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 March 31, 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 May 10, 2001: 52,899,163
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q For the Quarter Ended March 31, 2001
INDEX
Page No.
--------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000....................................................3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2001 and 2000........................................4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 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................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........14
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................15
Signatures..........................................................16
Index to Exhibits...................................................17
2
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31, December 31,
2001 2000
--------- ---------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ....................................................... $ 30,187 $ 32,751
Short-term investments .......................................................... 22,178 10,982
--------- ---------
Total cash, cash equivalents and short-term investments ...................... 52,365 43,733
Accounts receivable-
Trade-
Billed, net of allowance of $4,756 and $5,001 ............................ 79,898 128,902
Unbilled ................................................................. 8,335 4,306
Other ........................................................................ 2,811 1,259
Deferred income taxes ........................................................... 3,815 3,247
Other current assets ............................................................ 8,576 7,507
--------- ---------
Total current assets ......................................................... 155,800 188,954
Property and equipment, net of depreciation of $45,575 and $42,457 ................. 39,881 36,630
Software, net of amortization of $36,162 and $39,112 ............................... 3,819 4,284
Goodwill, net of amortization of $4,926 and $4,883 ................................. 1,686 1,894
Client contracts and related intangibles, net of amortization of $28,416 and $28,855 51,386 52,368
Deferred income taxes .............................................................. 46,387 47,331
Other assets ....................................................................... 536 628
--------- ---------
Total assets ................................................................ $ 299,495 $ 332,089
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ............................................ $ 26,250 $ 25,436
Client deposits ................................................................. 12,785 12,391
Trade accounts payable .......................................................... 11,920 14,850
Accrued employee compensation ................................................... 13,072 19,147
Deferred revenue ................................................................ 11,246 8,172
Accrued income taxes ............................................................ 22,559 15,633
Other current liabilities ....................................................... 14,476 12,008
--------- ---------
Total current liabilities .................................................... 112,308 107,637
--------- ---------
Non-current liabilities:
Long-term debt, net of current maturities ....................................... 26,250 32,820
Deferred revenue ................................................................ 451 463
--------- ---------
Total non-current liabilities ................................................ 26,701 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;
52,392,240 shares and 52,530,203 shares outstanding .......................... 565 543
Common stock warrants; zero and 2,000,000 warrants outstanding .................. -- 17,430
Additional paid-in capital ...................................................... 225,401 180,750
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on short-term investments, net of tax ................. 12 (350)
Cumulative translation adjustments ........................................... (813) (654)
Treasury stock, at cost, 4,110,986 shares and 1,830,986 shares .................. (156,692) (71,497)
Accumulated earnings ............................................................ 92,013 64,947
--------- ---------
Total stockholders' equity ................................................... 160,486 191,169
--------- ---------
Total liabilities and stockholders' equity ................................... $ 299,495 $ 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
----------------------
March 31, March 31,
2001 2000
--------- ---------
Revenues:
Processing and related services .......... $ 79,098 $ 70,627
Software and professional services ....... 35,001 21,436
--------- ---------
Total revenues .................. 114,099 92,063
--------- ---------
Cost of Revenues:
Cost of processing and related services .. 28,515 25,770
Cost of software and professional services 13,279 10,516
--------- ---------
Total cost of revenues .......... 41,794 36,286
--------- ---------
Gross margin (exclusive of depreciation) ..... 72,305 55,777
--------- ---------
Operating expenses:
Research and development ................. 11,611 9,888
Selling, general and administrative ...... 13,540 10,088
Depreciation ............................. 3,350 2,812
--------- ---------
Total operating expenses ........ 28,501 22,788
--------- ---------
Operating income ............................. 43,804 32,989
--------- ---------
Other income (expense):
Interest expense ...................... (1,082) (1,541)
Interest and investment income, net ... 947 1,263
Other ................................. (19) 7
--------- ---------
Total other ..................... (154) (271)
--------- ---------
Income before income taxes ................... 43,650 32,718
Income tax provision ..................... (16,584) (12,409)
--------- ---------
Net income ................................... $ 27,066 $ 20,309
========= =========
Basic net income per common share:
Net income available to common stockholders $ 0.52 $ 0.39
========= =========
Weighted average common shares ............ 52,469 51,857
========= =========
Diluted net income per common share:
Net income available to common stockholders $ 0.49 $ 0.36
========= =========
Weighted average common shares ............ 55,135 56,830
========= =========
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)
Three Months ended
---------------------
March 31, March 31,
2001 2000
-------- --------
Cash flows from operating activities:
Net income ...................................................................... $ 27,066 $ 20,309
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation ................................................................. 3,350 2,812
Amortization ................................................................. 1,777 1,838
Loss on short-term investment ................................................ 495 --
Deferred income taxes ........................................................ 158 1,446
Stock-based employee compensation ............................................ -- 30
Changes in operating assets and liabilities:
Trade accounts and other receivables, net ................................... 43,423 5,345
Other current and noncurrent assets ......................................... (1,121) (1,087)
Accounts payable and accrued liabilities .................................... 4,793 (5,645)
-------- --------
Net cash provided by operating activities ................................ 79,941 25,048
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ............................................. (6,587) (6,442)
Purchases of short-term investments ............................................. (16,993) --
Proceeds from sale of short-term investments .................................... 5,882 --
Investment in client contracts .................................................. (30) --
-------- --------
Net cash used in investing activities .................................... (17,728) (6,442)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock .......................................... 2,299 7,059
Proceeds from exercise of stock warrants ........................................ 24,000 --
Repurchase of common stock ...................................................... (85,195) (2,987)
Payments on notes receivable from employee stockholders ......................... -- 27
Payments on long-term debt ...................................................... (5,756) (5,000)
-------- --------
Net cash used in financing activities .................................... (64,652) (901)
-------- --------
Effect of exchange rate fluctuations on cash ....................................... (125) (104)
-------- --------
Net increase (decrease) in cash and cash equivalents ............................... (2,564) 17,601
Cash and cash equivalents, beginning of period ..................................... 32,751 48,676
-------- --------
Cash and cash equivalents, end of period ........................................... $ 30,187 $ 66,277
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest ....................................................................... $ 970 $ 1,393
Income taxes ................................................................... $ 8,598 $ 3,942
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 March 31, 2001, and for the
three 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, 2000, filed with the Securities and
Exchange Commission (the Company's 2000 10-K). The results of operations for the
three months ended March 31, 2001, are not necessarily indicative of the results
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 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 March 31, 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 $0.9 million and $5.0
million for the three months ended March 31, 2001 and 2000. 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
March 31,
-------------------
2001 2000
------ ------
Basic common shares outstanding ............. 52,469 51,857
Dilutive effect of common stock options...... 1,724 2,693
Dilutive effect of common stock warrants..... 942 2,280
------ ------
Diluted common shares outstanding............ 55,135 56,830
====== ======
Common Stock options of 1,703,950 shares and 23,000 shares for the three months
ended March 31, 2001 and 2000, 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
March 31,
------------------
2001 2000
------- -------
Net income ....................................... $27,066 $20,309
Other comprehensive income (loss), net of tax,
if any:
Foreign currency translation adjustments ...... (159) (103)
Reclassification adjustment for loss included
in net income ............................... 335 --
Unrealized gain on short-term investments ..... 27 --
------- -------
Comprehensive income ............................. $27,269 $20,206
======= =======
5. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended (SFAS 133), became effective for
the Company on January 1, 2001. SFAS 133 establishes accounting and reporting
standards requiring every derivative instrument, as defined, to be recorded in
the consolidated balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Adoption of SFAS 133 effective January 1, 2001 did not have a significant
effect on the Company's consolidated financial statements. The Company has only
one derivative financial instrument at this time; an interest rate cap agreement
related to its long-term debt. The fair value of this agreement is
insignificant. See the Company's 2000 10-K for further discussion of this
matter.
7
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 period indicated (in thousands):
Three months ended March 31,
----------------------------------------
2001 2000
------------------- -------------------
% of % of
Amount Revenue Amount Revenue
--------- ------- --------- -------
Revenues:
Processing and related services .......... $ 79,098 69.3% $ 70,627 76.7%
Software and professional services ....... 35,001 30.7 21,436 23.3
--------- ----- --------- -----
Total revenues .................. 114,099 100.0 92,063 100.0
--------- ----- --------- -----
Cost of Revenues:
Cost of processing and related services .. 28,515 25.0 25,770 28.0
Cost of software and professional services 13,279 11.6 10,516 11.4
--------- ----- --------- -----
Total cost of revenues .......... 41,794 36.6 36,286 39.4
--------- ----- --------- -----
Gross margin (exclusive of depreciation) .... 72,305 63.4 55,777 60.6
--------- ----- --------- -----
Operating expenses:
Research and development ................. 11,611 10.2 9,888 10.7
Selling, general and administrative ...... 13,540 11.9 10,088 11.0
Depreciation ............................. 3,350 2.9 2,812 3.1
--------- ----- --------- -----
Total operating expenses ............. 28,501 25.0 22,788 24.8
--------- ----- --------- -----
Operating income ............................ 43,804 38.4 32,989 35.8
--------- ----- --------- -----
Other income (expense):
Interest expense ....................... (1,082) (1.0) (1,541) (1.7)
Interest and investment income, net .... 947 0.8 1,263 1.4
Other .................................. (19) -- 7 --
--------- ----- --------- -----
Total other .......................... (154) (0.2) (271) (0.3)
--------- ----- --------- -----
Income before income taxes .................. 43,650 38.2 32,718 35.5
Income tax provision ..................... (16,584) (14.5) (12,409) (13.4)
--------- ----- --------- -----
Net income .................................. $ 27,066 23.7% $ 20,309 22.1%
========= ===== ========= =====
8
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Revenues. Total revenues for the three months ended March 31, 2001, increased
23.9% to $114.1 million, from $92.1 million for the three months ended March 31,
2000.
Revenues from processing and related services for the three months ended March
31, 2001, increased 12.0% to $79.1 million, from $70.6 million for the three
months ended March 31, 2000. Of the total increase in revenue, approximately 90%
resulted from an increase in the number of customers of the Company's clients
which were serviced by the Company and approximately 10% was due to increased
revenue per customer. Customers served were as follows (in thousands):
As of March 31,
------------------------------
2001 2000 Increase
------ ------ --------
Video................................... 34,076 32,745 1,331
Internet................................ 2,302 1,441 861
Telephony............................... 630 124 506
------ ------ -----
Total.............................. 37,008 34,310 2,698
====== ====== ======
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 April 1, 2000
through March 31, 2001, the Company converted and processed approximately 1.4
million new customers on its systems, including approximately 0.4 million for
the first quarter of 2001. As of March 31, 2001, the Company had a total
conversion backlog of approximately 4.8 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
March 31,
------------------------------
Increase
2001 2000 (Decrease)
----- ----- ----------
Video account...................... $8.43 $8.31 1.4%
Internet account................... $4.94 $5.46 (9.5%)
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
March 31, 2001, increased 63.3% to $35.0 million, from $21.5 million for the
three months ended March 31, 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 years relates to the continued strong
demand for the Company's existing software products, primarily its workforce
automation application (CSG Workforce Express).
Cost of Processing and Related Services. Processing costs as a percentage of
related processing revenues were 36.1% for the three months ended March 31,
2001, compared to 36.5% for the three months ended March 31, 2000. The costs as
a percentage of related revenues between periods remained relatively unchanged
as the Company continues to (i) focus on cost controls and cost reductions
within its core processing business, and
9
(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.
Cost of Software and Professional Services. The cost of software and
professional services as a percentage of related revenues was 37.9% for the
three months ended March 31, 2001, compared to 49.1% for the three months ended
March 31, 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 March 31, 2001,
increased 29.6% to $72.3 million, from $55.8 million for the three months ended
March 31, 2000, due primarily to revenue growth. The overall gross margin
percentage increased to 63.4% for the three months ended March 31, 2001,
compared to 60.6% for the three months ended March 31, 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 March 31, 2001, increased 17.4% to $11.6 million, from $9.9
million for the three months ended March 31, 2000. As a percentage of total
revenues, R&D expense decreased to 10.2% for the three months ended March 31,
2001, from 10.7% for the three months ended March 31, 2000. The Company did not
capitalize any software development costs during the three months ended March
31, 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
first quarter of 2001 were focused primarily on the development of products to:
o address the international customer care and billing system market
(primarily, CSG NextGen),
o increase the efficiencies and productivity of its clients' operations,
o address the systems needed to support the convergence of the
communications markets,
o support a web-enabled, customer self-care and electronic bill
presentment/payment application, and
o 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).
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 March 31, 2001, increased 34.2% to
$13.5 million, from $10.1 million for the three months ended March 31, 2000. As
a percentage of total revenues, SG&A expense increased to 11.9% for the three
months ended March 31, 2001, from 11.0% for the three months ended March 31,
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.
Depreciation Expense. Depreciation expense for the three months ended March 31,
2001, increased 19.1% to $3.4 million, from $2.8 million for the three months
ended March 31, 2000. The increase in expense relates to capital expenditures
made during the last nine months of 2000 and the first three 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.
10
Operating Income. Operating income for the three months ended March 31, 2001,
was $43.8 million or 38.4% of total revenues, compared to $33.0 million or 35.8%
of total revenues for the three months ended March 31, 2000. The increase
between years relates to the factors discussed above.
Interest Expense. Interest expense for the three months ended March 31, 2001,
decreased 29.8% to $1.1 million, from $1.5 million for the three months ended
March 31, 2000, with the decrease due primarily to scheduled principal payments
on the Company's long-term debt during 2000 and a decrease in interest rates.
The balance of the Company's long-term debt as of March 31, 2001, was $52.5
million, compared to $76.0 million as of March 31, 2000, a decrease of $23.5
million.
Interest and Investment Income. Interest and investment income for the three
months ended March 31, 2001, decreased 25.0% to $0.9 million, from $1.3 million
for the three months ended March 31, 2000, with the decrease due primarily to
the Company recording a charge of $0.5 million for an "other-than-temporary"
decline in market value for a short-term investment during the three months
ended March 31, 2001.
Income Tax Provision. For the three months ended March 31, 2001, the Company
recorded an income tax provision of $16.6 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 March 31, 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.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
As of March 31, 2001, the Company's principal sources of liquidity included
cash, cash equivalents and short-term investments of $52.4 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 March 31, 2001. The Company's ability
to borrow under the revolving credit facility is subject to maintenance of
certain levels of eligible receivables. At March 31, 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 March 31, 2001 and December 31, 2000, respectively, the Company had $79.9
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 March 31, 2001 and 2000 were 56 days and 54 days,
respectively. The Company improved from its fourth quarter 2000 DBO of 72 days
as a result of strong cash collections during the quarter, in particular, the
large software receivable mentioned in the previous paragraph. The Company's
target range for DBOs is 55 to 60 days.
The Company's net cash flows from operating activities for the three months
ended March 31, 2001 and 2000 were $79.9 million and $25.0 million,
respectively. The increase of $54.9 million between periods relates to (i) an
increase in net cash flows from operations of $6.4 million and (ii) an increase
in the net changes in operating assets and liabilities of $48.5 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
11
been approximately $43.0 million for the first quarter of 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 $17.7 million
for the three months ended March 31, 2001, compared to $6.4 million for the
three months ended March 31, 2000, an increase of $11.3 million. The increase
between periods relates primarily to net purchases of short-term investments of
$11.1 million during the first quarter of 2001. During the third quarter of
2000, the Company began investing its excess cash balances in various low-risk,
short-term investments.
The Company's net cash flows used in financing activities was $64.7 million for
the three months ended March 31, 2001, compared to $0.9 million for the three
months ended March 31, 2000, an increase of $63.8 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 $0.8 million. This
increase is offset by a change in proceeds between periods of $19.2 million from
the exercise of stock options and warrants.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the
three months ended March 31, 2001 was $48.3 million, or 42.3% of total revenues,
compared to $37.5 million, or 40.7% of total revenues for the three months ended
March 31, 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 March 31, 2001, the spread on the LIBOR rate and
the prime rate was 0.50% and 0%, respectively. As of March 31, 2001, the entire
amount of the debt was under a one-month LIBOR contract with an interest rate of
5.58% (i.e., LIBOR at 5.08% plus spread of 0.50%).
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 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 March 31, 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 expects to expand its
international business and is continually evaluating potential business and
asset acquisitions. The Company had no significant capital commitments as of
March 31, 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
12
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 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
three months ended March 31, 2001 and 2000, revenues from AT&T Broadband and
affiliated companies (AT&T) represented approximately 61.9% and 50.0% of total
revenues, respectively. The increase in the percentage between periods relates
primarily to the timing and the amount of software purchases 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 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 Company also has certain contractual rights to continue to process
certain AT&T customers for a specified time period in the event that AT&T sells
a portion of its customers to another company. During the fourth quarter of
2000, the Company relinguished 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, and this matter has been considered in determining the Company's
financial guidance for 2001.
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.
13
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
There have been no material changes to the Company's market risks during the
three months ended March 31, 2001. See the Company's 2000 10-K for additional
discussion regarding the Company's market risks.
14
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1-5. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.03 CSG Systems International, Inc. 1996 Stock Incentive Plan
10.44 CSG Systems International, Inc. Stock Option Plan for
Non-Employee Directors
10.48 Employment Agreement with Peter Kalan, dated January 18,
2001
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 March 1, 2001, under Item 5, Other Events, was
filed with the Securities and Exchange Commission which included
a press release dated March 1, 2001. The press release announced
that the Company had executed a Warrant Exercise and Stock
Purchase Agreement with AT&T for 2.0 million shares of the
Company's Common Stock.
15
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: May 15, 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)
16
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
10.03 CSG Systems International, Inc. 1996 Stock Incentive Plan
10.44 CSG Systems International, Inc. Stock Option Plan for Non-Employee
Directors
10.48 Employment Agreement with Peter Kalan, dated January 18, 2001
99.01 Safe Harbor for Forward-Looking Statements Under the Private
Securities Litigation Reform Act of 1995-Certain Cautionary
Statements and Risk Factors
17