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, 1999
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 August 6, 1999:
NUMBER OF SHARES
TITLE OF CLASS OUTSTANDING
Common Stock, $.01 par value 37,353,110
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, 1999 and September 30, 1998............................ 3
Condensed Consolidated Statements of Income -
For the Three and Nine months Ended June 30, 1999 and 1998...... 4
Condensed Consolidated Statements of Cash Flows -
For the Nine months Ended June 30, 1999 and 1998................ 5
Notes to Interim Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................10
Item 3. Quantitative and Qualitative Disclosure about Market Risk.........21
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................22
Item 6. Exhibits and Reports on Form 8-K..................................23
SIGNATURE...................................................................24
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,
1999 1998
--------- ---------------
Current assets:
Cash and cash equivalents .................................................... $ 529 $ 2,622
Accounts receivable, net ..................................................... 19,121 9,696
Prepaids and other ........................................................... 744 908
Net current assets of discontinued operations ................................ 57,797 54,068
--------- ---------------
Total current assets ....................................................... 78,191 67,294
Property and equipment, net ................................................... 7,029 4,387
Other assets, net ............................................................. 5,806 6,505
Investment in equity affiliates ............................................... 7,331 8,000
Net non-current assets of discontinued operations ............................. 18,889 19,859
--------- ---------------
Total assets ............................................................... $ 117,246 $ 106,045
========= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ...................................................... $ 1,133 $ 1,910
Accrued liabilities ......................................................... 2,867 4,615
Current portion of long-term debt ........................................... 0 471
--------- ---------------
Total current liabilities .................................................. 4,000 6,996
Long-term debt, less current portion .......................................... 0 1,654
Other liabilities ............................................................. 635 1,272
Deferred income taxes ......................................................... 1,685 1,931
--------- ---------------
Total liabilities .......................................................... 6,320 11,853
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; no shares
issued or outstanding at June 30 or September 30 ........................... 0 0
Common stock, $0.01 par value, 75,000,000 shares authorized; 37,283,882 shares
issued and outstanding at June 30; 36,642,890 shares issued and outstanding
at September 30 ............................................................ 373 366
Additional paid-in capital .................................................... 63,172 60,028
Retained earnings ............................................................. 47,584 34,192
Deferred compensation ......................................................... (203) (394)
--------- ---------------
Total stockholders' equity ................................................. 110,926 94,192
--------- ---------------
Total liabilities and stockholders' equity ................................. $ 117,246 $ 106,045
========= ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Operating revenues:
Software Group operating revenues ....................... $ 11,296 $ 7,302 $ 34,061 $ 18,757
Operating expenses:
Cost of revenues ........................................ 5,047 4,476 16,347 10,963
Selling, general and administrative expenses ............ 4,156 2,349 11,454 6,311
Research and development ................................ 1,185 548 2,888 1,446
Depreciation and amortization expense ................... 1,080 685 3,023 1,761
Special charges ......................................... 806 0 806 0
-------- -------- -------- --------
Total operating expenses ............................. 12,274 8,058 34,518 20,481
-------- -------- -------- --------
Loss from continuing operations ............................ (978) (756) (457) (1,724)
Other income (expense):
Equity in net loss of investee ........................... (438) 0 (1,208) 0
Interest income .......................................... 20 3 57 11
Interest expense ......................................... 0 (38) (39) (82)
Other, net ............................................... (4) 166 (34) 197
-------- -------- -------- --------
Total other income (expense) ............................ (422) 131 (1,224) 126
-------- -------- -------- --------
Loss from continuing operations before income taxes ........ (1,400) (625) (1,681) (1,598)
Income tax benefit ......................................... 514 181 518 429
-------- -------- -------- --------
Net loss from continuing operations ........................ (886) (444) (1,163) (1,169)
Discontinued operations (Note 6):
Income from discontinued operations, net of income
taxes of $1,945, $4,379, $9,993, $13,671, respectively. 3,173 7,144 16,305 22,305
-------- -------- -------- --------
Net income ................................................. $ 2,287 $ 6,700 $ 15,142 $ 21,136
======== ======== ======== ========
Basic and diluted earnings (loss) per common share (Note 2):
Continuing operations ................................... $ (0.02) $ (0.01) $ (0.03) $ (0.03)
Discontinued operations ................................. $ 0.08 $ 0.20 $ 0.44 $ 0.62
-------- -------- -------- --------
Net income .............................................. $ 0.06 $ 0.19 $ 0.41 $ 0.59
Weighted average common shares outstanding ............... 37,203 36,181 37,043 35,633
======== ======== ======== ========
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,
1999 1998
-------- --------
Cash flows from operating activities:
Net loss from continuing operations ......................... $ (1,163) $ (1,169)
Adjustments to reconcile net loss from continuing operations
to net cash provided by operating activities:
Depreciation and amortization ............................. 3,023 1,761
Deferred compensation ..................................... 191 193
Gain on disposition of equipment .......................... 0 (197)
Equity in net loss of investee ............................ 1,208 0
Changes in operating assets and liabilities:
Increase in accounts receivable .......................... (9,346) (1,366)
Increase (decrease) in prepaids and other ................ 170 (834)
Decrease in trade accounts payable ....................... (1,127) (928)
Increase (decrease) in accrued liabilities ............... (2,766) 7,812
Increase (decrease) in other liabilities ................. (637) 430
Increase in deferred taxes ............................... 0 32
-------- --------
Net cash provided by (used in) continuing operations ......... (10,447) 5,734
Net cash provided by (used in) discontinued operations ....... 13,049 (12,510)
Cash flows from investing activities:
Purchases of property and equipment ......................... (3,836) (2,880)
Investments in net assets of affiliates ..................... (539) 0
Proceeds from sale of equipment ............................. 0 538
Other investing activities .................................. (376) (220)
-------- --------
Net cash used in investing activities ........................ (4,751) (2,562)
Cash flows from financing activities:
Proceeds from issuance of long-term debt .................... 0 962
Payments on long-term debt .................................. (2,125) (174)
Proceeds from issuance of common stock ...................... 2,181 7,355
-------- --------
Net cash provided by financing activities .................... 56 8,143
-------- --------
Net decrease in cash and cash equivalents .................... (2,093) (1,195)
Cash and cash equivalents, beginning of period ............... 2,622 2,314
-------- --------
Cash and cash equivalents, end of period ..................... $ 529 $ 1,119
======== ========
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"), formerly known as Billing
Information Concepts Corp., 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, 1998.
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 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 from continuing operations for the
three and nine-month periods ended June 30, 1999 and 1998, diluted EPS equals
basic EPS as potentially dilutive common stock equivalents are antidilutive in
loss periods. If the Company would have had income from continuing operations
for the three and nine-month periods ended June 30, 1999 and 1998, 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.
6
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACQUISITIONS
Effective October 1, 1998, the Company acquired Expansion Systems
Corporation ("ESC"), a privately held company headquartered in Glendale,
California that develops and markets billing and registration systems to
Internet Service Providers ("ISPs") under its flagship products TOTALBILL and
INSTANTREG. An aggregate of 170,000 shares of the Company's common stock was
issued in connection with this transaction, which has been accounted for as a
pooling of interests combination. The consolidated financial statements for
periods prior to the combination have not been restated to include the accounts
and results of operations of ESC due to the transaction not having a significant
impact on the Company's prior period financial position or results of operations
as none of ESC's assets, liabilities, revenues, expenses or income (loss)
exceeded 2% of the Company's consolidated respective amounts as of or for any of
the three years in the period ended September 30, 1998.
In December 1998, the Company completed the merger of Communications
Software Consultants, Inc. ("CommSoft") in consideration of 2,492,759 shares of
the Company's common stock. CommSoft was a privately held, international
software development and consulting firm specializing in the telecommunications
industry. The business combination has been accounted for as a pooling of
interests. The consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of operations
of CommSoft.
In September 1998, BCC acquired a 22% ownership position in Princeton eCom
Corporation, formerly known as Princeton TeleCom Corporation ("PTC"), which
provides Internet-based bill publishing and automated payment using secure
Internet transactions or integrated voice response accessed by toll-free
numbers. Through June 30, 1999, BCC has acquired additional shares of PTC stock,
increasing the Company's ownership position to approximately 23%. Subsequent to
June 30, 1999, BCC acquired additional shares of PTC stock increasing the
Company's ownership position to approximately 24%. The Company accounts for its
investment in PTC under the equity method.
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. Although no assurances can be given, the Company believes it
has meritorious defenses to this action and intends to defend itself vigorously.
The Company believes it is unlikely that the final outcome of this proceeding
will have a material adverse effect on the Company's financial position or
results of operations; however, due to the inherent uncertainty of litigation,
the range of possible loss, if any, cannot be estimated with a reasonable degree
of precision and there can be no assurance that the resolution of such
proceeding will not have an adverse effect on the Company's results of
operations for the fiscal period in which such resolution occurs.
The Company faces the possibility that a $1.0 million default judgment
will be entered against it as a result of a garnishment action in Wisconsin
state court. The Company was not alleged to have done anything wrong, and its
liability is based solely on a failure by former in-house counsel to timely
answer the garnishment lawsuit. The underlying judgment was against a former
customer of the Company. The class plaintiff's attempt to collect that judgment
through moneys held by the Company on behalf of its former customer gave rise to
the garnishment action against the Company. The Company intends to vigorously
pursue legal arguments that could result in the judgment being vacated. In
addition, the Company intends to oppose the plaintiff's expected efforts to add
attorney's fees to the judgment and to assess interest on the judgment at a 12%
rate since the original default in 1996. The Company posted a third-quarter
charge in the amount of $1.8 million to cover the contingent liability that it
continues to challenge.
7
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 or
proceedings to which the Company is a party 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 occurred.
NOTE 5. 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, including
interest outstanding, of advances to officers during the nine months ended June
30, 1999 was $263,000. The Company had a $68,000 note receivable bearing
interest at 7.0% from a certain officer of the Company at June 30, 1999.
NOTE 6. SPINOFF OF LEC BILLING GROUP
On April 22, 1999, the Company announced that its Board of Directors
approved a plan to separate its businesses into two separate public companies
(the "Distribution"). The Systems and Software division ("Software Group") will
operate under the name Aptis. It is anticipated that BCC will change its name to
Aptis Corp. ("Aptis") prior to the Distribution Date, and the Local Exchange
Carrier ("LEC") Billing division ("Billing Group") will, at the Distribution
Date, operate as a new public company under the name Billing Concepts Corp.
("Billing"). The terms of the various agreements between the proposed two
entities have not been finalized, and the Company continues to evaluate the
effects of taxation and other issues as they relate to this transaction. The
Company anticipates that prior to November 1999, stockholders of the Company
will receive a distribution of one share of the new company for each share of
common stock of the Company owned on a record date to be determined by the Board
of Directors. Any references to the Billing Group relate to the discontinued
operations in the accompanying interim condensed consolidated financial
statements. In addition, the Distribution is subject to the existence of
favorable general economic and financial conditions, and the Board of Directors
of the Company has reserved the right to abandon, defer or modify any and all
aspects of the Distribution at any time prior to the date of the Distribution.
For purposes of governing certain ongoing relationships between the
Software Group and the Billing Group after the Distribution and to provide for
an orderly transition, the Software Group and the Billing Group will enter into
certain agreements. Such agreements include: (i) the Distribution Agreement,
providing for, among other things, the Distribution and the division between the
Software Group and the Billing Group of certain assets and liabilities and
material indemnification provisions, (ii) the Benefit Plans and Employment
Matters Allocation Agreement, providing for certain allocation of
responsibilities with respect to benefit plans, employee compensation, and labor
and employment matters, and (iii) the Tax Sharing Agreement pursuant to which
the Software Group and the Billing Group will agree to allocate tax liabilities
that relate to periods prior to and after the Distribution Date.
8
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. SPINOFF OF LEC BILLING GROUP (CONTINUED)
As a result of the Board's decision, the operating results of the Software
Group are segregated and reported as continuing operations while the Billing
Group operating results are segregated and reported as discontinued operations
in the accompanying Condensed Consolidated Statements of Income in accordance
with Accounting Principles Board Opinion No. 30. Prior period operating results
and financial position have been restated to reflect continuing operations,
including identifying the corporate costs and net assets that are directly
related to the Software Group and the Billing Group. Operating revenues of the
discontinued operations were $31.7 million and $36.2 million for the three
months ended June 30, 1999 and 1998, respectively. For the nine months ended
June 30, 1999 and 1998, operating revenues of the discontinued operations were
$102.5 million and $109.8 million, respectively. At June 30, 1999 and September
30, 1998, the net assets of the Billing Group consisted of:
JUNE 30, SEPTEMBER 30,
1999 1998
--------- -------------
(IN THOUSANDS)
Current assets:
Cash .......................................... $ 118,866 $ 118,350
Other current assets .......................... 67,436 93,942
Current liabilities ........................... (128,505) (158,224)
--------- -------------
Net current assets .......................... 57,797 54,068
Net fixed assets ............................... 17,695 19,499
Other non-current assets ....................... 2,698 2,555
Non-current liabilities ........................ (1,504) (2,195)
--------- -------------
Total net assets ............................... $ 76,686 $ 73,927
========= =============
NOTE 7. SPECIAL CHARGES
The special charges of $806,000 incurred during the quarter ended June 30,
1999, are associated with the previously announced intent to spinoff the Billing
Group. These costs relate to professional expenses incurred from attorneys,
accountants and underwriters. Over the next 18 months, total costs associated
with separating the businesses could reach $3.0 million and the cost of moving
the Software Group to Austin, Texas could be an additional $5.0 million, but no
assurances can be made that these costs will not exceed such estimates.
9
ITEM 2.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS CERTAIN "FORWARD-LOOKING"
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") AND SECTION 21E OF THE SECURITIES AND EXCHANGE
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q,
INCLUDING WITHOUT LIMITATION STATEMENTS THAT USE TERMINOLOGY SUCH AS
"ANTICIPATE," "BELIEVE," "CONTINUE," "ESTIMATE," "EXPECT," "INTEND," "MAY,"
"PLAN," "PREDICT," "SHOULD," "WILL" AND SIMILAR EXPRESSIONS, ARE FORWARD-LOOKING
STATEMENTS, AND SUCH STATEMENTS REFLECT THE CURRENT RISKS, UNCERTAINTIES AND
ASSUMPTIONS RELATED TO CERTAIN FACTORS, SOME OF WHICH ARE DESCRIBED BELOW. THESE
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHER THINGS, DISCUSSIONS REGARDING
THE DISTRIBUTION, WHETHER SUCH DISTRIBUTION WILL ULTIMATELY OCCUR, THE COMPANY'S
BUSINESS STRATEGY AND EXPECTATIONS CONCERNING THE COMPANY'S MARKET POSITION,
FUTURE OPERATIONS, PROFITABILITY AND LIQUIDITY AND CAPITAL RESOURCES. ALL PHASES
OF THE OPERATIONS OF THE COMPANY INVOLVE RISKS AND UNCERTAINTIES, MANY OF WHICH
ARE OUTSIDE THE CONTROL OF THE COMPANY AND ANY ONE OF WHICH, OR A COMBINATIONS
OF WHICH, COULD MATERIALLY AFFECT THE RESULTS OF THE COMPANY'S OPERATIONS AND
WHETHER THE FORWARD-LOOKING STATEMENTS ULTIMATELY PROVE TO BE CORRECT. ACTUAL
RESULTS AND TRENDS IN THE FUTURE MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF
FACTORS INCLUDING, BUT NOT LIMITED TO, COMPETITIVE FACTORS, GENERAL ECONOMIC
CONDITIONS, CUSTOMER RELATIONS, RELATIONSHIPS WITH VENDORS, THE INTEREST RATE
ENVIRONMENT, GOVERNMENTAL REGULATIONS AND SUPERVISION, SEASONALITY, DISTRIBUTION
NETWORKS, PRODUCT INTRODUCTIONS AND ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN
INDUSTRY PRACTICES, ONETIME EVENTS, STATE AND FEDERAL REGULATIONS, ANY CHANGES
THEREIN, AND ANY LEGAL OR REGULATORY DELAYS OR OTHER FACTORS BEYOND THE
COMPANY'S CONTROL; ADVERSE RULINGS, JUDGMENTS OR SETTLEMENTS IN LITIGATION OR
OTHER LEGAL MATTERS; ACTIONS OF CUSTOMERS AND COMPETITORS; THE CONDITIONS OF THE
CAPITAL MARKETS AND EQUITY MARKETS DURING THE PERIOD COVERED BY THE
FORWARD-LOOKING STATEMENTS AND OTHER FACTORS DESCRIBED HEREIN AND IN OTHER
FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. BASED
ON CHANGING CONDITIONS, SHOULD 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. ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE FOREGOING. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY REVISIONS TO ANY
SUCH FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
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"), formerly known as
Billing Information Concepts Corp., and subsidiaries (collectively referred to
as the "Company"), for the quarters and nine months ended June 30, 1999 and
1998. It should be read in conjunction with the 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, 1998. 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.
10
On April 22, 1999, the Company announced that its Board of Directors
approved a plan to separate its businesses into two separate public companies
(the "Distribution"). The Systems and Software division ("Software Group") will
operate under the name Aptis. It is anticipated that BCC will change its name to
Aptis Corp. ("Aptis") prior to the Distribution Date, and the Local Exchange
Carrier ("LEC") Billing division ("Billing Group") will, on the Distribution
Date, operate as a new public company under the name Billing Concepts Corp.
("Billing"). The terms of the various agreements between the proposed two
entities have not been finalized, and the Company continues to evaluate the
effects of taxation and other issues as they relate to this transaction. The
Company anticipates that prior to November 1999, stockholders of the Company
will receive a distribution of one share of the new company for each share of
common stock of the Company owned on a record date to be determined by the Board
of Directors. In addition, the Distribution is subject to the existence of
favorable general economic and financial conditions, and the Board of Directors
of the Company has reserved the right to abandon, defer or modify any and all
aspects of the Distribution at any time prior to the date of the Distribution.
Any references to the Billing Group relate to the discontinued operations in the
accompanying interim condensed consolidated financial statements.
For purposes of governing certain ongoing relationships between the
Software Group and the Billing Group after the Distribution and to provide for
an orderly transition, the Software Group and the Billing Group will enter into
certain agreements. Such agreements include: (i) the Distribution Agreement,
providing for, among other things, the Distribution and the division between the
Software Group and the Billing Group of certain assets and liabilities and
material indemnification provisions, (ii) the Benefit Plans and Employment
Matters Allocation Agreement, providing for certain allocation of
responsibilities with respect to benefit plans, employee compensation, and labor
and employment matters, and (iii) the Tax Sharing Agreement pursuant to which
the Software Group and the Billing Group will agree to allocate tax liabilities
that relate to periods prior to and after the Distribution Date.
As a result of the Board's decision, the operating results of the Software
Group are segregated and reported as continuing operations while the Billing
Group operating results are segregated and reported as discontinued operations
in the accompanying Condensed Consolidated Statements of Income in accordance
with Accounting Principles Board Opinion No. 30. Prior period operating results
and financial position have been restated to reflect continuing operations,
including identifying the corporate costs and net assets that are directly
related to the Software Group and the Billing Group. The operating results of
the Software Group for the three and nine-month periods ended June 30, 1999 and
1998 are discussed below. The Software Group Condensed Consolidated Pro Forma
Balance Sheet and the Software Group Condensed Consolidated Pro Forma Statements
of Income are also included and discussed in a separate section below.
RESULTS OF CONTINUING OPERATIONS - SOFTWARE GROUP
The following table presents certain items in the Company's Condensed
Consolidated Statements of Income as a percentage of total revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1999 1998 1999 1998
------- ----- ------ -----
Software Group operating revenues .......... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ........................... 44.7 61.3 48.0 58.4
------- ----- ------ -----
Gross profit ............................... 55.3 38.7 52.0 41.6
Selling, general and administrative expenses 36.8 32.2 33.6 33.7
Research and development ................... 10.5 7.5 8.4 7.7
Depreciation and amortization expense ...... 9.6 9.4 8.9 9.4
Special charges ............................ 7.1 0.0 2.4 0.0
------- ----- ------ -----
Loss from continuing operations ............ (8.7) (10.4) (1.3) (9.2)
Other income (expense), net ................ (3.7) 1.8 (3.6) 0.7
------- ----- ------ -----
Loss before income taxes ................... (12.4) (8.6) (4.9) (8.5)
Income tax benefit ......................... 4.6 2.5 1.5 2.3
------- ----- ------ -----
Net loss from continuing operations ........ (7.8)% (6.1)% (3.4)% (6.2)%
======= ===== ====== =====
11
OPERATING REVENUES
The Software Group develops, sells and supports convergent billing systems
for telecommunications and Internet service providers and provides direct
billing outsourcing services. In addition to license and maintenance fees
charged by the Software Group for the use of its billing software applications,
fees are also charged on a time and materials basis for software customization
and professional services. Processing fees for direct billing services provided
through the Software Group's service bureau are assessed to customers based on
volume. Software Group revenues also include retail sales of third party
computer hardware and software. Total revenues for the quarter ended June 30,
1999 were $11.3 million, an increase of 54.7% from the comparable prior year
quarter of $7.3 million. During the first nine months of 1999, total revenues
increased 81.6% to $34.1 million from $18.8 million during the comparable period
of 1998. The increase in revenues from the prior year periods was primarily
attributable to the increase in license and maintenance 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 development, technical,
service bureau and professional service personnel who generate revenue from
contracted services. The gross profit margin of 55.3% reported for the quarter
ended June 30, 1999, increased from 38.7% achieved in the third quarter of 1998.
The gross profit margin of 52.0% reported for the first nine months ended June
30, 1999, increased from 41.6% achieved in the respective prior year period. The
increase in software license and maintenance fees as a percentage of total
revenues in 1999 served to improve gross margin due to the higher margins
associated with such sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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 Software Group. Additionally, costs driven
exclusively by corporate-level activities have been included in the operating
results of the Software Group. Consequently, restated historical SG&A expenses
for the Software Group may not be indicative of the amount of SG&A expenses that
the Software Group would have incurred as an independent, stand-alone entity.
SG&A expenses for the third quarter of 1999 and 1998 were $4.2 million and $2.3
million, representing 36.8% and 32.2% of revenues, respectively. SG&A expenses
for the first nine months of 1999 increased to $11.5 million, or 33.6% of
revenues, from $6.3 million, or 33.7% of revenues, in the comparable period of
1998. The increase in SG&A from the prior year quarter as a percentage of total
revenues was primarily attributable to the growth in marketing expenditures.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses are comprised of the salaries
and benefits of the employees involved in software development and related
expenses. R&D expenses in the third quarter of 1999 were $1.2 million compared
to $548,000 in the third quarter of 1998. For the nine months ended June 30,
1999 and 1998, R&D expenses were $2.9 million and $1.4 million, respectively.
The Software Group intends to continue its research and development efforts in
the future and anticipates spending up to a total of $3.5 million during 1999
for such expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses are incurred with respect to
certain assets, including computer hardware and software, office equipment,
furniture, leasehold improvements, goodwill and other intangibles. Asset lives
range between three and fifteen years. Depreciation and amortization expense was
$1.1 million in the third quarter of 1999 compared with $685,000 in the third
quarter of 1998. Depreciation and amortization expense as a percentage of
revenues was 9.6% and 9.4% in the third quarter of 1999 and 1998, respectively.
For the first nine months of 1999, depreciation and amortization expense was
$3.0 million, or 8.9% of revenues, compared to $1.8 million, or 9.4% of
revenues, for the first nine months of 1998.
12
SPECIAL CHARGES
The special charges of $806,000 incurred during the quarter ended June 30,
1999, are associated with the previously announced intent to spinoff the Billing
Group. These costs relate to professional expenses incurred from attorneys,
accountants and underwriters. Over the next 18 months, total costs associated
with separating the businesses could reach $3.0 million and the cost of moving
the Software Group to Austin, Texas could be an additional $5.0 million, but
no assurances can be made that these costs will not exceed such estimates.
LOSS FROM CONTINUING OPERATIONS
Loss from operations in the third quarter of 1999 was $978,000, or 8.7% of
revenue, compared to a loss from operations of $756,000, or 10.4% of revenue, in
the third quarter of 1998. Loss from operations for the first nine months of
1999 and 1998 was $457,000, or 1.3% of revenue, and $1.7 million, or 9.2% of
revenue, respectively. The decrease in loss from operations as a percentage of
revenue from the prior periods is primarily attributable to a higher gross
profit margin.
OTHER INCOME (EXPENSE)
Net other expense of $422,000 and $1.2 million for the quarter and nine
months ended June 30, 1999 compares to net other income of $131,000 and $126,000
for the quarter and first nine months ended June 30, 1998, respectively. The
change from the prior year periods was primarily due to the Software Group's
equity in the loss of its investee, Princeton eCom Corporation, since the
Software Group's initial investment in September 1998.
RESULTS OF DISCONTINUED OPERATIONS - BILLING GROUP
The following table reflects the operations of the Billing Group for the
three and nine-month periods ended June 30, 1999 and 1998, which are reflected
as discontinued operations in the Condensed Consolidated Statements of Income.
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
(IN THOUSANDS)
1999 1998 1999 1998
-------- -------- --------- ---------
Billing Group operating revenues ........... $ 31,673 $ 36,236 $ 102,534 $ 109,809
Cost of revenues ........................... 21,575 23,240 66,211 68,577
-------- -------- --------- ---------
Gross profit ............................... 10,098 12,996 36,323 41,232
Selling, general and administrative expenses 5,647 3,286 12,928 10,023
Research and development ................... 268 338 913 788
Advance funding program income, net ........ (878) (2,004) (3,061) (6,268)
Depreciation and amortization expense ...... 1,232 1,152 3,781 3,403
-------- -------- --------- ---------
Income from discontinued operations ........ 3,829 10,224 21,762 33,286
Other income, net .......................... 1,289 1,299 4,536 2,690
-------- -------- --------- ---------
Income before income taxes ................. 5,118 11,523 26,298 35,976
Income tax expense ......................... (1,945) (4,379) (9,993) (13,671)
-------- -------- --------- ---------
Net income from discontinued operations .... $ 3,173 $ 7,144 $ 16,305 $ 22,305
======== ======== ========= =========
13
OPERATING REVENUES
Billing Group services revenues decreased 12.6% to $31.7 million in the
third quarter of 1999, from $36.2 million in the third quarter of 1998. For the
first nine months of 1999, Billing Group services revenues decreased 6.6% to
$102.5 million, from $109.8 million in the first nine months of 1998. The
decrease in Billing Group services revenue from the prior periods was
attributable to a bad debt write-off of $2.3 million due from a former customer
as well as a decrease in the number of call records processed. The number of
call records processed for billing was impacted by "slamming and cramming"
issues that have occurred in the long distance industry. These "slamming and
cramming" issues have caused some of the larger Local Exchange Carriers ("LEC")
to affect the ability of certain of the Billing Group's customers to market
certain services. Also, as a proactive measure, the Billing Group has taken
action against certain customers that includes, but is not limited to, the
cessation of billing for certain new or existing products. Management believes
that its actions have mitigated the effects of "slamming and cramming" issues on
the call record volumes of its current customer base. Telephone call record
volumes were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1999 1998 1999 1998
------- -------- ------- --------
(IN MILLIONS) (IN MILLIONS)
Direct dial long distance services ..... 148.4 142.9 452.7 467.8
Operator services ...................... 24.0 32.8 71.9 106.7
Enhanced billing services .............. 1.2 2.6 3.6 9.0
Billing management services ............ 59.1 68.6 172.9 252.4
Although billing management records decreased significantly from the prior
quarter, the impact on revenues was minimal because revenue per record for
billing management customers, who have their own billing and collection
agreements with the local telephone companies, is significantly less than
revenue per record for the Billing Group's other customers.
COST OF REVENUES
The gross profit margin of 31.9% and 35.4% reported for the quarter and
nine months ended June 30, 1999, decreased from 35.9% and 37.5% achieved in the
respective prior year periods. The decrease in margin from the prior periods is
primarily attributable to a bad debt write-off of $2.3 million due from a former
customer. Had the Company not incurred this write-off, margins would have been
36.5% and 36.8% for the quarter and nine months ended June 30, 1999. The
decrease in margin from the prior nine-month period was also attributable to the
loss of certain higher margin revenues in enhanced billing services and the
decrease in revenues from billing inquiry calls to the Company's call centers.
The decrease in both of these revenue sources is the result of the Billing
Group's and certain LECs' actions regarding slamming and cramming issues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses are comprised of all selling, marketing and administrative
costs incurred in direct support of the business operations of the Billing
Group. Costs driven exclusively by corporate-level activities have been included
in the operating results of the Software Group. Consequently, restated
historical SG&A expenses for the Billing Group may not be indicative of the
amount of SG&A expenses that the Billing Group would have incurred as an
independent, stand-alone entity. SG&A expenses for the third quarter of 1999 and
1998 were $5.6 million and $3.3 million, representing 17.8% and 9.1% of
revenues, respectively. SG&A expenses for the first nine months of 1999
increased to $12.9 million, or 12.6% of revenues, from $10.0 million, or 9.1% of
revenues, in the comparable period of 1998. The increase in SG&A as a percentage
of revenue was primarily due to a special charge of $1.8 million recorded in the
third quarter of 1999 for a default judgment that the Company continues to
challenge as well as overall decreased revenue.
14
RESEARCH AND DEVELOPMENT
R&D expenses are comprised of the salaries and benefits of the employees
involved in software development and related expenses. R&D expenses were
$268,000 in the third quarter of 1999 and $913,000 for the first nine months of
1999 compared to $338,000 and $788,000 in the third quarter and first nine
months of 1998, respectively. The Billing Group intends to continue its research
and development efforts in the future and anticipates spending up to an
additional $400,000 during the last quarter of 1999 for such expenses.
ADVANCE FUNDING PROGRAM INCOME AND EXPENSE
Advance funding program income decreased 55.3% to $910,000 for the third
quarter of 1999 from $2.0 million for the third quarter of 1998. Advance funding
program income for the first nine months of 1999 decreased 50.4% to $3.2 million
from $6.4 million in the first nine months of 1998. The decrease was primarily
the result of financing a lower level of customer receivables under the Billing
Group's advance funding program. The quarterly average balance of purchased
receivables was $50.7 million and $89.8 million for the nine months ended June
30, 1999 and 1998, respectively.
Advance funding program expense was flat at $93,000 and $94,000 for the
first nine months of 1999 and 1998, respectively. The Billing Group financed all
customer receivables during both periods with internally generated funds rather
than with funds borrowed through the Billing Group's revolving credit facility.
The expense recognized during both 1999 and 1998 represents unused credit
facility fees and is the minimum expense that the Billing Group could have
incurred during these periods.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $1.2 million in the third
quarter of 1999 and 1998. Depreciation and amortization expense as a percentage
of revenues was 3.9% and 3.2% in the third quarter of 1999 and 1998,
respectively. For the first nine months of 1999, depreciation and amortization
expense was $3.8 million, or 3.7% of revenues, compared to $3.4 million, or 3.1%
of revenues, for the first nine months of 1998. The increase in depreciation and
amortization was primarily attributable to decreased revenue.
INCOME FROM DISCONTINUED OPERATIONS
Income from discontinued operations in the third quarter of 1999 was $3.8
million, or 12.1% of revenues, compared to income from discontinued operations
of $10.2 million, or 28.2% of revenues, in the third quarter of 1998. Income
from discontinued operations in the first nine months of 1999 decreased to $21.8
million, or 21.2% of revenues, from $33.3 million, or 30.3% of revenues, in the
first nine months of 1998. The decrease in income from discontinued operations
as a percentage of revenues from the prior year periods is attributable to
higher SG&A and depreciation and amortization expense as a percentage of
revenues, a lower gross profit margin and lower advance funding income.
OTHER INCOME
Net other income in the third quarter of both 1999 and 1998 was $1.3
million. Net other income increased to $4.5 million for the nine months ended
June 30, 1999 from $2.7 million for the nine months ended June 30, 1998. The
increase from the prior year period was primarily due to increased interest
income from short-term investments due to higher cash balances as a result of
the decline in financing levels under the advance funding program. Interest
expense was also lower in the first nine months of 1999 due to the voluntary
paydown of long-term debt.
15
EFFECTS OF SEPARATION OF SOFTWARE GROUP AND BILLING GROUP BUSINESSES
The Condensed Consolidated Statements of Income included in this report
reflect the continuing and discontinued operations of the Company for the three
and nine-month periods ended June 30, 1999 and 1998. Included below is
supplemental pro forma financial information that management believes is
important to provide a more complete understanding of the results of the
Software Group, excluding the Billing Group, on a stand-alone basis. Condensed
Consolidated Pro Forma Statements of Income are presented below for each of the
last three fiscal years, as well as for the nine-month periods ended June 30,
1999 and 1998. These Condensed Consolidated Pro Forma Statements of Income are
based on the historical statements of the periods presented, adjusted to reflect
the items discussed in the accompanying notes to the pro forma financial
statements. The Condensed Consolidated Pro Forma Statements of Income give
effect to the Distribution as if it had occurred on October 1, 1995. A Condensed
Consolidated Pro Forma Balance Sheet at June 30, 1999 is also presented which
gives effect to the Distribution as if it had occurred on June 30, 1999. The pro
forma adjustments reflect the anticipated terms of the Distribution Agreement
and the related spinoff agreements, which are expected to have a continuing
impact on the Software Group. Neither the Condensed Consolidated Pro Forma
Statements of Income nor the Condensed Consolidated Pro Forma Balance Sheet
reflects an estimate of the direct costs to be incurred in connection with the
Distribution.
The unaudited consolidated pro forma financial information is presented
for informational purposes only and should be read in conjunction with the
accompanying notes and with the Company's historical financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" set forth herein and in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998. The pro forma
financial statements are forward-looking and should not be considered indicative
of the operating results or financial positions which the Software Group will
achieve in the future if it were operated on an independent, stand-alone basis
because, among other things, these statements are based on historical rather
than prospective information and include certain assumptions which are subject
to change.
The unaudited Condensed Consolidated Pro Forma Statements of Income and
the Condensed Consolidated Pro Forma Balance Sheet reflect, in management's
opinion, all adjustments necessary to fairly state the pro forma results of
operations for the periods presented and financial position at June 30, 1999 to
make the unaudited pro forma statements not misleading.
16
SOFTWARE GROUP
CONDENSED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
YEAR ENDED SEPTEMBER 30, ENDED JUNE 30,
--------------------------------- ---------------------
1998 1997 1996 1999 1998
-------- -------- ------- -------- --------
Operating revenues ............................ $ 28,481 $ 11,786 $ 5,537 $ 34,061 $ 18,757
Cost of revenues .............................. 15,417 6,963 3,507 16,347 10,963
-------- -------- ------- -------- --------
Gross profit ................................ 13,064 4,823 2,030 17,714 7,794
Selling, general and administrative expenses .. 9,539 2,015 1,154 11,454 6,311
Research and development ...................... 2,109 1,067 335 2,888 1,446
Depreciation and amortization expense ......... 2,514 494 141 3,023 1,761
Special charges ............................... 2,000 13,011 0 806 0
-------- -------- ------- -------- --------
Income (loss) from operations ............... (3,098) (11,764) 400 (457) (1,724)
Equity in net loss of investee ................ 0 0 0 (1,208) 0
Other income (expense), net ................... 116 40 10 (16) 126
-------- -------- ------- -------- --------
Income (loss) before provision for income taxes (2,982) (11,724) 410 (1,681) (1,598)
Provision for income taxes (A) ................ 0 0 (166) 0 0
-------- -------- ------- -------- --------
Net income (loss) ............................. $ (2,982) $(11,724) $ 244 $ (1,681) $ (1,598)
======== ======== ======= ======== ========
17
SOFTWARE GROUP
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
AT JUNE 30, 1999
(IN THOUSANDS)
(UNAUDITED)
PRO FORMA
HISTORICAL ADJUSTMENT PRO FORMA
---------- ---------- ---------
ASSETS
Total current assets ........................... $ 20,394 $ 114,191(B) $ 134,585
Net property and equipment ..................... 7,029 7,029
Other assets, net .............................. 13,137 13,137
---------- ---------- ---------
Total assets ................................. $ 40,560 $ 114,191 $ 154,751
========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities ...................... $ 4,000 $ 4,000
Long-term obligations .......................... 2,320 2,320
Total stockholders' equity ..................... 34,240 $ 114,191 148,431
---------- ---------- ---------
Total liabilities and stockholders' equity .. $ 40,560 $ 114,191 $ 154,751
========== ========== =========
Notes to unaudited condensed consolidated pro forma financial statements:
(A)On its historical Condensed Consolidated Statements of Income, the Company
has reported consolidated income on a pre-tax basis and, consequently, income
tax expense. On a pro forma stand-alone basis, the Software Group has
incurred losses with the exception of the year ended September 30, 1996.
However, no tax benefit is reflected in the pro forma Condensed Consolidated
Statements of Income for those years and periods for which a loss was
reported.
(B)Cash historically has been managed by a centralized cash management
department in the Company. Consequently, cash was not allocated among the
subsidiaries but was recorded on the balance sheet of the Company. The
anticipated terms of the Distribution Agreement call for the Billing Group to
transfer to the Software Group an amount of cash on the Distribution Date
equal to the working capital balance of the consolidated balance sheet prior
to the Distribution in addition to as much as $40 million. The calculation of
the cash amount to be transferred by the Billing Group to the Software Group
will be based on current assets and current liabilities as reported on the
consolidated balance sheet on the month-end immediately preceding the
Distribution and is subject to change at any time prior to the execution of
the Distribution Agreement in light of changes in the financial position and
results of operation of the Billing Group and the Software Group. Had the
Distribution Date been June 30, 1999, the amount of cash that could have been
transferred from the Billing Group to the Software Group would have been
$114.2 million.
18
LIQUIDITY AND CAPITAL RESOURCES - THE COMPANY
The Company's cash balance, including that held by its discontinued
operations, decreased to $119.4 million at June 30, 1999 from $121.0 million at
September 30, 1998. Large fluctuations in daily cash balances are normal due to
the large amount of customer receivables that the Company collects on behalf of
its customers. The Company's working capital position increased to $74.2 million
at June 30, 1999 from $60.3 million at September 30, 1998. Net cash provided by
operating activities of the Software Group and the Billing Group was $13.6
million and $19.5 million in the first nine months of 1999 and 1998,
respectively.
The Company has 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 telephone companies. This credit
facility terminates on December 20, 1999. Borrowings under the credit facility
are limited to a portion of the Company's eligible receivables. Management
believes that the capacity under the credit facility will be sufficient to fund
advances to its billing customers for the foreseeable future. No amounts were
borrowed by the Company under its credit facility to finance the advance funding
program at either June 30, 1999 or September 30, 1998. At June 30, 1999, the
amount available under the Company's receivable financing facility was $50.0
million.
Under certain of its credit agreements, the Company is prohibited from
paying dividends on its common stock, is required to comply with certain
financial covenants and is subject to certain limitations on the issuance of
additional secured debt. The Company was in compliance with all required
covenants at June 30, 1999.
Capital expenditures of the Software Group and the Billing Group amounted
to approximately $6.2 million in the first nine months of 1999 and related
primarily to purchases of computer equipment and software. The Company
anticipates capital expenditures before acquisitions of up to $2 million in the
last quarter of 1999, including expenditures for development, leasehold
improvements and computer equipment and software. 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.
The Company's cash requirements consist principally of working capital
requirements, requirements under its advance funding program, scheduled payments
of principal on its outstanding indebtedness 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 and periodic borrowings under its receivable financing facility,
will be sufficient to fund capital expenditures, advance funding requirements,
working capital needs and debt repayment requirements for the foreseeable
future.
Effective October 1, 1998, the Company acquired Expansion Systems
Corporation ("ESC"), a privately held company headquartered in Glendale,
California that develops and markets billing and registration systems to
Internet Service Providers ("ISPs") under its flagship products TOTALBILL and
INSTANTREG. An aggregate of 170,000 shares of the Company's common stock was
issued in connection with this transaction, which has been accounted for as a
pooling of interests combination. The consolidated financial statements for
periods prior to the combination have not been restated to include the accounts
and results of operations of ESC due to the transaction not having a significant
impact on the Company's prior period financial position or results of operations
as none of ESC's assets, liabilities, revenues, expenses or income (loss)
exceeded 2% of the Company's consolidated respective amounts as of or for any of
the three years in the period ended September 30, 1998.
In December 1998, the Company completed the merger of Communications
Software Consultants, Inc. ("CommSoft") in consideration of 2,492,759 shares of
the Company's common stock. CommSoft was a privately held, international
software development and consulting firm specializing in the telecommunications
industry. The business combination was accounted for as a pooling of interests.
The consolidated financial statements for periods prior to the combination have
been restated to include the accounts and results of operations of CommSoft.
19
YEAR 2000 COMPLIANCE
The operation of the Company's business is highly dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services, third-party
billing clearinghouse services (including the advance funding program), direct
billing services and financial reporting, as well as in various administrative
functions. In providing information management, third-party billing
clearinghouse and direct billing services, the Company processes telephone call
records which are date sensitive. The Company also develops, sells and supports
sophisticated billing systems and software (the "Billing Systems") which must be
able to process date-dependent data correctly. Certain of the Billing Systems
sold by the Company have been warranted to process information related to or
including dates that are prior to, on or after January 1, 2000.
The Company has been evaluating its Programs and Systems to identify
potential Year 2000 readiness problems, as well as manual processes, external
interfaces with customers and services supplied by vendors to coordinate Year
2000 compliance and conversion. The Year 2000 problem refers to the limitations
of the programming code in certain existing software programs to recognize
date-sensitive information for the Year 2000 and beyond. Unless modified prior
to December 31, 1999, such systems may not properly recognize such information
and could generate erroneous data or cause a system to fail to operate properly.
The Company filed a Year 2000 Certification Request with ITAA (Information
Technology Association of America) in January 1999. The Company has installed
its Year 2000 compliant Billing Systems in its Service Bureau operation and made
a general release of such Billing Systems available in the second fiscal quarter
of 1999. The Company believes that all significant modifications and
replacements required to make its systems that perform LEC billing Year 2000
compliant were completed during April 1999.
The Company believes that, with modifications to existing software and
conversions to new software, the Year 2000 problem will not pose a significant
operational 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
be able to provide 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 problem if it or
unrelated parties fail to successfully address this issue.
Management of the Company currently anticipates that the total expenses
and capital expenditures associated with its Year 2000 readiness project,
including costs associated with modifying the Programs and Systems and the cost
of purchasing or leasing certain hardware and software, will be approximately $2
million. As of June 30, 1999, the Company has spent approximately $1.5 million
on capital expenditures for related hardware and software and incurred and
expensed approximately $500,000 in personnel and other costs related to the Year
2000 readiness process. Any additional personnel or other costs related to this
process will be expensed as incurred. The cost of Year 2000 readiness is the
best estimate of Company management and is believed to be reasonably accurate.
In the event the Company's plan to address the Year 2000 problem was not
successfully implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could have
a material adverse effect on the Company's financial condition and results of
operations. Problems encountered by the Company's vendors, customers and other
third parties also may have a material adverse effect on the Company's financial
condition and results of operations.
20
In the event the Company determines, following the Year 2000 date change,
that its Programs and Systems are not Year 2000 ready, the Company will be
unable to process date-sensitive telephone call records and thus be unable to
provide most of its revenue-producing services, which will have a material
adverse effect on the Company's financial condition and results of operations.
The Company also will likely experience considerable delays in compiling
information required for financial reporting and performing various
administrative functions. In addition, in the event the Company's Billing
Systems are not Year 2000 ready, the Company will be required to devote more
monetary and other resources to achieving such readiness, which could have a
material adverse effect on the Company's financial condition and results of
operations.
The Company is currently developing a contingency plan for implementation
in the event its Programs and Systems are not Year 2000 ready prior to December
31, 1999. Such contingency plan will be modeled upon the Company's Disaster
Recovery Plan. The Disaster Recovery Plan outlines a strategy for reduced
continued operations following a natural disaster which damages the Company's
operations center in San Antonio, Texas.
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
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk and other relevant market rate
or price risks. The Company is exposed to some market risk through interest
rates, related to its investment of its current cash, cash equivalents and
marketable securities. These funds are generally invested in highly liquid money
market accounts with short-term maturities. As such instruments mature and the
funds are reinvested, the Company is exposed to changes in market interest
rates. The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments, which would
require disclosure under this item.
21
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. Although no assurances can be given, the Company believes it
has meritorious defenses to this action and intends to defend itself vigorously.
The Company believes it is unlikely that the final outcome of this proceeding
will have a material adverse effect on the Company's financial position or
results of operations; however, due to the inherent uncertainty of litigation,
the range of possible loss, if any, cannot be estimated with a reasonable degree
of precision and there can be no assurance that the resolution of such
proceeding will not have an adverse effect on the Company's results of
operations for the fiscal period in which such resolution occurs.
The Company faces the possibility that a $1.0 million default judgment
will be entered against it as a result of a garnishment action in Wisconsin
state court. The Company was not alleged to have done anything wrong, and its
liability is based solely on a failure by former in-house counsel to timely
answer the garnishment lawsuit. The underlying judgment was against a former
customer of the Company. The class plaintiff's attempt to collect that judgment
through moneys held by the Company on behalf of its former customer gave rise to
the garnishment action against the Company. The Company intends to vigorously
pursue legal arguments that could result in the judgment being vacated. In
addition, the Company intends to oppose the plaintiff's expected efforts to add
attorney's fees to the judgment and to assess interest on the judgment at a 12%
rate since the original default in 1996. The Company posted a third-quarter
charge in the amount of $1.8 million to cover the contingent liability that it
continues to challenge.
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 or
proceedings to which the Company is a party 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 occurred.
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PART II OTHER INFORMATION (CONTINUED)
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 (filed herewith)
(b) Current Reports on Form 8-K:
Form 8-K dated April 22, 1999, and filed April 29, 1999, reporting the
approval by the Board of Directors of the plan to separate the Billing Group and
the Software Group.
ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
BILLING CONCEPTS CORP.
(Registrant)
Date: August 12, 1999 By: /S/ KELLY E. SIMMONS
---------------------------
Kelly E. Simmons
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(Duly authorized and principal
financial officer)
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