================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 or [X] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-28536 ----------- BILLING CONCEPTS CORP. (Exact name of registrant as specified in its charter) DELAWARE 74-2781950 (State or other jurisdiction of (IRS Employer ID No.) incorporation or organization) 7411 JOHN SMITH DRIVE, SUITE 200 SAN ANTONIO, TEXAS 78229 (Address of principal executive offices) (Zip code) (210) 949-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicated below is the number of shares outstanding of the registrant's only class of common stock at August 4, 2000: NUMBER OF SHARES TITLE OF CLASS OUTSTANDING -------------- ----------- Common Stock, $.01 par value 42,312,534 ================================================================================ BILLING CONCEPTS CORP. AND SUBSIDIARIES INDEX PAGE ---- PART I FINANCIAL INFORMATION Item 1. Interim Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - June 30, 2000 and September 30, 1999................... 3 Condensed Consolidated Statements of Operations - For the Quarter and Nine Months Ended June 30, 2000 and 1999........ 4 Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended June 30, 2000 and 1999........ 5 Notes to Interim Condensed Consolidated Financial Statements...................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 13 Item 3. Quantitative and Qualitative Disclosure about Market Risk....... 20 PART II OTHER INFORMATION Item 1. Legal Proceedings............................................... 21 Item 6. Exhibits and Reports on Form 8-K................................ 21 SIGNATURE................................................................ 22 2 PART I FINANCIAL INFORMATION ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BILLING CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) ASSETS JUNE 30, SEPTEMBER 30, 2000 1999 --------- --------- Current assets: Cash and cash equivalents ......................... $ 96,331 $ 134,007 Accounts receivable, net .......................... 37,068 44,053 Purchased receivables ............................. 15,261 31,375 Prepaids and other ................................ 3,852 3,776 --------- --------- Total current assets ............................ 152,512 213,211 Property and equipment, net ........................ 24,934 25,868 Other assets, net .................................. 33,136 8,470 Investments in and advances to equity affiliates ........................................ 39,197 7,530 --------- --------- Total assets .................................... $ 249,779 $ 255,079 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable ........................... $ 15,514 $ 21,397 Accounts payable - billing customers ............. 96,391 90,089 Accrued liabilities .............................. 24,920 28,172 --------- --------- Total current liabilities ....................... 136,825 139,658 Deferred income taxes .............................. 1,725 1,971 Other liabilities .................................. 1,380 1,315 --------- --------- Total liabilities ............................... 139,930 142,944 Commitments and contingencies (Note 6) Stockholders' equity: Preferred stock, $0.01 par value, 10,000,000 shares authorized; no shares issued or outstanding at June 30 or September 30 ......................... -- -- Common stock, $0.01 par value, 75,000,000 shares authorized; 42,312,534 shares issued and outstanding at June 30; 37,378,216 shares issued and outstanding at September 30 .................................... 417 374 Additional paid-in capital ......................... 88,665 63,771 Retained earnings .................................. 21,623 48,213 Deferred compensation .............................. (96) (223) Treasury stock, at cost ............................ (760) -- --------- --------- Total stockholders' equity ...................... 109,849 112,135 --------- --------- Total liabilities and stockholders' equity ... $ 249,779 $ 255,079 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. 3 BILLING CONCEPTS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) QUARTER ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Operating revenues .............................. $ 36,262 $ 43,392 $ 111,345 $ 137,139 Cost of revenues ................................ 26,259 26,622 76,444 82,714 --------- --------- --------- --------- Gross profit .................................... 10,003 16,770 34,901 54,425 Selling, general and administrative expenses .... 11,248 9,802 29,793 24,749 Bad debt expense ................................ 4,008 423 5,754 543 Research and development ........................ 2,150 1,453 12,937 3,278 Advance funding program income, net ............. (377) (878) (1,452) (3,061) Depreciation and amortization expense ........... 3,278 2,312 9,572 6,804 Special charges ................................. -- 806 2,950 806 --------- --------- --------- --------- Income (loss) from operations ................... (10,304) 2,852 (24,653) 21,306 Other income (expense): Interest income, net ........................... 1,923 1,318 4,916 4,625 Equity in net loss of investees ................ (3,567) (438) (6,288) (1,208) In-process research and development of investees -- -- (4,965) -- Other, net ..................................... 2 (14) (321) (106) --------- --------- --------- --------- Total other income (expense), net ............. (1,642) 866 (6,658) 3,311 --------- --------- --------- --------- Income (loss) before income taxes ............... (11,946) 3,718 (31,311) 24,617 Benefit (provision) for income taxes ............ 2,889 (1,431) 4,721 (9,475) --------- --------- --------- --------- Net income (loss) ............................... $ (9,057) $ 2,287 $ (26,590) $ 15,142 ========= ========= ========= ========= Basic: Net income (loss) per common share .............. $ (0.22) $ 0.06 $ (0.68) $ 0.41 Weighted average common shares outstanding ...... 41,462 37,203 39,367 37,043 Diluted: Net income (loss) per common share and common share equivalents ...................... $ (0.22) $ 0.06 $ (0.68) $ 0.40 Weighted average common shares and common share equivalents outstanding .......... 41,462 37,990 39,367 37,772 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) NINE MONTHS ENDED JUNE 30, ------------------------- 2000 1999 --------- --------- Cash flows from operating activities: Net income (loss) ..................................... $ (26,590) $ 15,142 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization ....................... 9,572 6,804 Equity in net loss of investees ..................... 6,288 1,208 In-process research and development of investees .... 4,965 -- Noncash special charges ............................. 1,700 -- Changes in operating assets and liabilities: Decrease (increase) in accounts receivable ......... 8,765 (4,987) Decrease in prepaids and other ..................... 38 1,408 Decrease in accounts payable ....................... (6,414) (4,063) Decrease in accrued liabilities .................... (2,209) (1,577) Increase (decrease) in other liabilities and other noncash items .................................... 949 (279) --------- --------- Net cash (used in) provided by operating activities .... (2,936) 13,656 Cash flows from investing activities: Purchases of property and equipment ................... (4,819) (6,212) Purchase of companies, net of cash acquired ........... (4,523) (539) Investments in and advances to equity affiliates ...... (44,500) -- Collections of purchased receivables from billing customers, net ...................................... 16,114 21,057 Collections of proceeds due (payments made) to billing customers, net ...................................... 6,302 (26,337) Payments for sales taxes due on behalf of billing customers, net ...................................... (2,850) (1,269) Other investing activities ............................ (425) (662) --------- --------- Net cash used in investing activities .................. (34,701) (13,962) Cash flows from financing activities: Payments on long-term debt ............................ -- (3,199) Payments on capital leases ............................ -- (252) Proceeds from issuance of common stock ................ 721 2,180 Purchases of treasury stock ........................... (760) -- --------- --------- Net cash used in financing activities .................. (39) (1,271) --------- --------- Net decrease in cash and cash equivalents .............. (37,676) (1,577) Cash and cash equivalents, beginning of period ......... 134,007 120,972 --------- --------- Cash and cash equivalents, end of period ............... $ 96,331 $ 119,395 ========= ========= 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 nine months ended June 30, 2000, diluted EPS equals basic EPS, as potentially dilutive common stock equivalents are antidilutive in loss periods. If the Company would have had net income for the quarter and nine months ended June 30, 2000, the denominator (weighted average number of common shares and common share equivalents outstanding) in the diluted EPS calculation would have been increased, through application of the treasury stock method, for each class of options for which the average market price per share of the Company's common stock exceeded the common stock equivalent's exercise price. For the quarter and nine months ended June 30, 2000, certain options to purchase 5,736,000 shares of common stock at prices ranging from $4.78 to $29.00 per share would not have been included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. There were additional options to purchase 2,889,000 shares of common stock at prices ranging from $1.98 to $4.71 per share which were excluded as they were antidilutive for the losses incurred for the quarter and nine months ended June 30, 2000. 6 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 JUNE 30, 1999 --------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- BASIC EPS Net income available to common stockholders $2,287,000 37,203,000 $0.06 ===== EFFECT OF POTENTIALLY DILUTIVE SECURITIES Stock options ............................. 787,000 ---------- DILUTED EPS Net income available to common stockholders including assumed conversions .......... $2,287,000 37,990,000 $0.06 ========== ========== ===== FOR THE NINE MONTHS ENDED JUNE 30, 1999 ----------------------------------------- INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- BASIC EPS Net income available to common stockholders $15,142,000 37,043,000 $ 0.41 ========= EFFECT OF POTENTIALLY DILUTIVE SECURITIES Stock options ............................. 729,000 ------------- DILUTED EPS Net income available to common stockholders including assumed conversions .......... $15,142,000 37,772,000 $ 0.40 =========== ============= ========= Certain options to purchase 2,422,000 shares of common stock at prices ranging from $12.14 to $29.00 per share were outstanding for the quarter ended June 30, 1999. Certain options to purchase 2,745,000 shares of common stock at prices ranging from $10.19 to $29.00 per share were outstanding for a portion of the nine months ended June 30, 1999. They were not included in the computation of the diluted EPS because the options' exercise price was greater than the average market price of the common shares. NOTE 3. OTHER ASSETS Other assets is comprised of the following: JUNE 30, SEPTEMBER 30, 2000 1999 ------- ------- (In thousands) Goodwill - Transaction Processing....... $16,913 $ -- Goodwill - Software .................... 986 1,048 Goodwill - Internet .................... 6,384 -- LEC Contract costs ..................... 2,981 2,726 Other non-current assets ............... 5,872 4,696 ------- ------- Total other assets .................. $33,136 $ 8,470 ======= ======= 7 BILLING CONCEPTS CORP. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. INVESTMENTS IN AND ADVANCES TO EQUITY AFFILIATES Investments in and advances to equity affiliates is comprised of the following: JUNE 30, SEPTEMBER 30, 2000 1999 ------- ------- (In thousands) Equity investment in Princeton eCom Corporation ........... $30,834 $ 7,530 Advance to Princeton eCom Corporation ..................... 5,000 -- Equity investment in COREINTELLECT, Inc. .................. 3,363 -- ------- ------- Total investments in and advances to equity affiliates.. $39,197 $ 7,530 ======= ======= NOTE 5. ACQUISITIONS AND INVESTMENTS In April 2000, the Company completed the acquisition of Operator Service Company ("OSC"), a Lubbock, Texas-based provider of inbound directory assistance, interactive voice response and customer relationship management services to the telecommunications and consumer products industries. The Company acquired OSC through the issuance of 3.077 million shares of common stock. This acquisition is accounted for under the purchase method of accounting. Accordingly, the results of operations for OSC have been included in the Company's consolidated financial statements, and the shares related to the acquisition have been included in the weighted average shares outstanding for purposes of calculating net income (loss) per common share since the date of acquisition. A portion of the total purchase price of $19.2 million has been allocated to assets acquired and liabilities assumed based on estimated fair market value at the date of acquisition. The additional balance of $17.1 million was recorded as goodwill and is being amortized over twenty years on a straight-line basis. In March 2000, the Company completed the purchase of a voting preferred stock investment of $6.0 million in privately-held COREINTELLECT, Inc. ("CORE"), giving the Company a 22% equity ownership stake, assuming conversion of the voting preferred stock. This investment is accounted for under the equity method. Based in Dallas, Texas, CORE is an application service provider that develops and markets Internet-based business-to-business products for the acquisition, classification, retention and dissemination of business-critical knowledge and information. The Company expensed $2.5 million of the consideration for the purchase of in-process research and development in connection with this equity investment, which is included in Other income (expense). In March 2000, the Company invested an additional $33.5 million through the purchase of $27.0 million of convertible preferred stock and $6.5 million of common stock in privately-held Princeton eCom Corporation ("Princeton"), increasing its ownership stake to approximately 51%, assuming conversion of the preferred stock, from approximately 24%. The Company accounts for this investment under the equity method because the Company does not have majority control of the board of directors and it considers its voting control to be temporary. The Company expects its interest in Princeton to be less than 50% by September 30, 2000. The Company expensed $2.5 million of in-process research and development in connection with this additional equity investment, which is included in Other income (expense). In June 2000, under the terms of a Convertible Promissory Note due July 15, 2001, the Company advanced $5.0 million to Princeton. The Convertible Promissory Note may be converted into shares of Princeton's preferred stock, which are convertible into 1,111,111 shares of Princeton's Common Stock. 8 BILLING CONCEPTS CORP. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In November 1999, the Company completed the acquisition of FIData, Inc. ("FIData"), a San Antonio, Texas-based company that provides Internet-based automated loan approval products to the financial services industries. This acquisition has been accounted for as a purchase. Accordingly, the results of operations for FIData have been included in the Company's consolidated financial statements, and the shares related to the acquisition have been included in the weighted average shares outstanding for purposes of calculating net income (loss) per common share since the date of acquisition. The total consideration for the acquisition of FIData was approximately $4.2 million in cash and debt assumption and 1,100,000 shares of the Company's common stock. The excess of the purchase price over the fair value of net tangible assets acquired amounted to approximately $9.1 million, of which approximately $7.4 million was recorded as goodwill and other intangibles and is being amortized on a straight-line basis over five years. The remaining balance of $1.7 million was expensed as acquired in-process research and development (see Note 9). In connection with these acquisitions, the Company acquired certain intangible assets, including goodwill and in-process research and development. In connection with these allocations, the Company expensed approximately $2.5 million of each of its equity investments in CORE and Princeton and $1.7 million of the purchase price for FIData as in-process research and development. In performing these allocations, the Company considered the respective company's research and development projects in-process at the date of acquisition, among other factors such as the stage of development of the technology at the time of investment, the importance of each project to the overall development plan, alternative future use of the technology and the projected incremental cash flows from the projects when completed and any associated risks. The in-process research and development purchased from CORE focused on next generation Internet-based acquisition, classification, retention and dissemination of business-critical knowledge and information. The in-process research and development purchased from Princeton focused on next generation Internet-based bill publishing and payment systems and solutions. The in-process research and development purchased from FIData focused on next generation Internet-based automated loan approval products and banking systems and solutions. Due to their specialized nature, the in-process research and development projects had no alternative future use, either for re-deployment elsewhere in the business or in liquidation, in the event the projects failed. The Income Approach was the primary technique utilized in valuing the purchased research and development. The valuation technique employed in the appraisals was designed to properly reflect all intellectual property rights in the intangible assets, including core technology. The value of the developed technology was derived from direct sales of existing products, including their contribution to in-process research and development. In this way, value was properly attributed to the engineering know-how embedded in the existing product that will be used in developmental products. The appraisals also considered the fact that the existing know-how diminishes in value over time as new technologies are developed and changes in market conditions render current products and methodologies obsolete. The assumptions underlying the cash flow projections used were derived primarily from investment banking reports, historical results, company records and discussions with management. Revenue estimates for each in-process project were developed by management and based on an assessment of the industry. Cost of goods sold for each project is expected to be in line with historical industry accepted pricing. Due to the technological and economic risks associated with the developmental projects, discount rates of 40%, 25% and 35% were used to discount cash flows from the in-process projects for CORE, Princeton and FIData, respectively. The Company believes that the foregoing assumptions used in the forecasts were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. For these reasons, actual results may vary from projected results. The most significant and uncertain assumptions relating to the in-process projects relate to the projected timing of completion and revenues attributable to each project. 9 BILLING CONCEPTS CORP. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. COMMITMENTS AND CONTINGENCIES A lawsuit was filed on December 31, 1998, in the United States District Court in San Antonio, Texas by an alleged stockholder of the Company against the Company and various of its officers and directors, alleging unspecified damages as a result of alleged false statements in various press releases prior to November 19, 1998. In September 1999, the U.S. District Court for the Western District of Texas entered an order and judgment dismissing the plaintiff's lawsuit. The plaintiff noticed an appeal of that decision on September 29, 1999. Although no assurances can be given, the Company believes it has meritorious defenses to this action and intends to defend itself vigorously. The Company is cooperating with the Federal Trade Commission's ("FTC") Bureau of Consumer Protection ("BCP") regarding BCP staff requests for industry and customer specific information from the Company relating primarily to the alleged cramming of charges for non-regulated telecommunications services by certain of its customers. Cramming is the addition of charges to a telephone bill for programs, products or services the consumer did not knowingly authorize. In connection with the Company's responses to the ongoing informational requests, the BCP staff has proposed a complaint against the Company. The BCP staff alleges that it can impose a variety of civil remedies on the Company, including consumer redress or other equitable relief as well as restrictions on the way the Company processes charges for enhanced services. The Company disputes the BCP staff's alleged basis for liability and is reviewing the BCP staff's allegations to ensure that corrective action has already been taken. BCC has and will continue to cooperate and engage the BCP staff in good faith negotiations. The Company is unable to predict what action, if any, the FTC will take regarding the BCP staff's proposed complaint or what, if any, financial impact would result. The Company is involved in various other claims, legal actions and regulatory proceedings arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the claims, litigation or proceedings to which the Company is a party, including those described above, will have a material adverse effect on the Company's financial position or results of operations; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company's results of operations for the fiscal period in which such resolution occurs. 10 BILLING CONCEPTS CORP. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. BUSINESS SEGMENTS The Company conducts operations in three principal segments - Transaction Processing (formerly known as LEC Billing), Software and Internet. Information as to the operations of the Company in different business segments is set forth below based on the nature of the products and services offered. The Company evaluates performance based on several factors, of which the primary financial measures are segment revenues and operating income. QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, ------------------------- ------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (IN THOUSANDS) (IN THOUSANDS) Operating revenues: Transaction Processing .............. $ 28,843 $ 31,673 $ 85,776 $ 102,534 Software ............................ 7,231 11,719 25,124 34,605 Internet ............................ 188 -- 445 -- --------- --------- --------- --------- Total operating revenues .......... $ 36,262 $ 43,392 $ 111,345 $ 137,139 Income (loss) from operations: Transaction Processing .............. $ 3,157 $ 5,291 $ 14,587 $ 25,706 Software ............................ (7,723) 2,011 (18,070) 6,523 Internet ............................ (2,064) -- (9,936) -- Corporate Overhead .................. (3,674) (4,450) (11,234) (10,923) --------- --------- --------- --------- Total income (loss) from operations $ (10,304) $ 2,852 $ (24,653) $ 21,306 Income (loss) before income taxes: Income (loss) from operations ....... $ (10,304) $ 2,852 $ (24,653) $ 21,306 Interest income, net ................ 1,923 1,318 4,916 4,625 Equity in net loss of investees ..... (3,567) (438) (6,288) (1,208) In-process research and development of investees .......... -- -- (4,965) -- Other, net .......................... 2 (14) (321) (106) --------- --------- --------- --------- Income (loss) before income taxes . $ (11,946) $ 3,718 $ (31,311) $ 24,617 Interest income (expense), net: Transaction Processing .............. $ 1,917 $ 1,298 $ 4,887 $ 4,616 Software ............................ -- 20 19 25 Internet ............................ 6 -- 9 -- Corporate Overhead .................. -- -- 1 (16) --------- --------- --------- --------- Total interest income, net ........ $ 1,923 $ 1,318 $ 4,916 $ 4,625 Depreciation and amortization: Transaction Processing .............. $ 1,513 $ 1,249 $ 4,582 $ 3,764 Software ............................ 821 576 2,321 1,597 Internet ............................ 443 -- 1,154 -- Corporate Overhead .................. 501 487 1,515 1,443 --------- --------- --------- --------- Total depreciation and amortization $ 3,278 $ 2,312 $ 9,572 $ 6,804 Total assets: Transaction Processing .............. $ 174,060 $ 199,741 Software ............................ 21,483 25,307 Internet ............................ 46,839 -- Corporate ........................... 7,397 22,252 --------- --------- Total assets ...................... $ 249,779 $ 247,300 11 BILLING CONCEPTS CORP. AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. RELATED PARTY TRANSACTIONS From time to time, the Company has made advances to or was owed amounts from certain officers of the Company. The highest aggregate amount outstanding of advances to officers during the nine months ended June 30, 2000 was $252,000. The Company had an aggregate of $54,000 in notes receivable bearing interest at 10.0% annually from a certain officer of the Company at June 30, 2000. On January 4, 2000, the Company forgave a certain note receivable from an officer of the Company with a principal balance and accrued interest totaling approximately $70,000, in lieu of a cash bonus. On April 4, 2000, the Company forgave a certain note receivable from an officer of the Company with a principal balance and accrued interest totaling approximately $133,000, in lieu of a cash bonus. On April 5, 2000, the Board of Directors of the Company approved a restricted stock grant to the Chief Executive Officer of the Company. The restricted stock consists of 400,000 shares of Princeton common stock, which vests on April 30, 2003. The Company expenses the fair market value of the restricted stock grant over the three-year period ended April 30, 2003. The Company recognized $0.2 million during the third quarter of 2000 as compensation expense related to the stock grant. NOTE 9. SPECIAL CHARGES During the nine months ended June 30, 2000, the Company recognized special charges in the amount of $2.9 million. Severance related costs of $1.2 million were recorded during the second quarter of 2000. In addition, the Company recognized a $1.7 million charge during the first quarter of 2000 for the in-process research and development costs acquired in connection with the acquisition of FIData (see Note 5). The Company recorded a third quarter 2000 charge of $3.5 million related to the Software division. The charge is a result of the narrowing of various software product offerings, the refocusing of software development efforts, and a reserve associated with a significant account. 12 ITEM 2. THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND INFORMATION RELATING TO THE COMPANY AND ITS SUBSIDIARIES THAT ARE BASED ON THE BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND "INTEND" AND WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY OR ITS SUBSIDIARIES OR COMPANY MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATED TO CERTAIN FACTORS INCLUDING, WITHOUT LIMITATIONS, COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER RELATIONS, RELATIONSHIPS WITH VENDORS, THE INTEREST RATE ENVIRONMENT, GOVERNMENTAL REGULATION AND SUPERVISION, SEASONALITY, DISTRIBUTION NETWORKS, PRODUCT INTRODUCTIONS AND ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY PRACTICES, ONETIME EVENTS AND OTHER FACTORS DESCRIBED HEREIN AND IN OTHER FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. BASED UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following is a discussion of the consolidated financial condition and results of operations for Billing Concepts Corp. ("BCC") and subsidiaries (collectively referred to as the "Company"), as of and for the quarter and nine months ended June 30, 2000 and 1999. It should be read in conjunction with the Unaudited Interim Condensed Consolidated Financial Statements of the Company, the notes thereto and other financial information included elsewhere in this report, and the Company's Annual Report on Form 10-K for the year ended September 30, 1999. For purposes of the following discussion, references to year periods refer to the Company's fiscal year ended September 30 and references to quarterly periods refer to the Company's fiscal quarter ended June 30. RESULTS OF OPERATIONS - CONSOLIDATED The following table presents certain items in the Company's Condensed Consolidated Statements of Operations as a percentage of total revenues: QUARTER ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2000 1999 2000 1999 ----- ----- ----- ----- Operating revenues ......................... 100.0% 100.0% 100.0% 100.0% Cost of revenues ........................... 72.4 61.4 68.7 60.3 ----- ----- ----- ----- Gross profit ............................... 27.6 38.6 31.3 39.7 Selling, general and administrative expenses 31.0 22.6 26.8 18.0 Bad debt expense ........................... 11.1 1.0 5.2 0.4 Research and development ................... 5.9 3.3 11.6 2.4 Advance funding program income, net ........ (1.0) (2.0) (1.3) (2.2) Depreciation and amortization expense ...... 9.0 5.3 8.6 5.0 Special charges ............................ 0.0 1.9 2.6 0.6 ----- ----- ----- ----- Income (loss) from operations .............. (28.4) 6.5 (22.2) 15.5 Other (expense) income, net ................ (4.5) 2.0 (6.0) 2.4 ----- ----- ----- ----- Income (loss) before income taxes .......... (32.9) 8.5 (28.2) 17.9 Benefit (provision) for income taxes ....... 8.0 (3.3) 4.2 (6.9) ----- ----- ----- ----- Net income (loss) .......................... (24.9)% 5.2% (24.0)% 11.0% ===== ===== ===== ===== 13 The Company's revenues are derived primarily from the provision of billing clearinghouse and information management services to telecommunications services providers through Local Exchange Carrier billing ("LEC billing") by its transaction processing services division ("Transaction Processing"), formerly known as the LEC billing division. During the third quarter of 2000, the Company completed the acquisition of Operator Service Company ("OSC"), which provides inbound directory assistance, interactive voice response and customer relationship management. Through its subsidiary, Aptis, Inc., the Company also operates a Software division ("Software") that develops, markets and supports convergent billing and customer care software applications for telecommunications and Internet services providers and provides direct billing outsourcing services. In addition, the Company has an Internet division ("Internet") which includes an equity interest in Princeton eCom Corporation ("Princeton"), which offers electronic bill presentment and payment services via the Internet. During the first quarter of 2000, the Company completed the acquisition of FIData, Inc. ("FIData"), which provides automated loan approval products via the Internet. During the second quarter of 2000, the Company purchased an additional equity interest in Princeton and an equity interest in COREINTELLECT, Inc ("CORE"), which provides Internet-based business-to-business products for the acquisition, classification, retention and dissemination of business-critical knowledge and information. Total revenues for the quarter ended June 30, 2000 were $36.3 million, a decrease of 16.4% from $43.4 million in the comparable prior year quarter. During the first nine months of 2000, total revenues decreased 18.7% to $111.3 million from $137.1 million during the comparable period of 1999. The decrease in total revenues from the prior year quarter was primarily due to the 38.5% decrease in Software revenues to $7.2 million in the third quarter of 2000 from $11.7 million in the third quarter of 1999. In addition, Transaction Processing revenues decreased 9.1% to $28.8 million in the third quarter of 2000 from $31.7 million in the third quarter of 1999. The gross profit margin of 27.6% reported for the third quarter of 2000 compares to 38.6% achieved in the comparable quarter of 1999. During the first nine months of 2000, gross profit margin decreased from 39.7% in 1999 to 31.3% in 2000. The decrease in gross margins from the first quarter of the prior year periods is primarily attributable to the decrease in the gross margin achieved by the Transaction Processing division as a result of higher billing and collection costs charged by the LECs. In addition, the decrease in software license fee revenues generated by the Software division contributed to the lower consolidated gross margin. Selling, general and administrative ("SG&A") expenses are comprised of all selling, marketing and administrative costs incurred in direct support of the business operations of the Company. SG&A expenses for the third quarter of 2000 were $11.2 million, or 31.0% of revenues, compared to $9.8 million, or 22.6% of revenues, in the third quarter of 1999. SG&A expenses for the first nine months of 2000 were $29.8 million, or 26.8% of revenues, compared to $24.7 million, or 18.0% of revenues, in the first nine months of 1999. SG&A expenses increased from the prior year periods primarily due to the Company's Internet operations, which began during the fourth quarter of 1999. Internet operations incurred $1.6 million and $4.0 million of SG&A expenses during the third quarter and nine months ended June 30, 2000, respectively. Bad debt expense for the third quarter of 2000 was $4.0 million compared to $0.4 million in the third quarter of 1999. Bad debt expense for the first nine months of 2000 was $5.8 million compared to $0.5 million in the first nine months of 1999. Bad debt expense increased from the prior year periods primarily due to a $3.5 million charge taken in the third quarter of 2000. Related to the Software division, this charge is a result of the narrowing of various software product offerings, the refocusing of software development efforts, and a reserve associated with a significant account. Research and development ("R&D") expenses are comprised of the salaries and benefits of the employees involved in development and related expenses. R&D expenses increased to $2.2 million in the third quarter of 2000 from $1.5 million in the prior year quarter. During the first nine months of 2000, R&D expenses increased to $12.9 million from $3.3 million in the comparable period in 1999. The increase is attributable to the growth of such expenses incurred by the Software and Internet divisions to facilitate the development of new and enhanced products. Depreciation and amortization expenses are incurred with respect to certain assets, including computer hardware, software, office equipment, furniture, leasehold improvements, costs incurred in securing contracts with local telephone companies, goodwill and other intangibles. Depreciation and amortization expenses were $3.3 million in the third quarter of 2000 compared to $2.3 million in the third quarter of 1999. During the nine months ended June 30, 2000 and 1999, 14 depreciation and amortization expenses were $9.6 million and $6.8 million, respectively. The increase in depreciation and amortization expenses from the prior year periods is attributable to capital expenditures as well as the amortization of intangibles acquired in connection with the acquisition of FIData in November 1999 and OSC in April 2000. Net other expense of $1.6 million in the third quarter of 2000 compares to net other income of $0.9 million in 1999. During the nine months ended June 30, 2000 and 1999, the Company reported net other expense of $6.7 million and net other income of $3.3 million, respectively. The decrease in net other expense from the prior year periods was primarily due to the Company's equity in the net loss of Princeton and CORE of $3.6 million for the third quarter of 2000 and $6.3 million for the nine months ended June 30, 2000. The net other expense for the nine months ended June 30, 2000 also includes special charges of $5.0 million of in-process research and development costs acquired in connection with the March 2000 equity investments in Princeton and CORE. The Company's effective tax rate was 24.2% in the third quarter of 2000 and 38.5% in the third quarter of 1999. For the nine months ended June 30, 2000 and 1999, the Company's effective tax rate was 15.1% and 38.5%, respectively. Excluding its Internet operations and special charges, the Company's effective tax rate would have been 37.1% and 34.4% in the third quarter of 2000 and 1999, respectively. The Company reported a net loss of $9.1 million for the third quarter of 2000 compared to net income of $2.3 million in the third quarter of 1999. During the first nine months of 2000, the Company reported a net loss of $26.6 million compared to net income of $15.1 million in the first nine months of 1999. Excluding the Internet division, special charges, and the $3.5 million Software charge, the Company recorded a net loss of $3.2 million, or $0.08 per share, for the nine months ended June 30, 2000. The net loss for the nine months ended June 30, 2000 includes special charges of $1.2 million in severance related costs and $1.7 million in in-process research and development. The decrease in the net loss, exclusive of special charges, from the prior year periods is primarily attributable to margin pressures experienced by the Transaction Processing division, lower than anticipated revenues from the Software division, and the $3.5 million Software charge. RESULTS OF OPERATIONS - TRANSACTION PROCESSING The following table presents the operating results of the Company's Transaction Processing division and as a percentage of related revenues for each period: QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, ---------------------------------------- --------------------------------------- (IN THOUSANDS, EXCEPT PERCENTAGES) 2000 1999 2000 1999 ----------------- ------------------ ----------------- ----------------- Operating revenues ......................... $ 28,843 100.0% $ 31,673 100.0% $ 85,776 100.0% $ 102,534 100.0% Cost of revenues ........................... 20,473 71.0 21,575 68.1 57,841 67.4 66,211 64.6 --------- ----- --------- ----- --------- ----- --------- ----- Gross profit ............................... 8,370 29.0 10,098 31.9 27,935 32.6 36,323 35.4 Selling, general and administrative expenses 3,553 12.3 4,167 13.2 8,655 10.1 9,001 8.8 Research and development ................... 524 1.8 269 0.8 1,563 1.8 913 0.9 Advance funding program income, net ........ (377) (1.3) (878) (2.8) (1,452) (1.7) (3,061) (3.0) Depreciation and amortization expense ...... 1,513 5.2 1,249 3.9 4,582 5.3 3,764 3.7 --------- ----- --------- ----- --------- ----- --------- ----- Income from operations ................... $ 3,157 11.0% $ 5,291 16.8% $ 14,587 17.1% $ 25,706 25.0% ========= ===== ========= ===== ========= ===== ========= ===== OPERATING REVENUES Transaction processing fees charged by the Company include processing and customer service inquiry fees. Processing fees are assessed to customers either as a fee charged for each telephone call record or other transaction processed or as a percentage of the customer's revenue that is submitted by the Company to local telephone companies for billing and collection. Processing fees also include any charges assessed to the Company by local telephone companies for billing and collection services that are passed through to the customer. Customer service inquiry fees are assessed to customers either as a fee charged for each record processed by the Company or as a fee charged for each billing inquiry made by end users. 15 Transaction Processing service revenues decreased $2.8 million, or 8.9%, in the third quarter of 2000 from the prior year quarter. During the first nine months, revenues decreased $16.8 million, or 16.3%, from the comparable prior year period. The decrease in revenue from the prior periods was attributable to an overall decrease in the number of call records processed. The number of call records processed for billing during the third quarter of 2000 continues to be negatively impacted by market pressures that have occurred in the long distance industry. Management is continuing to take actions in order to mitigate the effects of "slamming and cramming" issues on the call record volumes of its current customer base. Consequently, the number of call records processed for billing decreased from the prior year periods. Telephone call record volumes were as follows: QUARTER ENDED QUARTER ENDED NINE MONTHS ENDED JUNE 30, MARCH 31, JUNE 30, ---------------- ---------------- ---------------- 2000 1999 2000 1999 2000 1999 ----- ----- ----- ----- ----- ----- (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) Direct dial long distance services 112.2 148.4 115.9 152.1 352.6 452.7 Operator services ................ 18.1 24.0 18.5 23.4 57.1 71.9 Enhanced billing services ........ 1.0 1.2 0.9 1.0 2.9 3.6 Billing management services ...... 54.6 59.1 42.0 60.6 144.0 172.9 Additionally, revenues were adversely affected by the loss of certain customers now using direct billing methods, versus LEC billing through the Company. The Company has addressed the need for a direct billing solution and has recently launched its own related product that is offered via a service bureau environment. COST OF REVENUES Cost of revenues includes billing and collection fees charged by local exchange carriers and related transmission costs, as well as all costs associated with the customer service organization, including staffing expenses and costs associated with telecommunications services. Billing and collection fees charged by the local exchange carriers include fees that are assessed for each record submitted and for each bill rendered to its end-user customers. The Company achieves discounted billing costs due to its aggregated volumes and can pass these discounted costs on to its customers. The gross profit margin for the quarter and nine months ended June 30, 2000, was 29.0% and 32.6%, respectively, compared to 31.9% and 35.4% achieved in the respective prior year periods. The decrease in the gross profit margin from the prior year period is primarily attributable to higher billing and collection costs charged to the Company by the local exchange carriers. SELLING, GENERAL AND ADMINISTRATIVE Excluding a $1.8 million charge for a legal judgment in the third quarter of 1999, SG&A expenses for the third quarter of 2000 were $3.6 million, or 12.3% of revenues, compared to $2.4 million, or 7.5% of revenues, for the third quarter of 1999. During the nine months ended June 30, 2000, the SG&A expenses were $8.7 million, or 10.1% of revenues, compared to $7.2 million, or 7.0% of revenues, in the prior year period. The increase in SG&A as a percentage of revenue in 2000 was primarily due to the overall decrease in Transaction Processing revenues. Expenses related to certain corporate functions, such as treasury, financial reporting, investor relations, legal, payroll, human resources and management information systems, have not been fully charged to Transaction Processing, but are included in the consolidated results of operations as general corporate expenses. RESEARCH AND DEVELOPMENT R&D expenses are comprised of the salaries and benefits of the employees involved in software development and related expenses. The Company internally funds R&D activities with respect to efforts associated with creating new and enhanced Transaction Processing services products. R&D expenses in the quarter and nine months ended June 30, 2000, 16 were $0.5 million and $1.6 million, respectively, compared to $0.3 million and $0.9 million in the respective prior year periods. The Transaction Processing division intends to continue its R&D efforts in the future and anticipates spending approximately $2.1 million during fiscal year 2000 for such expenses. ADVANCE FUNDING PROGRAM INCOME AND EXPENSE Net advance funding program income was $0.4 million in the third quarter of 2000 compared with $0.9 million in the third quarter of 1999. Net advance funding program income was $1.5 million in the first nine months of 2000 compared with $3.1 million in the first nine months of 1999. The decrease from the third quarter of 1999 was primarily the result of a lower level of customer receivables financed under the Company's advance funding program. The quarterly average balances of purchased receivables were $21.8 million and $50.7 million for the nine months ended June 30, 2000 and 1999, respectively. The Company financed all customer receivables during 2000 and 1999 with internally generated funds rather than with funds borrowed through the Company's revolving credit facility. The advance funding program expense recognized during both 2000 and 1999 represents unused credit facility fees and is the minimum expense that the Company could have incurred during these periods. INCOME FROM OPERATIONS Income from operations in the third quarter of 2000 was $3.2 million, or 11.0% of revenues, compared to income from operations of $5.3 million, or 16.8% of revenues, in the third quarter of 1999. During the first nine months of 2000, income from operations was $14.6 million, or 17.1% of revenues, compared to $25.7 million, or 25.0% of revenues, during the first nine months of 1999. The decrease in income from operations as a percentage of revenues from the prior year periods is attributable to a lower gross profit margin, as well as higher operating expenses and lower net advance funding program income as percentages of revenues. RESULTS OF OPERATIONS - SOFTWARE The following table presents the operating results of the Company's Software division and as a percentage of related revenues for each period: QUARTER ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, ------------------------------------------ ----------------------------------------- (IN THOUSANDS, EXCEPT PERCENTAGES) 2000 1999 2000 1999 ------------------ ------------------ ------------------ ----------------- Software license fee revenues ..... $ 165 2.3% $ 5,224 44.6% $ 4,413 17.5% $ 12,864 37.2% Services revenues ................. 5,951 82.3 5,566 47.5 17,579 70.0 16,208 46.8 Hardware revenues ................. 1,115 15.4 929 7.9 3,132 12.5 5,533 16.0 -------- ----- -------- ----- -------- ----- -------- ----- Total operating revenues .......... 7,231 100.0 11,719 100.0 25,124 100.0 34,605 100.0 Cost of revenues .................. 5,679 78.5 5,047 43.1 18,381 73.2 16,503 47.7 -------- ----- -------- ----- -------- ----- -------- ----- Gross profit ...................... 1,552 21.5 6,672 56.9 6,743 26.8 18,102 52.3 Selling, general and administrative expenses......................... 2,889 40.0 2,478 21.1 7,547 30.0 7,074 20.4 Bad debt expense .................. 3,984 55.1 423 3.6 5,730 22.8 543 1.6 Research and development .......... 1,581 21.9 1,184 10.1 8,082 32.2 2,365 6.8 Depreciation and amortization expense ......................... 821 11.4 576 4.9 2,321 9.2 1,597 4.6 Special Charges ................... -- -- -- -- 1,133 4.5 -- -- -------- ----- -------- ----- -------- ----- -------- ----- Income (loss) from operations ... $ (7,723) (106.9)% $ 2,011 17.2% $(18,070) (71.9)% $ 6,523 18.9% ======== ===== ======== ===== ======== ===== ======== ===== OPERATING REVENUES In addition to license and maintenance fees charged by Software for the use of its billing software applications, fees are charged on a time and materials basis for software customization and professional services. Software revenues also include retail sales of third-party computer hardware and software. 17 Software revenues decreased $4.5 million, or 38.3%, and $9.5 million, or 27.4%, in the quarter and nine months ended June 30, 2000, respectively, from the comparable periods of 1999. The decrease in revenues from the prior year periods was primarily attributable to lower sales of billing systems in 2000, which corresponded to a decrease in software license fees. COST OF REVENUES Cost of revenues includes the cost of third-party computer hardware and software sold, and the salaries and benefits of software support, technical and professional service personnel who generate revenue from contracted services. Gross profit margin of 21.5% reported for the third quarter of 2000 compares to 56.9% achieved in the third quarter of 1999. Gross profit margin of 26.8% reported for the first nine months of 2000 compares to 52.3% achieved in the respective prior year period. This is attributable to lower Software license fees as a percentage of total Software division revenues in 2000. This decrease in Software license revenues resulted in a lower overall gross margin due to the higher margins associated with such revenues. SELLING, GENERAL AND ADMINISTRATIVE SG&A expenses for the third quarter of 2000 were $2.9 million, or 40.0% of revenues, compared to $2.5 million, or 21.1% of revenues, in the third quarter of 1999. SG&A expenses for the first nine months of 2000 were $7.5 million, or 30.0% of revenues, compared to $7.1 million, or 20.4% of revenues, during the first nine months of 1999. The increase in SG&A expenses as a percentage of revenues from the prior year periods is attributable to a decrease in operating revenues. Expenses related to certain corporate functions, such as treasury, financial reporting, investor relations, legal, payroll, human resources and management information systems, have not been fully charged to the Software division, but are included in the consolidated results of operations as general corporate expenses. BAD DEBT Bad debt expense for the third quarter of 2000 was $4.0 million compared to $0.4 million in the third quarter of 1999. Bad debt expense for the first nine months of 2000 was $5.7 million compared to $0.5 million during the first nine months of 1999. Bad debt expense increased from the prior year periods primarily due to a $3.5 million charge taken in the third quarter of 2000. Related to the Software division, this charge is a result of the narrowing of various software product offerings, the refocusing of software development efforts, and a reserve associated with a significant account. RESEARCH AND DEVELOPMENT R&D expenses are comprised of the salaries and benefits of the employees involved in software development and related expenses. The Software division is actively involved in ongoing R&D efforts associated with creating new and enhanced products related to its convergent billing software platform for both telecommunications and Internet service providers. R&D expenses in the third quarter of 2000 increased to $1.6 million from $1.2 million in the third quarter of 1999. R&D expenses in the first nine months of 2000 were $8.1 million compared to $2.4 million in the comparable prior year period. This increase is primarily due to an increase in the number of R&D personnel necessary to support the efforts to expand the features and functionality of the Company's Aptis ICP and TotalBill products. The Company intends to continue its R&D efforts in the future and anticipates spending a total of approximately $9.5 million during fiscal year 2000 for such expenses. INCOME (LOSS) FROM OPERATIONS In the quarter and nine months ended June 30, 2000, the Software division incurred a loss from operations of $7.7 million and $18.1 million, compared to income from operations of $2.0 million and $6.5 million in the respective prior year periods. The loss from operations in 2000 reflected lower revenues and higher SG&A and R&D expenses. During the second quarter of 2000, the Company recorded a special charge of $1.1 million related to severance for the Software division. 18 RESULTS OF OPERATIONS - INTERNET The Company entered the Internet business with its initial equity investment in Princeton in September 1998. During the third quarter of 2000, in addition to recording its equity in the net loss of Princeton of $3.4 million and its equity in the net loss of CORE of $0.2 million, which are included in Other income (expense), the Company recorded $2.1 million of operating expenses related to its Internet division. During the first nine months of 2000, the Company recorded its equity in the net loss of Princeton of $6.1 million, its equity in the net loss of CORE of $0.2 million, and $8.2 million of operating expenses. These expenses included the operating results of FIData, a company that provides Internet-based automated loan approval products to the financial services industries, since its acquisition effective November 1, 1999, as well as expenses incurred by efforts to develop a financial services Website focused on the credit union industry and its members. The Company has since narrowed its credit union efforts to focus on FIData only and correspondingly expects operating expenses for the Internet division to decrease for the remaining three months of fiscal year 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's cash balance decreased to $96.3 million at June 30, 2000 from $134.0 million at September 30, 1999. This decrease is primarily related to the cash investments of $33.5 million in Princeton and $6.0 million in CORE and the $5.0 million advance to Princeton. The large fluctuations in daily cash balances are normal due to the large amount of customer receivables that the Company collects on behalf of its LEC billing customers. The Company's working capital position decreased to $15.7 million at June 30, 2000, from $73.6 million at September 30, 1999, and its current ratio was 1.1 and 1.5 at June 30, 2000 and September 30, 1999, respectively. The decrease in the working capital was primarily attributable to the decrease in the cash balance and a decrease in the level of customer receivables financed under the Company's advance funding program. Net cash used in operating activities was $2.9 million in the first nine months of 2000 as compared to net cash provided by operating activities of $13.7 million in the first nine months of 1999 and primarily reflected the change in net income (loss) from the prior year quarter, exclusive of special charges. In December 1996, the Company secured a $50.0 million revolving line of credit facility with certain lenders primarily to draw upon to advance funds to its billing customers prior to collection of the funds from the local exchange carriers. This credit facility terminated on March 20, 2000. Although the Company does not currently anticipate the need to draw on a credit facility due to its significant cash resources, the Company is negotiating a new credit facility with various lenders. Capital expenditures amounted to approximately $4.8 million in the first nine months of 2000 and related primarily to the purchase of computer equipment and software. The Company anticipates capital expenditures before acquisitions, if any, of approximately $0.8 million in the next three months of 2000, largely related to expenditures for furniture, fixtures, leasehold improvements, computer software and hardware upgrades. The Company believes that it will be able to fund expenditures with internally generated funds and borrowings, but there can be no assurance that such funds will be available or expended. In November 1999, the Company completed the acquisition of FIData, a company located in San Antonio, Texas that provides Internet-based automated loan approval products to the financial services industries. The total consideration for the acquisition was approximately $4.2 million in cash and debt assumption and 1,100,000 shares of the Company's common stock. This acquisition has been accounted for as a purchase. Accordingly, the results of operations for FIData have been included in the Company's consolidated financial statements, and the shares related to the acquisition have been included in the weighted average shares outstanding for purposes of calculating net income (loss) per common share since the date of acquisition. Approximately $7.4 million was recorded as goodwill and other intangibles and is included in Other assets. During the first quarter of 2000, the Company expensed $1.7 million of in-process R&D costs acquired in connection with this acquisition. 19 In March 2000, the Company increased its ownership in Princeton to approximately 51% with an additional $33.5 million equity investment, which consisted of $27.0 million of convertible preferred stock and $6.5 million of common stock. In connection with this investment, the Company expensed $2.5 million of in-process R&D costs during the second quarter. In June 2000, under the terms of a Convertible Promissory Note due July 15, 2001, the Company advanced $5.0 million to Princeton. The Convertible Promissory Note may be converted into shares of Princeton's preferred stock, which is convertible into 1,111,111 shares of Princeton Common Stock. In March 2000, the Company completed the purchase of a voting preferred stock investment of $6.0 million in CORE, a Dallas, Texas-based company that develops and markets Internet-based business-to-business products for the acquisition, classification, retention and dissemination of business-critical knowledge and information. During the second quarter, the Company expensed $2.5 million of in-process R&D costs acquired in connection with this equity investment. The Company will continue to review additional strategic Internet acquisition opportunities that will complement or enhance its existing operations. In April 2000, the Company completed the acquisition of Operator Service Company ("OSC"), a Lubbock, Texas-based provider of inbound directory assistance, interactive voice response and customer relationship management services to the telecommunications and consumer products industries. The Company acquired OSC through the issuance of 3.077 million shares of common stock. This acquisition is accounted for under the purchase method of accounting. Accordingly, the results of operations for OSC have been included in the Company's consolidated financial statements, and the shares related to the acquisition have been included in the weighted average shares outstanding for purposes of calculating net income (loss) per common share since the date of acquisition. A portion of the total purchase price of $19.2 million has been allocated to assets acquired and liabilities assumed based on estimated fair market value at the date of acquisition. The additional balance of $17.1 million was recorded as goodwill and is being amortized over twenty years on a straight-line basis. The Company's operating cash requirements consist principally of working capital requirements, requirements under its advance funding program and capital expenditures. The Company believes that it has the ability to continue to secure long-term equipment financing and that this ability, combined with cash flows generated from operations, will be sufficient to fund capital expenditures, advance funding requirements and working capital needs for the foreseeable future. YEAR 2000 As of August 10, 2000, the Year 2000 date change has not posed a significant problem for the Company. However, because the Company's business relies on processing date-sensitive telephone call records supplied by third parties, it is possible that non-compliant third-party computer systems may not have provided accurate data for processing through the Company's computer systems. The Company's business, financial condition and results of operations could be materially adversely affected by the Year 2000 date change if it or unrelated parties failed to successfully address this issue. The above Year 2000 disclosure constitutes a "Year 2000 Readiness Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act (the "Act"), which was signed into law on October 19, 1998. The Act provides added protection from liability for certain public and private statements concerning a company's Year 2000 readiness. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to interest rate risk primarily through its portfolio of cash equivalents and short-term marketable securities. The Company does not believe that it has significant exposure to market risks associated with changing interest rates as of June 30, 2000 because the Company's intention is to maintain a liquid portfolio to take advantage of investment opportunities. The Company does not use derivative financial instruments in its operations. 20 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS A lawsuit was filed on December 31, 1998, in the United States District Court in San Antonio, Texas by an alleged stockholder of the Company against the Company and various of its officers and directors, alleging unspecified damages as a result of alleged false statements in various press releases prior to November 19, 1998. In September 1999, the U.S. District Court for the Western District of Texas entered an order and judgment dismissing the plaintiff's lawsuit. The plaintiff noticed an appeal of that decision on September 29, 1999. Although no assurances can be given, the Company believes it has meritorious defenses to this action and intends to defend itself vigorously. The Company is cooperating with the Federal Trade Commission's ("FTC") Bureau of Consumer Protection ("BCP") regarding BCP staff requests for industry and customer specific information from the Company relating primarily to the alleged cramming of charges for non-regulated telecommunications services by certain of its customers. Cramming is the addition of charges to a telephone bill for programs, products or services the consumer did not knowingly authorize. In connection with the Company's responses to the ongoing informational requests, the BCP staff has proposed a complaint against the Company. The BCP staff alleges that it can impose a variety of civil remedies on the Company, including consumer redress or other equitable relief as well as restrictions on the way the Company processes charges for enhanced services. The Company disputes the BCP staff's alleged basis for liability and is reviewing the BCP staff's allegations to ensure that corrective action has already been taken. BCC has and will continue to cooperate and engage the BCP staff in good faith negotiations. The Company is unable to predict what action, if any, the FTC will take regarding the BCP staff's proposed complaint or what, if any, financial impact would result. The Company is involved in various other claims, legal actions and regulatory proceedings arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the claims, litigation or proceedings to which the Company is a party, including those described above, will have a material adverse effect on the Company's financial position or results of operations; however, due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company's results of operations for the fiscal period in which such resolution occurs. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The exhibits listed below are filed as part of or incorporated by reference in this report. Where such filing is made by incorporation by reference to a previously filed document, such document is identified in parentheses. EXHIBIT NUMBER DESCRIPTION 10.1 Restricted Stock Agreement dated April 5, 2000 by and between Billing Concepts Corp. and Parris H. Holmes, Jr. (filed herewith) 21.1 Amended List of Subsidiaries (filed herewith) 27.1 Financial Data Schedule as of June 30, 2000 (filed herewith) (b) Current Reports on Form 8-K: Form 8-K dated April 4, 2000, and filed April 10, 2000, announcing the execution of a definitive agreement to acquire Operator Service Company. ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 21 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BILLING CONCEPTS CORP. (Registrant) Date: August 10, 2000 By: /s/ DAVID P. TUSA David P. Tusa SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (Duly authorized and principal financial officer)