FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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.)
5251 DTC PARKWAY, SUITE 625
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 July 31, 1996: 25,496,323.
TOTAL OF SEQUENTIALLY NUMBERED PAGES: 15
EXHIBIT INDEX ON SEQUENTIALLY NUMBERED PAGE: 15
1
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
PAGE NO.
--------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995.................................................... 3
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1996 and 1995 ................................. 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995............................................. 5
Notes to Condensed Consolidated Financial Statements..................... 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 8 - 12
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................... 13
Signatures............................................................... 14
Index to Exhibits........................................................ 15
2
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
ASSETS (unaudited)
------
Current Assets:
Cash and cash equivalents................................................................ $ 4,294 $ 3,603
Accounts receivable-
Trade-
Billed, net of allowance of $486 and $521............................................ 30,176 22,400
Unbilled............................................................................. 1,306 803
Other.................................................................................. 1,319 1,925
Deferred income taxes.................................................................... 102 -
Other current assets..................................................................... 1,675 585
------------ ------------
Total current assets................................................................... 38,872 29,316
------------ ------------
Equipment and furniture, net of depreciation of $8,091 and $5,759......................... 10,313 9,881
Investment in discontinued operations..................................................... 732 2,732
Acquired software, net of amortization of $17,417 and $11,917............................. 15,583 21,083
Noncompete agreements and goodwill, net of amortization of $9,096 and $6,154.............. 28,759 25,657
Client contracts and related intangibles, net of amortization of $6,481 and $4,433........ 11,799 13,846
Deferred income taxes..................................................................... 1,344 -
Other assets.............................................................................. 1,737 3,038
------------ ------------
Total assets............................................................................. $ 109,139 $ 105,553
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt..................................................... $ 10,000 $ 10,000
Customer deposits........................................................................ 5,977 5,505
Trade accounts payable................................................................... 11,893 6,110
Accrued liabilities...................................................................... 6,097 4,421
Deferred revenue......................................................................... 2,283 622
Accrued income taxes..................................................................... 1,042 -
Other current liabilities................................................................ 370 299
------------ ------------
Total current liabilities.............................................................. 37,662 26,957
------------ ------------
Long-term debt, net of current maturities................................................. 30,000 75,068
Deferred revenue.......................................................................... 5,199 2,531
Redeemable convertible preferred stock, par value $.01 per share: zero shares and
9,500,000 shares authorized; zero shares and 8,999,999 shares issued and outstanding..... - 62,985
Stockholders' equity:
Preferred stock, par valule $.01 per share; 10,000,000 shares and zero shares
authorized; zero shares issued and outstanding......................................... - -
Common stock, par value $.01 per share; 100,000,000 shares and 50,000,000 shares
authorized; 25,496,323 shares and 4,243,000 shares issued and outstanding.............. 255 42
Additional paid-in-capital............................................................... 111,309 7,720
Deferred employee compensation........................................................... (1,424) (4,968)
Notes receivable from employee stockholders.............................................. (976) (976)
Accumulated deficit...................................................................... (72,886) (63,806)
------------ ------------
Total stockholders' equity (deficit)................................................... 36,278 (61,988)
------------ ------------
Total liabilities and stockholders' equity............................................... $ 109,139 $ 105,553
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS-UNAUDITED
(in thousands, except share and per share amounts)
Quarter ended Six months ended
------------------------- ------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1996
------------ ---------- ----------- ----------
Total revenues........................................................... $ 30,431 $ 24,092 $ 57,188 $ 46,936
Expenses:
Cost of revenues:
Cost of services..................................................... 14,369 11,556 27,200 22,917
Amortization of acquired software.................................... 2,751 2,750 5,501 5,500
Amortization of customer contracts and related intangibles........... 1,023 1,023 2,046 2,046
----------- ---------- ----------- ----------
Total cost of revenues............................................. 18,143 15,329 34,747 30,463
----------- ---------- ----------- ----------
Operating expenses:
Research and development............................................. 4,792 3,386 9,348 6,466
Selling and marketing................................................ 1,570 773 2,990 1,431
General and administrative:
General and administrative......................................... 3,146 2,685 6,428 4,980
Amortization of noncompete agreements and goodwill................. 1,519 1,420 2,939 2,840
Stock-based employee compensation.................................. 97 34 3,374 34
Depreciation......................................................... 1,246 1,375 2,436 2,676
----------- ---------- ----------- ----------
Total operating expenses........................................... 12,370 9,673 27,515 18,427
----------- ---------- ----------- ----------
Total expenses........................................................... 30,513 25,002 62,262 48,890
----------- ---------- ----------- ----------
Operating loss....................................................... (82) (910) (5,074) (1,954)
----------- ---------- ----------- ----------
Other income (expense):
Interest expenses.................................................... (870) (2,245) (2,610) (4,677)
Interest income...................................................... 256 145 485 319
----------- ---------- ----------- ----------
Total other........................................................ (614) (2,100) (2,125) (4,358)
----------- ---------- ----------- ----------
Loss before income taxes, extraordinary item and discontinued operations. (696) (3,010) (7,199) (6,312)
Income tax (provision) benefit......................................... - - - -
----------- ---------- ----------- ----------
Loss before extraordinary item and discontinued operations............... (696) (3,010) (7,199) (6,312)
Extraordinary loss from early extinguishment of debt..................... - - (1,260) -
Discontinued operations:
Loss from operations................................................... - (939) - (2,090)
Loss from disposition.................................................. - - - -
----------- ---------- ----------- ----------
Total loss from discontinued operations:........................... - (939) - (2,090)
----------- ---------- ----------- ----------
Net loss................................................................. $ (696) $ (3,949) $ (8,459) $ (8,402)
=========== ========== =========== ==========
Net loss per share:
Loss before extraordinary item and discontinued operations............. $ (0.03) (0.14) $ (0.30) $ (0.28)
Extraordinary loss from early extinguishment of debt................... - - (0.05) -
Loss from discontinued operations...................................... - (0.04) - (0.09)
----------- ---------- ----------- ----------
Net loss............................................................... $ (0.03) $ (0.18) $ (0.30) $ (0.28)
=========== ========== =========== ==========
Weighted average common shares and equivalents........................... 25,532,945 22,494,748 24,490,889 22,494,748
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, except share amounts)
Six months ended
--------------------------------------
June 30, June 30,
1996 1995
------------- -------------
Cash flows from operating activities:
Net loss........................................................... $ (8,459) $ (8,402)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation..................................................... 2,436 2,676
Amortization..................................................... 10,901 10,855
Stock-based employee compensation................................ 3,374 34
Extraordinary loss from early extinguishment of debt............. 1,260 -
Loss from discontinued operations................................ - 2,090
Changes in operating assets and liabilities:
Trade accounts receivable, net.................................. (5,999) (841)
Other receivables............................................... 835 394
Deferred income taxes........................................... (1,446) -
Other current assets and noncurrent assets...................... (1,374) (221)
Customer deposits............................................... 472 743
Trade accounts payable and accrued liabilities.................. 3,315 (1,178)
Deferred revenue................................................ 4,329 (46)
Other current liabilities....................................... 71 (17)
------------- -------------
Net cash provided by operating activities..................... 9,715 6,087
------------- -------------
Cash flows from investing activities:
Purchases of equipment and furniture, net.......................... (2,715) (2,524)
Acquisition of businesses, net of cash acquired.................... (3,518) -
Net investment in discontinued operations.......................... 2,000 (1,629)
------------- -------------
Net cash used in investing activities......................... (4,233) (4,153)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock............................. 44,794 243
Purchase and cancellation of common stock.......................... (20) -
Payment of dividends for redeemable convertible preferred stock.... (4,497) -
Payments on long-term debt......................................... (45,068) (3,750)
------------- -------------
Net cash used in financing activities......................... (4,791) (3,507)
-------------- --------------
Net increase (decrease) in cash and cash equivalents................ 691 (1,573)
Cash and cash equivalents, beginning of period...................... 3,603 6,650
------------- -------------
Cash and cash equivalents, end of period............................ $ 4,294 $ 5,077
============= =============
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for-
Interest.......................................................... $ 2,666 $ 3,914
Income taxes...................................................... $ (653) $ 1,121
Supplemental disclosure of noncash financing activities:
During March 1996, the Company converted 8,999,999 shares of redeemable convertible preferred stock
into 17,999,998 shares of common stock.
The accompanying notes are an integral part of these condensed consolidated financial statements.
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements at June 30, 1996 and for the
three and six months then ended are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim 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
Form S-1 Registration Statement filed with the Securities and Exchange
Commission (Registration No. 333-244). The results of operations for the three
and six months ended June 30, 1996 are not necessarily indicative of the results
for the entire year ending December 31, 1996.
2. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS
Certain December 31, 1995 amounts have been reclassified to conform with the
June 30, 1996 presentation.
3. STOCKHOLDERS' EQUITY
The Company completed an initial public offering (IPO) of common stock in March
1996. The Company sold 3,335,000 shares of common stock at an initial public
offering price of $15 per share, resulting in net proceeds to the Company, after
deducting underwriting discounts and offering expenses, of approximately
$44,794,000. As of the closing of the IPO, all of the 8,999,999 outstanding
shares of redeemable convertible Series A Preferred Stock were automatically
converted into 17,999,998 shares of common stock.
4. NET LOSS PER SHARE
Net loss per common and equivalent share for the three and six months ended June
30, 1996, is based on the weighted average number of shares of common stock and
common equivalent shares related to redeemable convertible Series A Preferred
Stock. Common equivalent shares related to stock options have been excluded from
the weighted average number of shares as the effect is antidilutive. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, all shares
and options issued during the twelve-month period prior to the Company's IPO
have been treated as if they were outstanding for all periods presented,
including periods in which the effect is antidilutive.
5. EXTRAORDINARY LOSS
The Company used $40.3 million of the IPO proceeds to repay a portion of
outstanding bank indebtedness (the Indebtedness). Upon repayment of the
Indebtedness, the Company recorded an extraordinary loss of $1.3 million for the
write-off of deferred financing costs.
6
6. ACQUISITION
On June 28, 1996, the Company acquired the capital stock of Bytel Limited, a
United Kingdom-based company which provides customer management software systems
to the cable and telecommunications industries. The total purchase price was
approximately $4.7 million consisting of cash payments of approximately $3.1
million and assumption of certain payables to one of the sellers of
approximately $1.6 million. The cash portion of the purchase price was paid out
of corporate funds. The acquisition was accounted for under the purchase method.
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 periods indicated (in thousands):
Quarter ended June 30, Six Months ended June 30,
----------------------------------------- ------------------------------------------
1996 1995 1996 1995
------------------ ------------------ ------------------ -------------------
% of % of % of % of
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
------ ------- ------ ------- ------ ------- ------ -------
Total revenues.................... $30,431 100.0% $24,092 100.0% $57,188 100.0% $46,936 100.0%
Expenses:
Cost of revenues:
Cost of services.............. 14,369 47.2% 11,556 48.0% 27,200 47.6% 22,917 48.8%
Amortization of acquired
software..................... 2,751 9.0% 2,750 11.4% 5,501 9.6% 5,500 11.7%
Amortization of customer
contracts and related
intangibles.................. 1,023 3.4% 1,023 4.2% 2,046 3.6% 2,046 4.4%
------- ----- ------- ----- ------- ----- ------- -----
Total cost of revenues...... 18,143 59.6% 15,329 63.6% 34,747 60.8% 30,463 64.9%
------- ----- ------- ----- ------- ----- ------- -----
Operating expenses:
Research and development..... 4,792 15.7% 3,386 14.1% 9,348 16.3% 6,466 13.8%
Selling and marketing........ 1,570 5.2% 773 3.2% 2,990 5.2% 1,431 3.0%
General and administrative:
General and administrative.. 3,146 10.3% 2,685 11.1% 6,428 11.2% 4,980 10.6%
Amortization of noncompete
agreements and goodwill.... 1,519 5.0% 1,420 5.9% 2,939 5.1% 2,840 6.1%
Stock-based employee
compensation............... 97 0.3% 34 0.1% 3,374 5.9% 34 0.1%
Depreciation................. 1,246 4.1% 1,375 5.7% 2,436 4.3% 2,676 5.7%
------- ----- ------- ----- ------- ----- ------- -----
Total operating expenses......... 12,370 40.6% 9,673 40.1% 27,515 48.0% 18,427 39.3%
------- ----- ------- ----- ------- ----- ------- -----
Total expenses.............. 30,513 100.2% 25,002 103.7% 62,262 108.8% 48,890 104.2%
------- ----- ------- ----- ------- ----- ------- -----
Operating loss............... (82) (0.2)% (910) (3.7)% (5,074) (8.8)% (1,954) (4.2)%
------- ----- ------- ----- ------- ----- ------- -----
Other income (expense):
Interest expense............. (870) (2.9)% (2,245) (9.3)% (2,610) (4.6)% (4,677) (10.0)%
Interest income.............. 256 0.8% 145 0.6% 485 0.8% 319 0.7%
------- ----- ------- ----- ------- ----- ------- -----
Total other................. (614) (2.1)% (2,100) (8.7)% (2,125) (3.8)% (4,358) (9.3)%
------- ----- ------- ----- ------- ----- ------- -----
Loss before income taxes,
extraordinary item and
discontinued operations........ (696) (2.3)% (3,010) (12.4)% (7,199) (12.6)% (6,312) (13.5)%
Income tax (provision)
benefit...................... - - - - - - - -
------- ----- ------- ----- ------- ----- ------- -----
Loss before extraordinary item
and discontinued operations.... (696) (2.3)% (3,010) (12.4)% (7,199) (12.6)% (6,312) (13.5)%
Extraordinary loss from early
extinguishment of debt......... - - - - (1,260) (2.2)% - -
Discontinued operations:
Loss from operations........... - - (939) (3.9)% - - (2,090) (4.5)%
Loss from disposition.......... - - - - - - - -
------ ----- ------- ----- ------- ----- ------- -----
Total loss from
discontinued operations... - - (939) (3.9)% - - (2,090) (4.5)%
------ ----- ------- ----- ------- ----- ------- -----
Net loss........................ $ (696) (2.3)% $(3,949) (16.3)% $(8,459) (14.8)% $(8,402) (18.0)%
====== ===== ======= ===== ======= ===== ======= =====
8
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Revenues. Revenues increased 26.3% from $24.1 million in the three months ended
June 30, 1995, to $30.4 million in the three months ended June 30, 1996, due
primarily to increased revenue from the Company's existing processing and
related ancillary services and increased revenue from new software products and
professional services. The increase in revenue from processing and related
ancillary services is due primarily to an increased number of customers of the
Company's clients which were serviced by the Company and increased revenue per
customer. Customers serviced as of June 30, 1995 and 1996, were 17.2 million
and 18.1 million, respectively. The increase in the number of customers was due
primarily to internal customer growth experienced by existing clients and the
addition of new clients. Revenue per customer increased due to annual price
increases included in client contracts and increased usage of ancillary services
by existing clients. New software products, consisting primarily of license
fees from Advanced Customer Service Representative (ACSR(TM)) and CSG Vantage
Point(TM)the Company's data warehouse product), and professional services
generated $2.8 million of revenue for the three months ended June 30, 1996.
Cost of Services. Cost of services increased 24.3% from $11.6 million in the
three months ended June 30, 1995, to $14.4 million in the three months ended
June 30, 1996, due primarily to the increased number of customers of the
Company's clients serviced by the Company with its existing processing and
related ancillary services and the cost to provide the new software products and
professional services.
As a percentage of revenues, cost of services decreased from 48.0% in the three
months ended June 30, 1995, to 47.2% in the three months ended June 30, 1996.
The decrease in cost of services as a percentage of revenue is due primarily to
the increased gross margin per customer for existing processing and related
ancillary services, which resulted primarily from annual price increases
included in customer contracts exceeding the corresponding cost to provide such
services and increased usage of ancillary services by existing customers.
Research and Development Expense. Research and development expense increased
41.5% from $3.4 million in the three months ended June 30, 1995, to $4.8 million
in the three months ended June 30, 1996, due primarily to continued efforts on
several products which are in development, including CSG Phoenix(TM) and a
telephony billing solution product, and to enhancements of the Company's
existing products. The increase in expense consists primarily of increases in
salaries, benefits, and other programming-related expenses. To date, the
Company has not capitalized any software development costs. The Company intends
to continue to increase its research and development expenditures.
Selling and Marketing Expense. Selling and marketing expense increased 103.1%
from $0.8 million in the three months ended June 30, 1995, to $1.6 million in
the three months ended June 30, 1996. As a percentage of revenues, selling and
marketing expense increased from 3.2% in the three months ended June 30, 1995,
to 5.2% in the three months ended June 30, 1996. The increase in expense is due
primarily to a realignment of the Company's sales force. Following the change
of ownership of the Company in late 1994, a substantial portion of the previous
sales force was terminated during the three months ended March 31, 1995, and
senior management focused on sales responsibilities in 1995. The Company began
building a new direct sales force in mid-1995 and has added additional staff
since that time. The Company intends to expand its sales force throughout
1996, and selling and marketing expense will increase.
General and Administrative Expense. General and administrative (G&A) expense
increased 17.2% from $2.7 million in the three months ended June 30, 1995, to
$3.1 million in the three months ended June 30, 1996. As a percentage of
revenues, G&A expense decreased from 11.1% in the three months ended June 30,
1995, to 10.3% in the three months ended June 30, 1996. The increase in expense
relates primarily to the development of the Company's management team and to
related administrative staff added during 1995 and the first six months of 1996
to support the Company's growth. The decrease in G&A expense as a percentage of
revenue is due primarily to increased leverage from the larger revenue base in
relation to the level of G&A expenses incurred during the during the three
months ended June 30, 1996. The Company does not intend to significantly
increase its administrative staff during the remainder of 1996.
Interest Expense. Interest expense decreased by 61.2% from $2.2 million in the
three months ended June 30, 1995, to $0.9 million in the three months ended June
30, 1996, with the decrease attributable primarily to scheduled principal
9
payments on the Company's long-term debt, the retirement of $40.3 million of
long-term debt with proceeds from the IPO in March 1996, and a decrease in
interest rates as a result of the Company favorably amending its long-term
credit facility with its banks in April 1996 in conjunction with the $40.3
million retirement of long-term debt.
Discontinued Operations. The loss of $0.9 million in the three months ended
June 30, 1995, relates to the Company's investment in Anasazi Inc., which was
disposed of during the third quarter of 1995.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues. Revenues increased 21.8% from $46.9 million in the six months ended
June 30, 1995, to $57.2 million in the six months ended June 30, 1996, due
primarily to increased revenue from the Company's existing processing and
related ancillary services and increased revenue from new software products and
professional services. The increase in processing and related ancillary
services is due primarily to an increased number of customers of the Company's
clients which were serviced by the Company and increased revenue per customer.
The increase in the number of customers was due primarily to internal customer
growth experienced by existing clients and the addition of new clients. Revenue
per customer increased due to annual price increases included in client
contracts and increased usage of ancillary services by existing clients. New
software products, consisting primarily of license fees from ACSR(TM) and CSG
Vantage Point(TM), and professional services generated $2.9 million of revenue
for the six months ended June 30, 1996.
Cost of Services. Cost of services increased 18.7% from $22.9 million in the
six months ended June 30, 1995, to $27.2 million in the six months ended June
30, 1996, due primarily to the increased number of customers of the Company's
clients serviced by the Company with its existing processing and related
ancillary services and the cost to provide the new software products and
professional services.
As a percentage of revenues, cost of services decreased from 48.8% in the six
months ended June 30, 1995, to 47.6% in the six months ended June 30, 1996. The
decrease in cost of services as a percentage of revenue is due primarily to the
increased gross margin per customer for existing processing and related
ancillary services, which resulted primarily from annual price increases
included in customer contracts exceeding the corresponding cost to provide such
services and increased usage of ancillary services by existing customers.
Research and Development Expense. Research and development expense increased
44.6% from $6.5 million in the six months ended June 30, 1995, to $9.3 million
in the six months ended June 30, 1996, due primarily to continued efforts on
several products which are in development, including CSG Phoenix(TM) and a
telephony billing solution product, and to enhancements of the Company's
existing products. The increase in expense consists primarily of increases in
salaries, benefits, and other programming-related expenses. To date, the
Company has not capitalized any software development costs. The Company intends
to continue to increase its research and development expenditures.
Selling and Marketing Expense. Selling and marketing expense increased 108.9%
from $1.4 million in the six months ended June 30, 1995, to $3.0 million in the
six months ended June 30, 1996. As a percentage of revenues, selling and
marketing expense increased from 3.0% in the six months ended June 30, 1995, to
5.2% in the six months ended June 30, 1996. The increase in expense is due
primarily to a realignment of the Company's sales force. Following the change
of ownership of the Company in late 1994, a substantial portion of the previous
sales force was terminated during the three months ended March 31, 1995, and
senior management focused on sales responsibilities in 1995. The Company began
building a new direct sales force in mid-1995 and has added additional staff
since that time. The Company intends to expand its sales force throughout
1996, and selling and marketing expense will increase.
General and Administrative Expense. General and administrative (G&A) expense
increased 29.1% from $5.0 million in the six months ended June 30, 1995, to $6.4
million in the six months ended June 30, 1996. As a percentage of revenues, G&A
expense increased from 10.6% in the six months ended June 30, 1995, to 11.2% in
the six months ended June 30, 1996. The increase in expense relates primarily
to the development of the Company's management team and to related
administrative staff added during 1995 and the first six months of 1996 to
support the Company's growth. The Company does not intend to significantly
increase its administrative staff during the remainder of 1996.
10
Stock-Based Employee Compensation. Stock-based employee compensation of $3.4
million in the six months ended June 30, 1996 relates to purchases of the
Company's common stock through performance stock purchase agreements with
executive officers and key employees. The Company has the option to repurchase
the shares upon the occurrence of certain events, principally termination of
employment with the Company. The shares were to be released from the repurchase
option on November 30, 2001. The structure of the performance stock agreements
required "variable" accounting for the related shares until the performance
conditions were removed, thereby establishing a measurement date of October 19,
1995. At that date, the Company recorded total deferred compensation of $5.8
million. The deferred compensation was being recognized as stock-based employee
compensation expense on a straight-line basis through November 30, 2001. Upon
the completion of the Company's initial public offering (IPO) of its common
stock in March 1996, shares owned by certain executive officers were no longer
subject to the repurchase option. In addition, the repurchase option for the
remaining performance stock shares decreases 20% annually over a five-year
period, commencing on the later of the employee's employment date or November
30, 1994. As a result, approximately $3.2 million of stock-based employee
compensation expense was recorded in the month the IPO was completed. Annual
stock-based employee compensation expense related to these shares subsequent to
the IPO will be approximately $0.4 million until December 31, 2000.
Interest Expense. Interest expense decreased by 44.2% from $4.7 million in the
six months ended June 30, 1995, to $2.6 million in the six months ended June 30,
1996, with the decrease attributable to scheduled principal payments on the
Company's long-term debt, the retirement of $40.3 million of long-term debt with
proceeds from the IPO in March 1996, and a decrease in interest rates as a
result of the Company favorably amending its long-term credit facility with its
banks in April 1996 in conjunction with the $40.3 million retirement of long-
term debt.
Extraordinary Loss From Early Extinguishment Of Debt. Upon the repayment of the
$40.3 million of long-term debt with IPO proceeds, the Company recorded an
extraordinary charge of $1.3 million for the write-off of deferred financing
costs attributable to the portion of the long-term debt repaid.
Discontinued Operations. The loss of $2.1 million in the six months ended June
30, 1995, relates to the Company's investment in Anasazi Inc., which was
disposed of during the third quarter of 1995.
General
- -------
The Company's existing contract with Tele-Communications, Inc. (TCI), which was
scheduled to expire December 31, 1996, has been extended automatically by its
terms for one additional year. TCI, a significant client, is developing an in-
house billing system, and the Company expects TCI's in-house system to replace
the Company's system in the future.
The first delivery of CSG Phoenix(TM), which is the Company's next generation
customer care and billing system for the converging communications industries,
is scheduled in the fourth quarter of 1996. The Company expects to install a
beta site in the first quarter of 1997. The CSG Phoenix(TM) system is being
developed on a three-tier client/server, object-oriented architecture. The
system is being developed to enable clients to quickly deploy new convergence
services such as voice, video and data, and to support millions of customers at
a single site. The statements regarding timing of the Company's delivery of CSG
Phoenix(TM) and the installation of a beta site in the first quarter of 1997 are
forward-looking statements. The actual timing is subject to delay due to the
variety of factors inherent in the development and initial implementation of a
new, complex software system. Installation is also subject to factors relating
to the integration of the new system with the client's existing systems.
Income Taxes
- ------------
As of June 30, 1996, the Company has net deferred tax assets of approximately
$23.7 million. Based on the Company's history of operating losses, the Company
has recorded a valuation allowance of $22.3 million, primarily for deferred tax
assets related to future deductible temporary differences since realization of
these benefits is not sufficiently assured as of June 30, 1996.
The Company expects a net loss for 1996 and anticipates recognizing a deferred
tax benefit for this and prior operating losses and other net deferred tax
assets only to the extent the Company has a current tax provision. Thus, the
Company
11
anticipates no income tax expense will be recognized in 1996. Although
the Company expects to incur a net loss in 1996, the Company expects to pay
income taxes in 1996, due primarily to differences in the timing of recognition
of the amortization of intangible assets for financial reporting and tax
purposes.
The Company intends to analyze the realizability of the net deferred tax assets
at each future reporting period. Such analysis may indicate that the
realization of various deferred tax benefits is more likely than not and,
therefore, the amount of deferred tax assets recognized may be increased.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 1996, the Company's principal sources of liquidity included cash
and cash equivalents of $4.3 million. The Company also has a revolving bank
line of credit in the amount of $5.0 million of which there were no borrowings
outstanding. The line of credit expires December 31, 2000.
During the six months ended June 30, 1996, the Company generated $9.7 million in
net cash flow from operating activities and received a $2.0 million principal
payment on a note receivable from Anasazi Inc. Cash generated from these
sources was used to fund capital expenditures of $2.7 million, to fund
acquisitions of $3.5 million and to repay long-term debt of $4.7 million. Also,
in March 1996, the Company sold 3,335,000 shares of common stock at an initial
public offering price of $15 per share, resulting in net proceeds to the
Company, after deducting underwriting discounts and offering expenses, of
approximately $44.8 million. The net proceeds from the IPO were used to repay
long-term debt of $40.3 million and to pay accrued dividends of $4.5 million on
redeemable convertible Series A Preferred Stock. In conjunction with the $40.3
million repayment of long-term debt, the Company decreased the interest rates on
its long-term debt by favorably amending its credit facility with its banks in
April 1996. As of the closing of the IPO, all of the 8,999,999 outstanding
shares of redeemable convertible Series A Preferred Stock were automatically
converted into 17,999,998 shares of common stock, at which time the accrued
dividends became payable.
Although the Company expects to incur a net loss in 1996, the Company expects to
pay income taxes in 1996, due primarily to differences in the timing of
recognition of the amortization of intangible assets for financial reporting and
tax purposes.
The Company believes that cash generated from operations and the amount
available under the revolving bank line of credit will be sufficient to meet its
anticipated cash requirements for operations, income taxes, debt service, and
anticipated capital expenditures for the current year.
12
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Items 1 - 5. None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.05 Amended and Restated Loan Agreement among CSG Systems Inc.,
certain lenders, and Banque Paribas, as Agent, dated
April 26, 1996.
11.01 Statement re: Computation of Per Share Earnings
27.01 Financial Data Schedule (EDGAR Version Only)
(b) Reports on Form 8-K
None
13
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 5, 1996
CSG SYSTEMS INTERNATIONAL, INC.
/s/ Neal C. Hansen
- ----------------------------------
Neal C. Hansen
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ David I. Brenner
- ----------------------------------
David I. Brenner
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
/s/ Randy R. Wiese
- ----------------------------------
Randy R. Wiese
Controller and Principal Accounting Officer
(Principal Accounting Officer)
14
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
2.05 Amended and Restated Loan Agreement among CSG Systems, Inc.,
certain lenders, and Banque Paribas, as Agent, dated April 26,
1996
11.01 Statement re: Computation of Per Share Earnings
27.01 Financial Data Schedule (EDGAR Version Only)
15