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 September 30, 2000
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 November 10, 2000: 52,503,957
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q For the Quarter Ended September 30, 2000
INDEX
Page No.
--------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999.................................................... 3
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and 1999 ................................ 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999................................. 5
Notes to 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 Disclosures About Market Risk............... 18
Part II - OTHER INFORMATION
Item 2. Legal Proceedings........................................................ 19
Item 6. Exhibits and Reports on Form 8-K......................................... 19
Signatures............................................................... 20
Index to Exhibits........................................................ 21
2
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, December 31,
2000 1999
---------------- ---------------
ASSETS (unaudited)
------
Current assets:
Cash and cash equivalents................................................................ $ 50,776 $ 48,676
Short-term investments................................................................... 32,958 --
---------------- ---------------
Total cash, cash equivalents and short-term investments................................ 83,734 48,676
Accounts receivable-
Trade-
Billed, net of allowance of $4,150 and $2,975...................................... 93,767 67,477
Unbilled........................................................................... 4,510 8,311
Other.................................................................................. 905 909
Deferred income taxes.................................................................... 2,437 1,972
Other current assets..................................................................... 4,787 2,850
---------------- ---------------
Total current assets................................................................... 190,140 130,195
---------------- ---------------
Property and equipment, net of depreciation of $39,332 and $31,864.......................... 35,908 26,507
Software, net of amortization of $38,647 and $37,251........................................ 4,750 6,145
Noncompete agreements and goodwill, net of amortization of $30,039
and $29,727............................................................................... 2,039 2,652
Client contracts and related intangibles, net of amortization of
$27,810 and $24,779....................................................................... 53,413 55,343
Deferred income taxes....................................................................... 48,627 52,845
Other assets................................................................................ 766 1,281
---------------- ---------------
Total assets.......................................................................... $ 335,643 $ 274,968
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt..................................................... $ 24,615 $ 21,711
Customer deposits........................................................................ 11,406 10,549
Trade accounts payable................................................................... 11,228 9,450
Accrued employee compensation............................................................ 14,837 16,386
Deferred revenue......................................................................... 6,908 16,746
Accrued income taxes..................................................................... 13,497 11,710
Other current liabilities................................................................ 14,093 11,551
---------------- ---------------
Total current liabilities.............................................................. 96,584 98,103
---------------- ---------------
Non-current liabilities:
Long-term debt, net of current maturities................................................ 39,385 59,289
Deferred revenue......................................................................... 476 714
---------------- ---------------
Total non-current liabilities.......................................................... 39,861 60,003
---------------- ---------------
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;
52,418,089 shares and 51,638,629 shares outstanding ................................... 532 523
Common stock warrants; 3,000,000 warrants outstanding.................................... 26,145 26,145
Additional paid-in capital............................................................... 157,152 136,373
Deferred employee compensation........................................................... -- (48)
Notes receivable from employee stockholders.............................................. (21) (115)
Accumulated other comprehensive income:
Unrealized loss on short-term investments classified as available-for-sale,
net of tax........................................................................... (39) --
Cumulative translation adjustments..................................................... (697) (120)
Treasury stock, at cost, 830,986 shares and 722,486 shares............................... (24,075) (20,374)
Accumulated earnings (deficit)........................................................... 40,201 (25,522)
---------------- ---------------
Total stockholders' equity ............................................................ 199,198 116,862
---------------- ---------------
Total liabilities and stockholders' equity............................................. $ 335,643 $ 274,968
================ ===============
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 Nine months ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Revenues:
Processing and related services................. $ 74,622 $ 64,625 $ 218,170 $ 187,205
Software and professional services.............. 27,448 19,409 72,025 44,426
--------- --------- --------- ---------
Total revenues.......................... 102,070 84,034 290,195 231,631
--------- --------- --------- ---------
Cost of Revenues:
Cost of processing and related services......... 26,863 24,262 78,948 71,120
Cost of software and professional services...... 11,495 10,279 31,914 25,016
--------- --------- --------- ---------
Total cost of revenues.................. 38,358 34,541 110,862 96,136
--------- --------- --------- ---------
Gross margin (exclusive of depreciation)............ 63,712 49,493 179,333 135,495
--------- --------- --------- ---------
Operating expenses:
Research and development........................ 10,687 8,681 30,941 24,518
Selling, general and administrative............. 12,618 11,622 33,790 33,940
Depreciation.................................... 3,076 2,563 8,850 7,467
--------- --------- --------- ---------
Total operating expenses................ 26,381 22,866 73,581 65,925
--------- --------- --------- ---------
Operating income.................................... 37,331 26,627 105,752 69,570
--------- --------- --------- ---------
Other income (expense):
Interest expense............................. (1,455) (1,657) (4,478) (5,690)
Interest and investment income, net.......... 1,683 751 4,301 2,208
Other........................................ (13) 31 (30) 14
--------- --------- --------- ---------
Total other............................. 215 (875) (207) (3,468)
--------- --------- --------- ---------
Income before income taxes.......................... 37,546 25,752 105,545 66,102
Income tax provision............................ (14,118) (9,691) (39,822) (24,966)
--------- --------- --------- ---------
Net income.......................................... $ 23,428 $ 16,061 $ 65,723 $ 41,136
========= ========= ========= =========
Basic net income per common share:
Net income available to common stockholders...... $ 0.45 $ 0.31 $ 1.26 $ 0.80
========= ========= ========= =========
Weighted average common shares................... 52,314 51,744 52,109 51,673
========= ========= ========= =========
Diluted net income per common share:
Net income available to common stockholders...... $ 0.41 $ 0.29 $ 1.16 $ 0.76
========= ========= ========= =========
Weighted average common shares................... 56,878 54,536 56,873 54,261
========= ========= ========= =========
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)
Nine months ended
----------------------------------
September 30, September 30,
2000 1999
--------------- -------------
Cash flows from operating activities:
Net income............................................................................ $ 65,723 $ 41,136
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation....................................................................... 8,850 7,467
Amortization....................................................................... 5,476 11,773
Deferred income taxes.............................................................. 3,777 5,292
Stock-based employee compensation.................................................. 48 220
Changes in operating assets and liabilities:
Trade accounts and other receivables, net......................................... (22,503) (14,918)
Other current and noncurrent assets............................................... (1,969) (1,581)
Accounts payable and accrued liabilities.......................................... 3,816 12,311
-------- --------
Net cash provided by operating activities...................................... 63,218 61,700
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net.............................................. (18,216) (6,264)
Purchase of short-term investments.................................................... (33,021) --
Conversion and other client incentive payments........................................ (1,100) (23,482)
-------- --------
Net cash used in investing activities.......................................... (52,337) (29,746)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock................................................ 12,335 7,847
Repurchase of common stock............................................................ (3,659) (6,545)
Payments on notes receivable from employee stockholders............................... 81 391
Payments on long-term debt............................................................ (17,000) (42,250)
-------- --------
Net cash used in financing activities.......................................... (8,243) (40,557)
-------- --------
Effect of exchange rate fluctuations on cash............................................. (538) (27)
-------- --------
Net increase (decrease) in cash and cash equivalents..................................... 2,100 (8,630)
Cash and cash equivalents, beginning of period........................................... 48,676 39,593
-------- --------
Cash and cash equivalents, end of period................................................. $ 50,776 $ 30,963
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest............................................................................. $ 4,429 $ 5,101
Income taxes......................................................................... $ 25,783 $ 11,743
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements at September 30, 2000, and for
the three and nine months then ended are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim period. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with management's discussion and analysis
of financial condition and results of operations, contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999, filed with the
Securities and Exchange Commission (the Company's 1999 10-K). The results of
operations for the three and nine months ended September 30, 2000, are not
necessarily indicative of the results for the entire year ending December 31,
2000.
2. SHORT-TERM INVESTMENTS
During the three months ended September 30, 2000, the Company began investing
its excess cash balances in various short-term investments. The Company
classifies all of its short-term investments as available-for-sale in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Such short-term investments consist primarily of corporate and
governmental debt securities (principally commercial paper as of September 30,
2000) which are stated at market value, with unrealized gains and losses on such
securities reflected, net of the related income tax effect, as other
comprehensive income in stockholders' equity. Realized gains and losses on
short-term investments are included in earnings and are derived using the
specific identification method for determining the cost of the securities.
There were no realized gains or losses on these securities during the three
months ended September 30, 2000. It is the Company's intent to maintain a
liquid portfolio to take advantage of investment opportunities and provide a
means to access such funds if needed; therefore, all securities are considered
to be available-for-sale and are classified as current assets.
3. STOCKHOLDERS' EQUITY
Common Stock Warrants. During the nine months ended September 30, 2000, AT&T
held 3.0 million warrants to purchase the Company's Common Stock at an exercise
price of $12 per share. See additional discussion of the Common Stock Warrants
in the Company's 1999 10-K.
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 September 30, 2000, the Company repurchased 15,000 shares
under the program for approximately $671,000 ($44.73 per share). During the
three months ended March 31, 2000, the Company repurchased 75,000 shares of
Common Stock for approximately $3.0 million ($39.92 per share). As of September
30, 2000, the Company has purchased a total of 745,500 shares for approximately
$23.9 million (a weighted-average price of $32.07 per share) since the program
was announced. 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
6
$2.3 million and $0.9 million for the three months ended September 30, 2000 and
1999, and $8.5 million and $3.0 million for the nine months ended September 30,
2000 and 1999, 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.
Subsequent Event. On October 30, 2000, the Company executed a Warrant Exercise
and Stock Purchase Agreement with AT&T for 1.0 million shares. See Note 9 for
additional discussion of the agreement and related transactions.
4. 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 reconciliation of the EPS numerator is
necessary as the basic and diluted net income available to common stockholders
is the same for all periods presented. The reconciliation of the EPS denominator
is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Basic common shares outstanding................... 52,314 51,744 52,109 51,673
Dilutive effect of common stock options........... 2,289 1,443 2,485 2,138
Dilutive effect of common stock warrants.......... 2,275 1,349 2,279 450
------ ------ ------ ------
Diluted common shares outstanding................. 56,878 54,536 56,873 54,261
====== ====== ====== ======
Common Stock options of 140,000 shares and 2,099,150 shares for the three months
ended September 30, 2000 and 1999, and 125,000 shares and 556,150 shares for the
nine months ended September 30, 2000 and 1999, 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.
The diluted potential common shares related to the Common Stock warrants were
excluded from the computation of diluted common shares outstanding for the six
months ended June 30, 1999, as the warrants were not considered exercisable
until the third quarter of 1999. During the three and nine months ended
September 30, 2000, all of the 3.0 million warrants were considered exercisable.
7
5. COMPREHENSIVE INCOME
The Company's components of comprehensive income were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Net income.................... $23,428 $16,061 $65,723 $41,136
Other comprehensive income,
net of tax, if any:
Foreign currency
translation
adjustments.............. (174) 290 (577) (17)
Unrealized loss on
short-term investments... (39) --- (39) ---
------- ------- ------- -------
Comprehensive income.......... $23,215 $16,351 $65,107 $41,119
======= ======= ======= =======
6. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS
Certain September 30, 1999 amounts have been reclassified to conform with the
September 30, 2000 presentation.
7. SERVICE AGREEMENTS
The Company has service agreements with First Data Corporation ("FDC") and its
subsidiaries for data processing services, communication charges and other
related services. FDC provides data processing and related services required
for the operation of the Company's CCS system. Effective April 1, 2000, the
Company extended its contract with FDC for data processing services through June
30, 2005. The contract was previously scheduled to expire on December 31, 2001.
8. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition". This SAB provides additional
guidance on revenue recognition criteria and related disclosure requirements.
This SAB is effective for the Company in the fourth quarter of 2000, with
retroactive application to January 1, 2000. Adoption of this SAB is not expected
to have a significant effect on the Company's consolidated financial statements.
9. SUBSEQUENT EVENT - WARRANT EXERCISE AND STOCK REPURCHASE
On October 30, 2000, the Company executed a Warrant Exercise and Stock Purchase
Agreement with AT&T. Under the agreement, AT&T exercised its right to purchase
1.0 million shares of the Company's Common Stock at an exercise price of $12 per
share, for a total exercise price of $12.0 million. Immediately following the
exercise of the warrant, the Company repurchased the 1.0 million shares at
$47.42 per share (an average of the closing price over the five-day trading
period ended October 26, 2000), for a total repurchase price of $47.4 million.
As a result, the net cash outlay paid to AT&T for this transaction was $35.4
million. The net repurchase price was funded from the Company's current cash
and short-term investment balances.
8
The 1.0 million shares repurchased from AT&T are intended to be held as treasury
shares by the Company. These shares were repurchased under the guidelines of
the Company's stock repurchase program. Including the repurchase of these 1.0
million shares, the total shares repurchased under the Company's program since
its inception in August 1999 is 1.75 million shares, at a total repurchase price
of $71.3 million (a weighted-average price of $40.86 per share). The Company is
authorized to repurchase up to a total of 5.0 million shares under its stock
repurchase program.
After this transaction, AT&T still holds warrants to purchase up to 2.0 million
additional shares of the Company's Common Stock, with an exercise price of $12
per share. These warrants are exercisable until September 19, 2002, at which
time the warrants expire.
9
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 ended September 30, Nine months ended September 30,
-------------------------------------------- -----------------------------------------
2000 1999 2000 1999
---------------------- --------------------- --------------------- -------------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
--------- ---------- ----------- --------- --------- ---------- -------- -------
Revenues:
Processing and related services........... $ 74,622 73.1% $ 64,625 76.9% $ 218,170 75.2% $ 187,205 80.8%
Software and professional services........ 27,448 26.9 19,409 23.1 72,025 24.8 44,426 19.2
--------- -------- --------- -------- --------- --------- --------- ------
Total revenues.................. 102,070 100.0 84,034 100.0 290,195 100.0 231,631 100.0
--------- -------- --------- -------- --------- --------- --------- ------
Cost of Revenues:
Cost of processing and related services... 26,863 26.3 24,262 28.9 78,948 27.2 71,120 30.7
Cost of software and professional
services................................ 11,495 11.3 10,279 12.2 31,914 10.9 25,016 10.8
--------- -------- --------- -------- --------- --------- --------- ------
Total cost of revenues.......... 38,358 37.6 34,541 41.1 110,862 38.1 96,136 41.5
--------- -------- --------- -------- --------- --------- --------- ------
Gross margin (exclusive of depreciation)... 63,712 62.4 49,493 58.9 179,333 61.8 135,495 58.5
--------- -------- --------- -------- --------- --------- --------- ------
Operating expenses:
Research and development.................. 10,687 10.5 8,681 10.3 30,941 10.7 24,518 10.6
Selling, general and administrative....... 12,618 12.3 11,622 13.9 33,790 11.5 33,940 14.7
Depreciation.............................. 3,076 3.0 2,563 3.0 8,850 3.0 7,467 3.2
--------- -------- --------- -------- --------- --------- --------- ------
Total operating expenses............. 26,381 25.8 22,866 27.2 73,581 25.2 65,925 28.5
--------- -------- --------- -------- --------- --------- --------- ------
Operating income........................... 37,331 36.6 26,627 31.7 105,752 36.6 69,570 30.0
--------- -------- --------- -------- --------- --------- --------- ------
Other income (expense):
Interest expense......................... (1,455) (1.4) (1,657) (2.0) (4,478) (1.5) (5,690) (2.5)
Interest and investment income, net...... 1,683 1.6 751 0.9 4,301 1.5 2,208 1.0
Other.................................... (13) -- 31 - (30) - 14 -
--------- -------- --------- -------- --------- --------- --------- ------
Total other............................ 215 0.2 (875) (1.1) (207) - (3,468) (1.5)
--------- -------- --------- -------- --------- --------- --------- ------
Income before income taxes................. 37,546 36.8 25,752 30.6 105,545 36.6 66,102 28.5
Income tax provision..................... (14,118) (13.8) (9,691) (11.5) (39,822) (13.7) (24,966) (10.8)
--------- -------- --------- -------- --------- --------- --------- ------
Net income................................. $ 23,428 23.0% $ 16,061 19.1% $ 65,723 22.9% $ 41,136 17.7%
========= ======== ========= ======== ========= ========= ========= =======
10
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues. Total revenues for the three months ended September 30, 2000,
increased 21.5% to $102.1 million, from $84.0 million for the three months ended
September 30, 1999.
Revenues from processing and related services for the three months ended
September 30, 2000, increased 15.5% to $74.6 million, from $64.6 million for the
three months ended September 30, 1999. Of the total increase in revenue,
approximately 53% resulted from an increase in the number of customers of the
Company's clients which were serviced by the Company and approximately 47% was
due to increased revenue per customer. Customers serviced as of September 30,
2000 and 1999, respectively, were 34.8 million and 32.7 million, an increase of
6.5%. 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 September 30, 2000, the Company converted and processed
approximately 650,000 new customers on its systems.
Revenues from software and professional services for the three months ended
September 30, 2000, increased 41.4% to $27.4 million, from $19.4 million for the
three months ended September 30, 1999. 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 years relates to the
continued strong demand for the Company's existing software products and the
rollout of additional new products and services to meet the changing needs of
the Company's client base.
Total annualized domestic revenue per customer account for the third quarter of
2000 was $11.71, compared to $10.16 for the same period in 1999, an increase of
15.3%. Revenue per customer increased primarily due to increased software sales
to new and existing clients, and to a lesser degree, increased processing
revenue per customer, as follows:
Three Months
Ended September 30
------------------
2000 1999
---- ----
Processing and related services............... $ 8.59 $ 8.05
Software and professional services............ 3.12 2.11
------ ------
Total.................................... $11.71 $10.16
====== ======
Cost of Processing and Related Services. Direct processing costs as a
percentage of related processing revenues were 36.0% (64.0% gross margin) for
the three months ended September 30, 2000, compared to 37.5% (62.5% gross
margin) for the three months ended September 30, 1999. The decrease in costs as
a percentage of related revenues between periods relates primarily to (i) the
Company's continued focus on cost controls and cost reductions within its core
processing business, and (ii) a decrease in amortization of client contracts
from the CSG Acquisition, which became fully amortized as of November 30, 1999.
Such amortization was $0.75 million for the third quarter of 1999.
Cost of Software and Professional Services. The cost of software and
professional services as a percentage of related revenues was 41.9% (58.1% gross
margin) for the three months ended September 30, 2000, compared to 53.0% (47.0%
gross margin) for the three months ended September 30, 1999. The improvement
between periods relates primarily to (i) better overall leveraging of costs as a
result of higher software and professional services revenues for the quarter,
and (ii) the timing of the sales cycle for new products and services.
Gross Margin. Overall gross margin for the three months ended September 30,
2000, increased 28.7% to $63.7 million, from $49.5 million for the three months
ended September 30, 1999, due primarily to revenue growth. The overall gross
margin percentage increased to 62.4% for the three months ended September 30,
2000, compared to 58.9% for the three months ended September 30, 1999. The
overall increase in the gross
11
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 September 30, 2000, increased 23.1% to $10.7 million,
from $8.7 million for the three months ended September 30, 1999. As a
percentage of total revenues, R&D expense increased to 10.5% for the three
months ended September 30, 2000, from 10.3% for the three months ended September
30, 1999. The Company did not capitalize any software development costs during
the three months ended September 30, 2000 and 1999.
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
third quarter of 2000 were focused primarily on the development of products to:
. 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,
. 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 (including CSG.net, the Company's ASP offering
to the ISP market), and
. address the international customer care and billing system market.
The Company expects its development efforts to focus on similar tasks through
the remainder of 2000.
Selling, General and Administrative Expense. Selling, general and
administrative (SG&A) expense for the three months ended September 30, 2000,
increased 8.6% to $12.6 million, from $11.6 million for the three months ended
September 30, 1999. As a percentage of total revenues, SG&A expense decreased
to 12.3% for the three months ended September 30, 2000, from 13.9% for the three
months ended September 30, 1999. The increase in SG&A expense relates primarily
to the continued expansion of the Company's management and administrative staff
and other administrative costs to support the Company's overall growth, offset
by a decrease related to the noncompete agreement from the CSG Acquisition
becoming fully amortized as of November 30, 1999 (such amortization was $1.2
million for the third quarter of 1999).
Depreciation Expense. Depreciation expense for the three months ended September
30, 2000, increased 20.0% to $3.1 million, from $2.6 million for the three
months ended September 30, 1999. The increase in expense relates to capital
expenditures made during the last three months of 1999 and the first nine months
of 2000 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 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 September 30,
2000, was $37.3 million or 36.6% of total revenues, compared to $26.6 million or
31.7% of total revenues for the three months ended September 30, 1999. The
increase between years relates to the factors discussed above.
Interest Expense. Interest expense for the three months ended September 30,
2000, decreased 12.2% to $1.5 million, from $1.7 million for the three months
ended September 30, 1999, with the decrease attributable primarily to (i)
scheduled principal payments on the Company's long-term debt, and (ii) optional
prepayments on long-term debt during 1999. The balance of the Company's long-
term debt as of September 30, 2000, was $64.0 million, compared to $86.0 million
as of September 30, 1999, a decrease of $22.0 million.
Interest and Investment Income. Interest and investment income for the three
months ended September 30, 2000, increased 124.1% to $1.7 million, from $0.8
million for the three months ended September 30, 1999,
12
with the increase attributable primarily to an increase in operating funds
available for investment.
Income Tax Provision. For the three months ended September 30, 2000, the Company
recorded an income tax provision of $14.1 million, or an effective income tax
rate of approximately 38%, which represents the Company's estimate of the
effective book income tax rate for 2000. The Company's effective income tax
rate for 1999 was also approximately 38%. As of September 30, 2000, management
continues to believe that sufficient taxable income will be generated to realize
the entire benefit of its deferred tax assets. The Company's assumptions of
future profitable operations are supported by its strong operating performances
over the last several years.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenues. Total revenues for the nine months ended September 30, 2000,
increased 25.3% to $290.2 million, from $231.6 million for the nine months ended
September 30, 1999.
Revenues from processing and related services for the nine months ended
September 30, 2000, increased 16.5% to $218.2 million, from $187.2 million for
the nine months ended September 30, 1999. Of the total increase in revenue,
approximately 65% resulted from an increase in the number of customers of the
Company's clients which were serviced by the Company and approximately 35% was
due to increased revenue per customer. 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 January 1, 2000 through September 30, 2000, the Company
converted and processed approximately 900,000 new customers on its systems.
Revenues from software and professional services for the nine months ended
September 30, 2000, increased 62.1% to $72.0 million, from $44.4 million for the
nine months ended September 30, 1999. 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 years relates to the
continued strong demand for the Company's existing software products and the
rollout of additional new products and services to meet the changing needs of
the Company's client base.
Total annualized domestic revenue per customer account for the nine months ended
September 30, 2000 was $11.20, compared to $9.59 for the same period in 1999, an
increase of 16.8%. Revenue per customer increased primarily due to increased
software sales to new and existing clients, and to a lesser degree, increased
processing revenue per customer, as follows:
Nine Months
Ended September 30
------------------
2000 1999
---- ----
Processing and related services.................. $ 8.44 $ 8.03
Software and professional services............... 2.76 1.56
------ ------
Total....................................... $11.20 $ 9.59
====== ======
Cost of Processing and Related Services. Direct processing costs as a
percentage of related processing revenues were 36.2% (63.8% gross margin) for
the nine months ended September 30, 2000, compared to 38.0% (62.0% gross margin)
for the nine months ended September 30, 1999. The decrease in costs as a
percentage of related revenues between periods relates primarily to (i) the
Company's continued focus on cost controls and cost reductions within its core
processing business, and (ii) a decrease in amortization of client contracts
from the CSG Acquisition, which became fully amortized as of November 30, 1999.
Such amortization was $2.3 million for the nine months ended September 30, 1999.
13
Cost of Software and Professional Services. The cost of software and
professional services as a percentage of related revenues was 44.3% (55.7% gross
margin) for the nine months ended September 30, 2000, compared to 56.3% (43.7%
gross margin) for the nine months ended September 30, 1999. The improvement
between periods relates primarily to (i) better overall leveraging of costs as a
result of higher software and professional services revenues for the period, and
(ii) the timing of the sales cycle for new products and services.
Gross Margin. Overall gross margin for the nine months ended September 30,
2000, increased 32.4% to $179.3 million, from $135.5 million for the nine months
ended September 30, 1999, due primarily to revenue growth. The overall gross
margin percentage increased to 61.8% for the nine months ended September 30,
2000, compared to 58.5% for the nine months ended September 30, 1999. 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 nine months ended
September 30, 2000, increased 26.2% to $30.9 million, from $24.5 million for the
nine months ended September 30, 1999. As a percentage of total revenues, R&D
expense increased to 10.7% for the nine months ended September 30, 2000, from
10.6% for the nine months ended September 30, 1999. The Company did not
capitalize any software development costs during the nine months ended September
30, 2000 and 1999.
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
nine months ended September 30, 2000 were focused primarily on the development
of products to:
. 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,
. 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 (including CSG.net, the Company's ASP offering
to the ISP market), and
. address the international customer care and billing system market.
Selling, General and Administrative Expense. SG&A expense for the nine months
ended September 30, 2000, decreased 0.4% to $33.8 million, from $33.9 million
for the nine months ended September 30, 1999. As a percentage of total
revenues, SG&A expense decreased to 11.5% for the nine months ended September
30, 2000, from 14.7% for the nine months ended September 30, 1999. The decrease
in SG&A expense relates primarily to the noncompete agreement from the CSG
Acquisition becoming fully amortized as of November 30, 1999 (such amortization
was $3.5 million for the nine months ended September 30, 1999), offset by an
increase in certain SG&A expenses related primarily to the continued expansion
of the Company's management and administrative staff and other administrative
costs to support the Company's overall growth.
Depreciation Expense. Depreciation expense for the nine months ended September
30, 2000, increased 18.5% to $8.9 million, from $7.5 million for the nine months
ended September 30, 1999. The increase in expense relates to capital
expenditures made during 1999 and the first nine months of 2000 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 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 nine months ended September 30,
2000, was $105.8 million or 36.6% of total revenues, compared to $69.6 million
or 30.0% of total revenues for the nine months ended September 30, 1999. The
increase between years relates to the factors discussed above.
Interest Expense. Interest expense for the nine months ended September 30,
2000, decreased 21.3% to $4.5
14
million, from $5.7 million for the nine months ended September 30, 1999, with
the decrease attributable primarily to (i) scheduled principal payments on the
Company's long-term debt, and (ii) optional prepayments on long-term debt during
1999.
Interest and Investment Income. Interest and investment income for the nine
months ended September 30, 2000, increased 94.8% to $4.3 million, from $2.2
million for the nine months ended September 30, 1999, with the increase
attributable primarily to an increase in operating funds available for
investment.
Income Tax Provision. For the nine months ended September 30, 2000, the Company
recorded an income tax provision of $39.8 million, or an effective income tax
rate of approximately 38%, which represents the Company's estimate of the
effective book income tax rate for 2000. The Company's effective income tax
rate for 1999 was also approximately 38%.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
As of September 30, 2000, the Company's principal sources of liquidity included
cash, cash equivalents and short-term investments of $83.7 million. See Note 2
to the Condensed Consolidated Financial Statements for additional discussion
regarding short-term investments. The Company also has a revolving credit
facility in the amount of $40.0 million, of which there were no borrowings
outstanding. The Company's ability to borrow under the revolving credit
facility is subject to maintenance of certain levels of eligible receivables.
At September 30, 2000, all of the $40.0 million revolving credit facility was
available to the Company. The revolving credit facility expires in September
2002.
As of September 30, 2000 and December 31, 1999, respectively, the Company had
$93.8 million and $67.5 million in net billed trade accounts receivable. The
increase between periods relates primarily to continued revenue growth and the
timing of billings and collections. 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
September 30, 2000 and 1999 were 59 days and 50 days, respectively. The
Company's target range for DBOs is 55 to 60 days.
Total deferred revenues decreased by approximately $10.1 million from December
31, 1999 to September 30, 2000, due primarily to performance on several
contracts during the first quarter that had previously been signed and billed in
the latter part of 1999. The deferred revenue balance decreased by
approximately $1.7 million from June 30, 2000, with the decrease primarily
related to the recognition of software maintenance fees, which are generally
billed on an annual basis at the beginning of the year and then recognized
ratably over the year as the services are performed.
During the nine months ended September 30, 2000, the Company generated $63.2
million of net cash flow from operating activities. Cash generated from these
sources and the proceeds of $12.3 million from the issuance of common stock
through the Company's stock incentive plans were used to (i) fund capital
expenditures of $18.2 million, (ii) purchase short-term investments of $33.0
million, (iii) pay a conversion bonus of $1.1 million, (iv) repurchase 90,000
shares of the Company's Common Stock for $3.7 million under its stock repurchase
program, and (v) repay long-term debt of $17.0 million, which included $15.7
million of scheduled payments and optional prepayments of $1.3 million.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the
nine months ended September 30, 2000 was $119.6 million, or 41.2% of total
revenues, compared to $88.2 million, or 38.1% of total revenues for the nine
months ended September 30, 1999. 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.
15
Interest rates for the term and revolving credit facilities 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 September 30, 2000, the spread on the LIBOR rate and the prime rate was
0.50% and 0%, respectively. As of September 30, 2000, the entire amount of the
debt was under a one-month LIBOR contract with an interest rate of 7.12% (i.e.,
LIBOR at 6.62% plus spread of 0.50%), compared to a weighted average rate of
6.55% at December 31, 1999.
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 nine months ended September 30, 2000,
the Company repurchased 90,000 shares of Common Stock for approximately $3.7
million ($40.73 per share). As of September 30, 2000, the Company had purchased
a total of 745,500 shares for approximately $23.9 million (a weighted-average
price of $32.07 per share) since the program was announced. The repurchased
shares are held as treasury shares.
On October 30, 2000, the Company executed a Warrant Exercise and Stock Purchase
Agreement with AT&T. Under the agreement, AT&T exercised its right to purchase
1.0 million shares of the Company's Common Stock at an exercise price of $12 per
share, for a total exercise price of $12.0 million. Immediately following the
exercise of the warrant, the Company repurchased the 1.0 million shares at
$47.42 per share (an average of the closing price over the five-day trading
period ended October 26, 2000), for a total repurchase price of $47.4 million.
As a result, the net cash outlay paid to AT&T for this transaction was $35.4
million. See Note 9 to the Condensed Consolidated Financial Statements for
additional discussion of the warrant exercise and stock repurchase.
The Company continues to make significant investments in capital equipment,
facilities, research and development, and at its discretion, may continue to
make stock repurchases. The Company had no significant capital commitments as
of September 30, 2000. The Company believes that cash generated from
operations, together with the 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, and stock
repurchases for both its short and long-term purposes. The Company also
believes it has significant unused 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 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.
AT&T Demand for Arbitration
- ----------------------------
On September 27, 2000, the Company received a Demand for Arbitration from AT&T
relating to the Master Subscriber Management System Agreement (the AT&T
Contract) the companies entered into in 1997. The arbitration demand contained
three claims. First, AT&T claimed that the Company had failed to fulfill certain
of its obligations under the contract with respect to telephony software and
services. Second, AT&T asked for a declaratory judgment that the exclusivity
clause of the contract does not apply to customers that were acquired by AT&T
after execution of the agreement with the Company. Third, AT&T claimed that
16
the Company had breached the Most Favored Nation clause of the agreement.
On October 10, 2000, AT&T agreed to dismiss with prejudice its Demand for
Arbitration with the Company. In connection with the dismissal, the companies
agreed to amend the AT&T Contract. A copy of the amendment is included in the
accompanying Exhibits to this Form 10-Q. The amendment includes, among other
things, the following significant items:
. AT&T agreed to use its best efforts to convert 90 percent of the
acquired MediaOne Group, Inc. (MediaOne) video and high-speed
data customers to the Company's processing system by December 31,
2001, and the remaining 10 percent by June 30, 2002. Excluded from
this obligation are any such customers that are sold or exchanged (or
under contract to do the same) by AT&T prior to December 31, 2001. The
Company expects to start converting the MediaOne customers onto its
systems in the first quarter of 2001.
. Once AT&T is processing certain incremental customers on the Company's
system, AT&T shall benefit from specified, tiered processing fees. The
Company does not believe this pricing change will have a material
impact to its annual processing revenue per customer account.
. The Company waived certain exclusivity rights pertaining to
residential wireline telephony (i.e., AT&T's cable telephony
initiative). The Company believes AT&T is in the process of
determining its overall cable telephony architecture in support of its
rollout efforts, and wanted more flexibility to determine which
vendors should participate in that strategy. Until July 10, 2001, CSG
has agreed to provide assistance in migrating AT&T's cable telephony
customers (currently processed on the Company's systems) to the
customer care and billing system of AT&T's designated third party, if
any. The Company does not believe the loss of the AT&T cable telephony
processing business would have a material impact on the Company's
results of operations.
. AT&T purchased expanded software licenses for the Company's call
center and workforce automation applications. AT&T is expected to use
the additional software licenses over the next 12 months as part of
their rollout of these software products to support more markets and
the conversion of the MediaOne customers to the Company's processing
system.
Dependence on AT&T
- ------------------
AT&T completed its merger with Tele-Communications, Inc. (TCI) in March 1999 and
recently completed its merger with MediaOne. During the nine months ended
September 30, 2000 and 1999, revenues from AT&T and affiliated companies
generated under the AT&T Contract represented approximately 47.4% and 47.5% of
total revenues, respectively. There are inherent risks whenever this large of a
percentage of total revenues is concentrated with one customer. One such risk is
that, should AT&T's business generally decline or not grow as rapidly as
anticipated, it would have a material impact on the Company's results of
operations.
Contract Rights and Obligations (as amended on October 10, 2000)
- ----------------------------------------------------------------
The AT&T Contract expires in 2012. The AT&T Contract has minimum financial
commitments 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. 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 impact on the Company's results of operations.
See Notes 3 and 9 to the Condensed Consolidated Financial Statements for
discussion regarding the Company's Common Stock Warrants held by AT&T.
17
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
There have been no material changes to the Company's market risks during the
nine months ended September 30, 2000. See the Company's 1999 10-K for
additional discussion regarding the Company's market risks.
18
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1. None.
Item 2. Legal Proceedings.
On September 27, 2000, the Company received a Demand for Arbitration from AT&T
relating to the Master Subscriber Management System Agreement (the AT&T
Contract) the companies entered into in 1997. The arbitration demand contained
three claims. First, AT&T claimed that the Company had failed to fulfill
certain of its obligations under the contract with respect to telephony software
and services. Second, AT&T asked for a declaratory judgment that the exclusivity
clause of the contract does not apply to customers that were acquired by AT&T
after execution of the agreement with the Company. Third, AT&T claimed that the
Company had breached the Most Favored Nation clause of the agreement.
On October 10, 2000, AT&T agreed to dismiss with prejudice its Demand for
Arbitration with the Company. In connection with the dismissal, the companies
agreed to amend the AT&T Contract. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for additional discussion of this
matter.
Item 3-5. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.19L* Forty-Ninth Amendment to Restated and Amended CSG Master
Subscriber Management System Agreement between CSG
Systems, Inc. and AT&T Broadband Management Corporation
dated October 10, 2000
10.14A First Amendment to Employment Agreement with Neal C.
Hansen, dated June 30, 2000
10.47 Employment Agreement with J. Richard Abramson, dated
August 17, 2000
27.01 Financial Data Schedule (EDGAR Version only)
99.01 Safe Harbor for Forward-Looking Statements Under the
Private Securities Litigation Reform Act of 1995-Certain
Cautionary Statements and Risk Factors
(b) Reports on Form 8-K
Form 8-K dated September 28, 2000, under Item 5, Other Events,
was filed with the Securities and Exchange Commission which
included a press release dated September 28, 2000. The press
release announced that the Company had received a Demand for
Arbitration from AT&T related to a Master Subscriber Management
System Agreement the companies entered into in 1997.
__________________
* Portions of the exhibit have been omitted pursuant to an application
for confidential treatment, and the omitted portions have been filed
separately with the Commission.
19
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: November 14, 2000
CSG SYSTEMS INTERNATIONAL, INC.
/s/ Neal C. Hansen
--------------------------------------
Neal C. Hansen
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Peter E. Kalan
------------------------------
Greg A. Parker
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Randy R. Wiese
--------------------------------------
Randy R. Wiese
Vice President and Controller
(Principal Accounting Officer)
20
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.19L* Forty-Ninth Amendment to Restated and Amended CSG Master Subscriber
Management System Agreement between CSG Systems, Inc. and AT&T
Broadband Management Corporation dated October 10, 2000
10.14A First Amendment to Employment Agreement with Neal C. Hansen, dated
June 30, 2000
10.47 Employment Agreement with J. Richard Abramson, dated August 17, 2000
27.01 Financial Data Schedule (EDGAR Version only)
99.01 Safe Harbor for Forward-Looking Statements Under the Private
Securities Litigation Reform Act of 1995-Certain Cautionary
Statements and Risk Factors
__________________
* Portions of the exhibit have been omitted pursuant to an application for
confidential treatment, and the omitted portions have been filed separately
with the Commission.
21