FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number 0-27512
CSG SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0783182
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7887 EAST BELLEVIEW, SUITE 1000
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices, including zip code)
(303) 796-2850
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] No [ ]
Shares of common stock outstanding at August 9, 2001: 53,216,397
----------
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
PAGE NO.
--------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000.................................................................. 3
Condensed Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2001 and 2000 ............................................... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2001 and 2000................................................ 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 16
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................ 17
Item 6. Exhibits and Reports on Form 8-K................................................... 17
Signatures......................................................................... 18
Index to Exhibits.................................................................. 19
2
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2001 2000
------------ -----------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents $ 31,436 $ 32,751
Short-term investments.................................................................. 24,096 10,982
--------- --------
Total cash, cash equivalents and short-term investments.............................. 55,532 43,733
Accounts receivable-
Trade-
Billed, net of allowance of $5,217 and $5,001...................................... 101,181 128,902
Unbilled........................................................................... 20,597 4,306
Other................................................................................ 2,994 1,259
Deferred income taxes................................................................... 4,078 3,247
Other current assets.................................................................... 7,802 7,507
--------- --------
Total current assets................................................................. 192,184 188,954
Property and equipment, net of depreciation of $49,032 and $42,457......................... 39,145 36,630
Software, net of amortization of $36,627 and $39,112....................................... 3,354 4,284
Goodwill, net of amortization of $3,637 and $4,883......................................... 1,532 1,894
Client contracts and related intangibles, net of amortization of $28,718 and $28,855....... 66,190 52,368
Deferred income taxes...................................................................... 43,368 47,331
Other assets............................................................................... 521 628
--------- --------
Total assets......................................................................... $ 346,294 $332,089
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt.................................................... $ 32,500 $ 25,436
Client deposits......................................................................... 13,095 12,391
Trade accounts payable.................................................................. 12,264 14,850
Accrued employee compensation........................................................... 19,210 19,147
Deferred revenue....................................................................... 28,568 8,172
Accrued income taxes.................................................................... 1,772 15,633
Other current liabilities............................................................... 14,930 12,008
--------- --------
Total current liabilities............................................................ 122,339 107,637
--------- --------
Non-current liabilities:
Long-term debt, net of current maturities............................................... 13,000 32,820
Deferred revenue........................................................................ 307 463
--------- --------
Total non-current liabilities........................................................ 13,307 33,283
--------- --------
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized;
zero shares issued and outstanding.................................................... - -
Common stock, par value $.01 per share; 100,000,000 shares authorized;
53,172,490 shares and 52,530,203 shares outstanding................................... 573 543
Common stock warrants; zero and 2,000,000 warrants outstanding.......................... - 17,430
Additional paid-in capital.............................................................. 247,019 180,750
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on short-term investments, net of tax.......................... 7 (350)
Cumulative translation adjustments.................................................... (799) (654)
Treasury stock, at cost, 4,110,986 shares and 1,830,986 shares.......................... (156,692) (71,497)
Accumulated earnings.................................................................... 120,540 64,947
--------- --------
Total stockholders' equity........................................................... 210,648 191,169
--------- --------
Total liabilities and stockholders' equity........................................... $ 346,294 $332,089
========= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
------------ ----------- ----------- -----------
Revenues:
Processing and related services.......................... $ 83,469 $ 72,921 $ 162,567 $ 143,548
Software and professional services....................... 36,617 23,141 71,618 44,577
------------ ----------- ----------- -----------
Total revenues........................................ 120,086 96,062 234,185 188,125
------------ ----------- ----------- -----------
Cost of Revenues:
Cost of processing and related services.................. 29,862 26,315 58,377 52,085
Cost of software and professional services............... 14,093 9,903 27,372 20,419
------------ ----------- ----------- -----------
Total cost of revenues................................ 43,955 36,218 85,749 72,504
------------ ----------- ----------- -----------
Gross margin (exclusive of depreciation)..................... 76,131 59,844 148,436 115,621
------------ ----------- ----------- -----------
Operating expenses:
Research and development................................. 13,566 10,366 25,177 20,254
Selling, general and administrative...................... 13,111 11,084 26,651 21,172
Depreciation............................................. 3,518 2,962 6,868 5,774
------------ ----------- ----------- -----------
Total operating expenses.............................. 30,195 24,412 58,696 47,200
------------ ----------- ----------- -----------
Operating income............................................. 45,936 35,432 89,740 68,421
------------ ----------- ----------- -----------
Other income (expense):
Interest expense........................................ (813) (1,482) (1,895) (3,023)
Interest and investment income, net..................... 887 1,355 1,834 2,618
Other................................................... (4) (24) (23) (17)
------------ ----------- ----------- -----------
Total other........................................... 70 (151) (84) (422)
------------ ----------- ----------- -----------
Income before income taxes................................... 46,006 35,281 89,656 67,999
Income tax provision..................................... (17,479) (13,295) (34,063) (25,704)
------------ ----------- ----------- -----------
Net income................................................... $ 28,527 $ 21,986 $ 55,593 $ 42,295
============ ========== ========== ===========
Basic net income per common share:
Net income available to common stockholders.............. $ 0.54 $ 0.42 $ 1.06 $ 0.81
============ ========== ========== ===========
Weighted average common shares........................... 52,867 52,158 52,668 52,007
============ ========== ========== ===========
Diluted net income per common share:
Net income available to common stockholders.............. $ 0.52 $ 0.39 $ 1.01 $ 0.74
============ ========== ========== ===========
Weighted average common shares........................... 54,915 56,910 55,025 56,870
============ ========== ========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
2001 2000
------------ -----------
Cash flows from operating activities:
Net income................................................................................... $ 55,593 $ 42,295
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation............................................................................... 6,868 5,774
Amortization............................................................................... 3,931 3,663
Loss on short-term investment.............................................................. 655 -
Deferred income taxes...................................................................... 2,916 2,671
Stock-based employee compensation.......................................................... - 45
Changes in operating assets and liabilities:
Trade accounts and other receivables, net................................................ 9,695 (13,432)
Other current and noncurrent assets...................................................... (470) (1,643)
Accounts payable and accrued liabilities................................................. 4,313 (1,477)
------------ -----------
Net cash provided by operating activities............................................. 83,501 37,896
------------ -----------
Cash flows from investing activities:
Purchases of property and equipment.......................................................... (9,370) (11,513)
Purchases of short-term investments.......................................................... (33,690) -
Proceeds from sale of short-term investments................................................. 20,494 -
Acquisitions of and investments in client contracts.......................................... (1,274) -
------------ -----------
Net cash used in investing activities................................................. (23,840) (11,513)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock....................................................... 13,039 9,100
Proceeds from exercise of stock warrants..................................................... 24,000 -
Repurchase of common stock................................................................... (85,195) (2,987)
Payments on notes receivable from employee stockholders...................................... - 44
Payments on long-term debt................................................................... (12,756) (11,000)
------------ -----------
Net cash used in financing activities................................................. (60,912) (4,843)
------------ -----------
Effect of exchange rate fluctuations on cash................................................... (64) (462)
------------ -----------
Net increase (decrease) in cash and cash equivalents........................................... (1,315) 21,078
Cash and cash equivalents, beginning of period................................................. 32,751 48,676
------------ -----------
Cash and cash equivalents, end of period....................................................... $ 31,436 $ 69,754
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest.................................................................................. $ 1,305 $ 3,140
Income taxes.............................................................................. $ 33,125 $ 14,865
Noncash operating and investing activities:
During the six months ended June 30, 2001, the Company acquired certain client contract rights valued at approximately
$15.0 million in exchange for the performance of certain future services.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. GENERAL
The accompanying condensed consolidated financial statements at June 30, 2001,
and for the three and six months then ended, are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with management's
discussion and analysis of financial condition and results of operations,
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, filed with the Securities and Exchange Commission (the
Company's 2000 10-K). The results of operations for the three and six months
ended June 30, 2001, are not necessarily indicative of the results to be
expected for the entire year ending December 31, 2001.
2. STOCKHOLDERS' EQUITY
Common Stock Warrants. On February 28, 2001, AT&T exercised its rights under
the Warrants to purchase 2.0 million shares of the Company's Common Stock at an
exercise price of $12 per share, for a total exercise price of $24.0 million.
Immediately following the exercise of the Warrants, the Company repurchased the
2.0 million shares for $37.00 per share (approximately the closing price on
February 28, 2001) for a total repurchase price of $74.0 million, pursuant to
the Company's stock repurchase program. As a result, the net cash outlay paid
to AT&T for this transaction was $50.0 million, which was paid by the Company
with available corporate funds. After this transaction, AT&T no longer has any
warrants or other rights to purchase the Company's Common Stock.
Stock Repurchase Program. In August 1999, the Company's Board of Directors
approved a stock repurchase program which authorized the Company at its
discretion to purchase up to a total of 5.0 million shares of its Common Stock
from time-to-time as market and business conditions warrant. This program
represents approximately 10% of the Company's outstanding shares. During the
three months ended June 30, 2001, the Company did not repurchase any shares
under the program. During the three months ended March 31, 2001, the Company
repurchased 2.28 million shares under the program for approximately $85.2
million (a weighted-average price of $37.37 per share), including the 2.0
million shares repurchased as part of the AT&T warrant exercise discussed above.
As of June 30, 2001, the Company has purchased a total of 4.03 million shares
for approximately $156.5 million (a weighted-average price of $38.88 per share)
since the program was announced in 1999. The repurchased shares are held as
treasury shares.
Income Tax Benefit from Exercise of Stock Options. Income tax benefits
associated with nonqualified stock options and disqualifying dispositions of
incentive stock options reduced accrued income taxes by $10.9 million and $1.2
million for the three months ended June 30, 2001 and 2000, and $11.8 million and
$6.2 million for the six months ended June 30, 2001 and 2000, respectively.
Such benefits were recorded as an increase to additional paid-in capital and are
included in net cash provided by operating activities in the Company's Condensed
Consolidated Statements of Cash Flows.
3. NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted net income per common share is consistent with the
calculation of basic net income per common share while giving effect to dilutive
potential common shares outstanding during the period. Basic and diluted
earnings per share (EPS) are presented on the face of the Company's Condensed
Consolidated Statements of Income. No
6
reconciliation of the EPS numerators is necessary as net income is used as the
numerator for each period presented. The reconciliation of the EPS denominators
is as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------
2001 2000 2001 2000
-------------------------------------------------------
Basic common shares outstanding................... 52,867 52,158 52,668 52,007
Dilutive effect of common stock options........... 2,048 2,471 1,886 2,582
Dilutive effect of common stock warrants.......... - 2,281 471 2,281
------ ------ ------ ------
Diluted common shares outstanding................. 54,915 56,910 55,025 56,870
====== ====== ====== ======
Common Stock options of 123,400 shares and 92,000 shares for the three months
ended June 30, 2001 and 2000, and 407,400 and 92,000 shares for the six months
ended June 30, 2001 and 2000, respectively, have been excluded from the
computation of diluted EPS because the exercise prices of these options were
greater than the average market price of the common shares for the respective
periods.
4. COMPREHENSIVE INCOME
The Company's components of comprehensive income were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------
2001 2000 2001 2000
----------------------------------------
Net income............................................... $28,527 $21,986 $55,593 $42,295
Other comprehensive income (loss), net of tax, if any:
Foreign currency translation adjustments................. 14 (300) (145) (403)
Reclassification adjustment for loss included in net
income................................................... --- --- 335 ---
Unrealized gain (loss) on short-term investments......... (5) --- 22 ---
------- ------- ------- -------
Comprehensive income..................................... $28,536 $21,686 $55,805 $41,892
======= ======= ======= =======
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141).
SFAS 141 addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16, "Business Combinations". SFAS 141 introduces
a single-method approach to accounting for business combinations, requiring the
use of the purchase method and eliminating the use of the pooling-of-interests
approach. In addition, SFAS 141 changes the criteria for the separate
recognition of intangible assets in a business combination. SFAS 141 is
effective for all business combinations initiated after June 30, 2001, and for
all business combinations accounted for using the purchase method for which the
date of acquisition is July 1, 2001 or later.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supercedes APB Opinion No. 17, "Intangible Assets". SFAS 142
addresses how intangible assets that are acquired individually or with a group
of other assets (but not those acquired in a business combination) should be
accounted for in the financial statements upon their acquisition. SFAS 142
also addresses how goodwill and other intangibles should be accounted for after
7
they have been initially recognized in the financial statements. SFAS 142 is
required to be applied by the Company beginning January 1, 2002 to all goodwill
and other intangible assets recognized in the financial statements at that date.
Goodwill and intangible assets acquired after June 30, 2001, are subject
immediately to the nonamortization and amortization provisions of SFAS 142.
The Company expects to adopt SFAS 141 and 142 on January 1, 2002. The adoption
of SFAS 141 and 142 is not expected to have a significant effect on the
Company's consolidated financial statements.
8
CSG SYSTEMS INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth certain financial data and the percentage of
total revenues of the Company for the periods indicated (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------------- ---------------------------------------
2001 2000 2001 2000
----------------- ----------------- ----------------- ------------------
% OF % OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
------ ------- ------ ------- ------ ------- ------ -------
Revenues:
Processing and related services $ 83,469 69.5% $ 72,921 75.9% $162,567 69.4% $143,548 76.3%
Software and professional services 36,617 30.5 23,141 24.1 71,618 30.6 44,577 23.7
-------- ----- -------- ----- -------- ----- -------- -----
Total revenues 120,086 100.0 96,062 100.0 234,185 100.0 188,125 100.0
-------- ----- -------- ----- -------- ----- -------- -----
Cost of Revenues:
Cost of processing and related services 29,862 24.9 26,315 27.4 58,377 24.9 52,085 27.7
Cost of software and professional services 14,093 11.7 9,903 10.3 27,372 11.7 20,419 10.8
-------- ----- -------- ----- -------- ----- -------- -----
Total cost of revenues 43,955 36.6 36,218 37.7 85,749 36.6 72,504 38.5
-------- ----- -------- ----- -------- ----- -------- -----
Gross margin (exclusive of depreciation 76,131 63.4 59,844 62.3 148,436 63.4 115,621 61.5
-------- ----- -------- ----- -------- ----- -------- -----
Operating expenses:
Research and development 13,566 11.3 10,366 10.8 25,177 10.8 20,254 10.8
Selling, general and administrative 13,111 10.9 11,084 11.5 26,651 11.4 21,172 11.2
Depreciation 3,518 2.9 2,962 3.1 6,868 2.9 5,774 3.1
-------- ----- -------- ----- -------- ----- -------- -----
Total operating expenses 30,195 25.1 24,412 25.4 58,696 25.1 47,200 25.1
-------- ----- -------- ----- -------- ----- -------- -----
Operating income 45,936 38.3 35,432 36.9 89,740 38.3 68,421 36.4
-------- ----- -------- ----- -------- ----- -------- -----
Other income (expense):
Interest expense (813) (0.7) (1,482) (1.6) (1,895) (0.8) (3,023) (1.6)
Interest and investment income, net 887 0.7 1,355 1.4 1,834 0.8 2,618 1.4
Other (4) - (24) - (23) - (17) -
-------- ----- -------- ----- -------- ----- -------- -----
Total other 70 - (151) (0.2) (84) - (422) (0.2)
-------- ----- -------- ----- -------- ----- -------- -----
Income before income taxes 46,006 38.3 35,281 36.7 89,656 38.3 67,999 36.2
Income tax provision (17,479) (14.5) (13,295) (13.8) (34,063) (14.6) (25,704) (13.7)
-------- ----- -------- ----- -------- ----- -------- -----
Net income $ 28,527 23.8% $ 21,986 22.9% $ 55,593 23.7% $ 42,295 22.5%
======== ===== ======== ===== ======== ===== ======== =====
9
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Revenues. Total revenues for the three months ended June 30, 2001, increased
25.0% to $120.1 million, from $96.1 million for the three months ended June 30,
2000.
Revenues from processing and related services for the three months ended June
30, 2001, increased 14.5% to $83.5 million, from $72.9 million for the three
months ended June 30, 2000. Of the total increase in these revenues,
approximately 83% resulted from an increase in the number of customers of the
Company's clients which were serviced by the Company and approximately 17% was
due to increased revenue per customer. Customers served were as follows (in
thousands):
As of June 30,
-------------------------------------------
2001 2000 Increase
-------------------------------------------
Video................... 35,830 32,864 2,966
Internet................ 2,640 1,453 1,187
Telephony............... 738 217 521
------ ------ -----
Total................... 39,208 34,534 4,674
====== ====== =====
The increase in the number of customers serviced was due to the conversion of
additional customers by new and existing clients to the Company's systems, and
internal customer growth experienced by existing clients. From July 1, 2000
through June 30, 2001, the Company converted and processed approximately 3.0
million new customers on its systems, including approximately 1.6 million for
the second quarter of 2001. As of June 30, 2001, the Company had a total
conversion backlog of approximately 3.2 million customers, which are expected to
be converted to the Company's processing system during the remainder of 2001.
Total annualized processing revenue per video and Internet account was as
follows:
For the three months ended June 30,
--------------------------------------
Increase
2001 2000 (Decrease)
--------------------------------------
Video account................ $8.70 $8.44 3.1%
Internet account............. $4.96 $5.31 (6.6%)
The change in processing revenues per account relates primarily to (i) changes
in the usage of ancillary services by clients, (ii) the introduction of new
products and services and the clients use of these products and services, and
(iii) price changes included in client contracts (e.g., price escalators for
inflationary factors, tiered pricing, etc.).
Revenues from software and professional services for the three months ended June
30, 2001, increased 58.2% to $36.6 million, from $23.2 million for the three
months ended June 30, 2000. The Company sells its software products and
professional services principally to its existing client base to (i) enhance the
core functionality of its service bureau processing application, (ii) increase
the efficiency and productivity of its clients' operations, and (iii) allow
clients to effectively rollout new products and services to new and existing
markets. The increase in revenue between periods relates to the continued
demand for the Company's existing software products and services to meet the
changing needs of the Company's client base.
Cost of Processing and Related Services. Processing costs as a percentage of
related processing revenues were 35.8% for the three months ended June 30, 2001,
compared to 36.1% for the three months ended June 30, 2000. The costs as a
percentage of related revenues remained relatively unchanged between periods as
the Company continues to (i) focus on cost controls and cost reductions within
its core processing business, and (ii) experience better overall leveraging of
its processing costs as a result of the continued growth of the customer base
processed on the Company's systems.
10
Cost of Software and Professional Services. The cost of software and
professional services as a percentage of related revenues was 38.5% for the
three months ended June 30, 2001, compared to 42.8% for the three months ended
June 30, 2000. The improvement between periods relates primarily to better
overall leveraging of costs as a result of higher software and professional
services revenues for the quarter.
Gross Margin. Overall gross margin for the three months ended June 30, 2001,
increased 27.2% to $76.1 million, from $59.8 million for the three months ended
June 30, 2000, due primarily to revenue growth. The overall gross margin
percentage increased to 63.4% for the three months ended June 30, 2001, compared
to 62.3% for the three months ended June 30, 2000. The overall increase in the
gross margin percentage is due primarily to the increase in gross margin for
software and professional services due to the factors discussed above.
Research and Development Expense. Research and development (R&D) expense for
the three months ended June 30, 2001, increased 30.9% to $13.6 million, from
$10.4 million for the three months ended June 30, 2000. As a percentage of
total revenues, R&D expense increased to 11.3% for the three months ended June
30, 2001, from 10.8% for the three months ended June 30, 2000. The Company did
not capitalize any software development costs during the three months ended June
30, 2001 and 2000.
The overall increase in the R&D expenditures between periods is due primarily to
increased efforts on several products which are in development and enhancements
of the Company's existing products. The Company's development efforts for the
second quarter of 2001 were focused primarily on the development of products to:
. address the international customer care and billing system market,
. increase the efficiencies and productivity of its clients' operations,
. address the systems needed to support the convergence of the
communications markets,
. support a web-enabled, customer self-care and electronic bill
presentment/payment application, and
. allow clients to effectively rollout new products and services to new and
existing markets, such as residential telephony, High-Speed Data/ISP and
IP markets.
The Company expects its development efforts to focus on similar tasks through
the remainder of 2001.
Selling, General and Administrative Expense. Selling, general and
administrative (SG&A) expense for the three months ended June 30, 2001,
increased 18.3% to $13.1 million, from $11.1 million for the three months ended
June 30, 2000. The increase in SG&A expense relates primarily to sales and
administrative costs to support the Company's overall growth and its
international business expansion. As a percentage of total revenues, SG&A
expense decreased to 10.9% for the three months ended June 30, 2001, from 11.5%
for the three months ended June 30, 2000. The decrease in SG&A expenses as a
percentage of total revenues is due primarily to revenues increasing at a faster
pace than the SG&A expenses.
Depreciation Expense. Depreciation expense for the three months ended June 30,
2001, increased 18.8% to $3.5 million, from $3.0 million for the three months
ended June 30, 2000. The increase in expense relates to capital expenditures
made during the last six months of 2000 and the first six months of 2001 in
support of the overall growth of the Company, consisting principally of (i)
computer hardware and related equipment, (ii) statement processing equipment,
and (iii) facilities and internal infrastructure expansion. Depreciation
expense for all property and equipment is reflected separately in the aggregate
and is not included in the other components of operating expenses.
Operating Income. Operating income for the three months ended June 30, 2001,
was $45.9 million or 38.3% of total revenues, compared to $35.4 million or 36.9%
of total revenues for the three months ended June 30, 2000. The increase
between periods relates to the factors discussed above.
Interest Expense. Interest expense for the three months ended June 30, 2001,
decreased 45.1% to $0.8 million,
11
from $1.5 million for the three months ended June 30, 2000, with the decrease
due primarily to scheduled principal payments on the Company's long-term debt
and a decrease in interest rates. The balance of the Company's long-term debt as
of June 30, 2001, was $45.5 million, compared to $70.0 million as of June 30,
2000, a decrease of $24.5 million.
Income Tax Provision. For the three months ended June 30, 2001, the Company
recorded an income tax provision of $17.5 million, or an effective income tax
rate of approximately 38%, which represents the Company's estimate of the
effective book income tax rate for 2001. The Company's effective income tax
rate for 2000 was also approximately 38%. As of June 30, 2001, management
continues to believe that sufficient taxable income will be generated to realize
the entire benefit of the Company's deferred tax assets. The Company's
assumptions of future profitable operations are supported by its strong
operating performances over the last several years.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Revenues. Total revenues for the six months ended June 30, 2001, increased
24.5% to $234.2 million, from $188.1 million for the six months ended June 30,
2000.
Revenues from processing and related services for the six months ended June 30,
2001, increased 13.2% to $162.6 million, from $143.5 million for the six months
ended June 30, 2000. Of the total increase in these revenues, approximately 85%
resulted from an increase in the number of customers of the Company's clients
which were serviced by the Company and approximately 15% was due to increased
revenue per customer. From July 1, 2000 through June 30, 2001, the Company
converted and processed approximately 3.0 million new customers on its systems,
including approximately 2.0 million for the six months ended June 30, 2001.
Total annualized processing revenue per video and Internet account was as
follows:
For the six months ended June 30,
------------------------------------
Increase
2001 2000 (Decrease)
------------------------------------
Video account...................... $8.57 $8.38 2.3%
Internet account................... $4.95 $5.38 (8.0%)
The change in processing revenues per account relates primarily to (i) changes
in the usage of ancillary services by clients, (ii) the introduction of new
products and services and the clients use of these products and services, and
(iii) price changes included in client contracts (e.g., price escalators for
inflationary factors, tiered pricing, etc.).
Revenues from software and professional services for the six months ended June
30, 2001, increased 60.7% to $71.6 million, from $44.6 million for the six
months ended June 30, 2000. The Company sells its software products and
professional services principally to its existing client base to (i) enhance the
core functionality of its service bureau processing application, (ii) increase
the efficiency and productivity of its clients' operations, and (iii) allow
clients to effectively rollout new products and services to new and existing
markets. The increase in revenue between periods relates to the continued
demand for the Company's existing software products and services to meet the
changing needs of the Company's client base.
Cost of Processing and Related Services. Processing costs as a percentage of
related processing revenues were 35.9% for the six months ended June 30, 2001,
compared to 36.3% for the six months ended June 30, 2000. The costs as a
percentage of related revenues remained relatively unchanged between periods as
the Company continues to (i) focus on cost controls and cost reductions within
its core processing business, and (ii) experience better overall leveraging of
its processing costs as a result of the continued growth of the customer base
processed on the Company's systems.
12
Cost of Software and Professional Services. The cost of software and
professional services as a percentage of related revenues was 38.2% for the six
months ended June 30, 2001, compared to 45.8% for the six months ended June 30,
2000. The improvement between periods relates primarily to better overall
leveraging of costs as a result of higher software and professional services
revenues for the period.
Gross Margin. Overall gross margin for the six months ended June 30, 2001,
increased 28.4% to $148.4 million, from $115.6 million for the six months ended
June 30, 2000, due primarily to revenue growth. The overall gross margin
percentage increased to 63.4% for the six months ended June 30, 2001, compared
to 61.5% for the six months ended June 30, 2000. The overall increase in the
gross margin percentage is due primarily to the increase in gross margin for
software and professional services due to the factors discussed above.
Research and Development Expense. R&D expense for the six months ended June 30,
2001, increased 24.3% to $25.2 million, from $20.3 million for the six months
ended June 30, 2000. As a percentage of total revenues, R&D expense remained
unchanged at 10.8% for the six months ended June 30, 2001 and 2000. The Company
did not capitalize any software development costs during the six months ended
June 30, 2001 and 2000.
The overall increase in the R&D expenditures between periods is due primarily to
increased efforts on several products which are in development and enhancements
of the Company's existing products. The Company's development efforts for the
six months ended June 30, 2001 were focused primarily on the development of
products to:
. address the international customer care and billing system market,
. increase the efficiencies and productivity of its clients' operations,
. address the systems needed to support the convergence of the
communications markets,
. support a web-enabled, customer self-care and electronic bill
presentment/payment application, and
. allow clients to effectively rollout new products and services to new and
existing markets, such as residential telephony, High-Speed Data/ISP and
IP markets.
Selling, General and Administrative Expense. SG&A expense for the six months
ended June 30, 2001, increased 25.9% to $26.7 million, from $21.2 million for
the six months ended June 30, 2000. The increase in SG&A expense relates
primarily to sales and administrative costs to support the Company's overall
growth and its international business expansion. As a percentage of total
revenues, SG&A expense increased to 11.4% for the six months ended June 30,
2001, from 11.2% for the six months ended June 30, 2000.
Depreciation Expense. Depreciation expense for the six months ended June 30,
2001, increased 18.9% to $6.9 million, from $5.8 million for the six months
ended June 30, 2000. The increase in expense relates to capital expenditures
made during 2000 and the first six months of 2001 in support of the overall
growth of the Company, consisting principally of (i) computer hardware and
related equipment, (ii) statement processing equipment, and (iii) facilities and
internal infrastructure expansion. Depreciation expense for all property and
equipment is reflected separately in the aggregate and is not included in the
other components of operating expenses.
Operating Income. Operating income for the six months ended June 30, 2001, was
$89.7 million or 38.3% of total revenues, compared to $68.4 million or 36.4% of
total revenues for the six months ended June 30, 2000. The increase between
periods relates to the factors discussed above.
Interest Expense. Interest expense for the six months ended June 30, 2001,
decreased 37.3% to $1.9 million, from $3.0 million for the six months ended June
30, 2000, with the decrease due primarily to scheduled principal payments on the
Company's long-term debt and a decrease in interest rates.
Interest and Investment Income, Net. Interest and investment income, net for
the six months ended June 30,
13
2001, decreased 29.9% to $1.8 million, from $2.6 million for the six months
ended June 30, 2000, with the decrease due primarily to the Company recording a
charge of $0.6 million for an "other-than-temporary" decline in market value for
a short-term investment.
Income Tax Provision. For the six months ended June 30, 2001, the Company
recorded an income tax provision of $34.1 million, or an effective income tax
rate of approximately 38%, which represents the Company's estimate of the
effective book income tax rate for 2001. The Company's effective income tax
rate for 2000 was also approximately 38%.
Financial Condition, Liquidity and Capital Resources
As of June 30, 2001, the Company's principal sources of liquidity included cash,
cash equivalents and short-term investments of $55.5 million. The Company also
has a revolving credit facility in the amount of $40.0 million, of which there
were no borrowings outstanding as of June 30, 2001. The Company's ability to
borrow under the revolving credit facility is subject to maintenance of certain
levels of eligible receivables. At June 30, 2001, all of the $40.0 million
revolving credit facility was available to the Company. The revolving credit
facility expires in September 2002.
As of June 30, 2001 and December 31, 2000, respectively, the Company had $101.2
million and $128.9 million in net billed trade accounts receivable. The
decrease between periods relates primarily to the collection (in January 2001)
of a large receivable from a software transaction that was outstanding at
yearend. The payment terms on this transaction were scheduled three weeks
across yearend to assist a client in its capital planning.
The Company's billed trade accounts receivable balance includes billings for
several non-revenue items, such as postage, communication lines, travel and
entertainment reimbursements, sales tax, and deferred items. As a result, the
Company evaluates its performance in collecting its accounts receivable through
its calculation of days billings outstanding (DBO) rather than a typical days
sales outstanding (DSO) calculation. DBO is calculated based on the billings
for the period (including non-revenue items) divided by the average net billed
trade accounts receivable balance for the period. The Company's DBO
calculations for the quarters ended June 30, 2001 and 2000 were 52 days and 53
days, respectively. The Company's target range for DBOs is 55 to 60 days.
As of June 30, 2001 and December 31, 2000, respectively, the Company had $20.6
million and $4.3 million of unbilled trade receivables. The increase in the
unbilled trade receivables between periods relate primarily to the timing of
billings on items for which revenue was recognized in the three months ended
June 30, 2001. Approximately 80 percent of the June 30, 2001 unbilled trade
receivables balance is due to be billed and paid by mid-October 2001.
The Company's net cash flows from operating activities for the six months ended
June 30, 2001 and 2000 were $83.5 million and $37.9 million, respectively. The
increase of $45.6 million between periods relates to (i) an increase in net cash
flows from operations of $15.5 million and (ii) an increase in the net changes
in operating assets and liabilities of $30.1 million. The increase in the net
changes in operating assets and liabilities relates primarily to the large
decrease in December 31, 2000 billed accounts receivable, for the reasons stated
above. The Company's cash flows from operating activities would have been
approximately $46.6 million for the six months ended June 30, 2001 if the
receivable for the large software transaction mentioned above would have been
collected in the fourth quarter of 2000 rather than in the first quarter of
2001.
The Company's net cash flows used in investing activities totaled $23.8 million
for the six months ended June 30, 2001, compared to $11.5 million for the six
months ended June 30, 2000, an increase of $12.3 million. The increase between
periods relates primarily to net purchases of short-term investments of $13.2
million during the six months ended June 30, 2001, with no comparable activity
during the six months ended June 30, 2000. During the third quarter of 2000,
the Company began investing its excess cash balances in various low-risk, short-
term investments.
14
The Company's net cash flows used in financing activities was $60.9 million for
the six months ended June 30, 2001, compared to $4.8 million for the six months
ended June 30, 2000, an increase of $56.1 million. The increase between periods
relates to (i) an increase in stock repurchases of $82.2 million, as discussed
below, and (ii) an increase in debt payments of $1.8 million. This increase is
offset by an increase in proceeds between periods of $27.9 million from the
exercise of stock options and warrants.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the
six months ended June 30, 2001 was $99.6 million, or 42.5% of total revenues,
compared to $77.5 million, or 41.2% of total revenues for the six months ended
June 30, 2000. EBITDA is presented here as a measure of the Company's debt
service ability and is not intended to represent cash flows for the periods in
accordance with generally accepted accounting principles.
Interest rates for the Company's long-term debt and revolving credit facility
are chosen at the option of the Company and are based on the LIBOR rate or the
prime rate, plus an additional spread, with the spread dependent upon the
Company's leverage ratio. As of June 30, 2001, the spread on the LIBOR rate and
the prime rate was 0.50% and 0%, respectively. As of June 30, 2001, the entire
amount of the debt was under either three-month or six-month LIBOR contracts
with an overall weighted average interest rate of 4.77% (i.e., LIBOR at 4.27%
plus spread of 0.50%). This compares to an overall weighted average interest
rate of 7.14% at December 31, 2000.
On February 28, 2001, AT&T exercised its rights under the Warrants to purchase
2.0 million shares of the Company's Common Stock at an exercise price of $12 per
share, for a total exercise price of $24.0 million. Immediately following the
exercise of the Warrants, the Company repurchased the 2.0 million shares for
$37.00 per share (approximately the closing price on February 28, 2001) for a
total repurchase price of $74.0 million, pursuant to the Company's stock
repurchase program. As a result, the net cash outlay paid to AT&T for this
transaction was $50.0 million, which was paid by the Company with available
corporate funds. After this transaction AT&T no longer has any warrants or
other rights to purchase the Company's Common Stock.
In August 1999, the Company's Board of Directors approved a stock repurchase
program which authorized the Company at its discretion to purchase up to a total
of 5.0 million shares of its Common Stock from time-to-time as market and
business conditions warrant. During the three months ended June 30, 2001, the
Company did not repurchase any shares under the program. During the three
months ended March 31, 2001, the Company repurchased 2.28 million shares of
Common Stock for approximately $85.2 million (a weighted-average price of $37.37
per share), including the 2.0 million shares repurchased as part of the AT&T
warrant exercise discussed above. As of June 30, 2001, the Company had
purchased a total of 4.03 million shares for approximately $156.5 million (a
weighted-average price of $38.88 per share) since the program was announced.
The repurchased shares are held as treasury shares.
The Company continues to make significant investments in client contracts,
capital equipment, facilities, research and development, and at its discretion,
may continue to make stock repurchases under its stock repurchase program. In
addition, as part of its growth strategy, the Company is continually evaluating
potential business and asset acquisitions and plans to expand its international
business. The Company had no significant capital commitments as of June 30,
2001. The Company believes that cash generated from operations, together with
its current cash, cash equivalents, and short-term investments, and the amount
available under its current revolving credit facility, will be sufficient to
meet its anticipated cash requirements for operations, income taxes, debt
service, capital expenditures, investments in client contracts, and stock
repurchases for both its short and long-term purposes. The Company also
believes it has significant additional borrowing capacity and could obtain
additional cash resources by amending its current credit facility and/or
establishing a new credit facility.
Forward-Looking Statements
This report contains a number of forward-looking statements relative to future
plans of the Company and its
15
expectations concerning the customer care and billing industry, as well as the
converging telecommunications industry it serves, and similar matters. Such
forward-looking statements are based on assumptions about a number of important
factors, and involve risks and uncertainties that could cause actual results to
differ materially from estimates contained in the forward-looking statements.
Some of the risks that are foreseen by management are contained in Exhibit 99.01
of this report. Exhibit 99.01 constitutes an integral part of this report, and
readers are strongly encouraged to read that section closely in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Dependence on AT&T
AT&T completed its merger with Tele-Communications, Inc. (TCI) in 1999 and
completed its merger with MediaOne Group, Inc. (MediaOne) in 2000. During the
six months ended June 30, 2001 and 2000, revenues from AT&T Broadband and
affiliated companies (AT&T) represented approximately 59.6% and 45.3% of total
revenues, respectively. The increase in the percentage between periods relates
primarily to the timing and the amount of software and services purchased by
AT&T. There are inherent risks whenever this large of a percentage of total
revenues is concentrated with one client. One such risk is that, should AT&T's
business generally decline, it would have a material impact on the Company's
results of operations.
Contract Rights and Obligations (as amended)
The AT&T Contract expires in 2012. The AT&T Contract has minimum financial
commitments (based upon processing 13 million wireline video customers) over the
term of the contract and includes exclusive rights to provide customer care and
billing products and services for AT&T's offerings of wireline video, all
Internet/high-speed data services, and print and mail services. During the
fourth quarter of 2000, the Company relinquished its exclusive rights to process
AT&T's wireline telephony customers, and expects these AT&T customers to be
fully converted to another service provider by the end of 2001. The Company does
not expect the loss of these customers to have a material impact on the
Company's result of operations.
Effective April 2001, the Company amended its agreement with AT&T giving the
Company certain contractual rights to continue to process certain AT&T customers
for a minimum of one year in the event that AT&T divests a portion of its
customers to another company. These new rights are co-terminus and are in
addition to the existing minimum processing commitments the Company has with
AT&T through September 2012. Any such divestitures to a third party would not
relieve AT&T of its minimum financial commitments over the term of the contract.
It has been recently reported in the public press that AT&T Broadband may be
acquired or merged with one or more third parties in a single transaction or a
series of transactions. It is impossible and premature at this time to speculate
what impact any particular transaction(s) would have on the Company's
operations, if any. The Company believes the AT&T Contract would remain in
effect in the event there is a change in control of AT&T Broadband.
The AT&T Contract contains certain performance criteria and other obligations to
be met by the Company. The Company is required to perform certain remedial
efforts and is subject to certain penalties if it fails to meet the performance
criteria or other obligations. The Company is also subject to an annual
technical audit to determine whether the Company's products and services include
innovations in features and functions that have become standard in the wireline
video industry.
The Company expects to perform successfully under the AT&T Contract, and is
hopeful that it can continue to sell products and services to AT&T that are in
excess of the minimum financial commitments and exclusive rights included in the
contract. Should the Company fail to meet its obligations under the AT&T
Contract, and should AT&T be successful in any action to either terminate the
AT&T Contract in whole or in part, or collect damages caused by an alleged
breach, it would have a material adverse impact on the Company's results of
operations.
A copy of the AT&T Contract and all subsequent amendments are included in the
Company's exhibits to its periodic public filings with the Securities and
Exchange Commission. These documents are available on the Internet and the
Company encourages readers to review those documents for further details.
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Company's market risks during the six
months ended June 30, 2001. See the Company's 2000 10-K for additional
discussion regarding the Company's market risks.
16
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1-3. None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The 2001 annual meeting (the "Annual Meeting") of stockholders of CSG
Systems International, Inc. was held on June 1, 2001.
(b) The following persons were elected as directors at the Annual Meeting:
Class I (term expiring in 2004)
Janice I. Obuchowski
John P. Pogge
Rockwell A. Schnabel
The following directors' term of office continued after the Annual
Meeting:
Royce J. Holland
Bernard W. Reznicek
George F. Haddix
Neal C. Hansen
Frank V. Sica
(c) Votes were cast or withheld at the Annual Meeting as follows:
(i) Election of directors:
Director For Withheld
--------- ---------- --------
Janice I. Obuchowski 44,143,373 377,544
John P. Pogge 44,141,725 379,192
Rockwell A. Schnabel 44,139,470 381,447
(ii) Increase the 1996 Stock Incentive Plan by 3,000,000 shares:
For Against Abstain
--- ------- -------
16,698,155 22,994,186 166,087
Item 5. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.44 CSG Systems International, Inc. Stock Option Plan
for Non-Employee Directors
99.01 Safe Harbor for Forward-Looking Statements Under
the Private Securities Litigation Reform Act of
1995-Certain Cautionary Statements and Risk Factors
(b) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2001
CSG SYSTEMS INTERNATIONAL, INC.
/s/ Neal C. Hansen
-----------------------------------
Neal C. Hansen
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Peter E. Kalan
-----------------------------------
Peter E. Kalan
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Randy R. Wiese
-----------------------------------
Randy R. Wiese
Vice President and Controller
(Principal Accounting Officer)
18
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
10.44 CSG Systems International, Inc. Stock Option Plan for Non-Employee
Directors
99.01 Safe Harbor for Forward-Looking Statements Under the Private Securities
Litigation Reform Act of 1995-Certain Cautionary Statements and Risk
Factors
19