opportunities. The Company does not use derivative financial instruments in its
operations.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A lawsuit was filed on December 31, 1998, in the United States District
Court in San Antonio, Texas by an alleged stockholder of the Company against the
Company and various of its officers and directors, alleging unspecified damages
as a result of alleged false statements in various press releases prior to
November 19, 1998. In September 1999, the U.S. District Court for the Western
District of Texas entered an order and judgment dismissing the plaintiff's
lawsuit. The plaintiff noticed an appeal of that decision on September 29, 1999.
Although no assurances can be given, the Company believes it has meritorious
defenses to this action and intends to defend itself vigorously.
The Company is cooperating with the Federal Trade Commission's ("FTC")
Bureau of Consumer Protection ("BCP") regarding BCP staff requests for industry
and customer specific information from the Company relating primarily to the
alleged cramming of charges for non-regulated telecommunication services by
certain of its customers. Cramming is the addition of charges to a telephone
bill for programs, products or services the consumer did not knowingly
authorize. In connection with the Company's responses to the ongoing
informational requests, the BCP staff has proposed a complaint against the
Company. The BCP staff alleges that it can impose a variety of civil remedies on
the Company, including consumer redress or other equitable relief as well as
restrictions on the way the Company processes charges for enhanced services. The
Company disputes the BCP staff's alleged basis for liability and is reviewing
the BCP staff's allegations to ensure that corrective action has already been
taken. BCC has and will continue to cooperate and engage the BCP staff in good
faith negotiations. The Company is unable to predict what action, if any, the
FTC will take regarding the BCP staff's proposed complaint or what, if any,
financial impact would result.
The Company is involved in various other claims, legal actions and
regulatory proceedings arising in the ordinary course of business. The Company
believes it is unlikely that the final outcome of any of the claims, litigation
or proceedings to which the Company is a party, including those described above,
will have a material adverse effect on the Company's financial position or
results of operations; however, due to the inherent uncertainty of litigation,
there can be no assurance that the resolution of any particular claim or
proceeding would not have a material adverse effect on the Company's results of
operations for the fiscal period in which such resolution occurs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed below are filed as part of or incorporated by
reference in this report. Where such filing is made by incorporation by
reference to a previously filed document, such document is identified in
parentheses.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27.1 Financial Data Schedule as of March 31, 2000 (filed herewith)
(b) Current Reports on Form 8-K:
Form 8-K dated February 22, 2000, and filed February 25, 2000,
announcing the increase in investment in Princeton eCom Corporation to
approximately 51% from approximately 24%.
Form 8-K dated March 16, 2000, and filed March 29, 2000, regarding (i)
the consummation of purchase of additional shares in Princeton eCom Corporation,
increasing the equity investment to approximately 51% from approximately 24%,
and (ii) the press release dated March 22, 2000, announcing the execution of a
definitive agreement to acquire OSC.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
BILLING CONCEPTS CORP.
(Registrant)
Date: May 11, 2000 By: /S/ DAVID P. TUSA
--------------------------------
David P. Tusa
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Duly authorized and principal financial
officer)
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