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, 1999
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 7, 1999: 51,677,250
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q For the Quarter Ended March 31, 1999
INDEX
Page No.
--------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 .......................................................... 3
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 1999 and 1998......................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 .................................................. 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...................... 15
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................................... 16
Signatures ..................................................................... 17
Index to Exhibits .............................................................. 18
2
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
March 31, December 31,
1999 1998
ASSETS ----------------- ---------------
------ (unaudited)
Current assets:
Cash and cash equivalents ............................................................... $ 40,035 $ 39,593
Accounts receivable-
Trade-
Billed, net of allowance of $2,637 and $2,051 .................................... 58,499 60,529
Unbilled ......................................................................... 4,883 2,828
Other ................................................................................ 728 1,179
Deferred income taxes ................................................................... 2,092 1,803
Other current assets .................................................................... 2,558 2,275
----------------- ---------------
Total current assets ................................................................. 108,795 108,207
----------------- ---------------
Property and equipment, net of depreciation of $26,039 and $23,765 ........................ 24,587 24,711
Software, net of amortization of $35,856 and $35,391 ...................................... 8,916 9,422
Noncompete agreements and goodwill, net of amortization of $26,154 and $24,878 ............ 6,218 7,596
Client contracts and related intangibles, net of amortization of $19,430 and $17,671 ...... 59,482 59,791
Deferred income taxes ..................................................................... 54,302 59,389
Other assets .............................................................................. 2,037 2,380
----------------- ---------------
Total assets ........................................................................ $ 264,337 $ 271,496
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .................................................... $ 19,821 $ 19,125
Customer deposits ....................................................................... 10,582 10,018
Trade accounts payable .................................................................. 10,634 10,471
Accrued employee compensation ........................................................... 9,965 12,276
Deferred revenue ........................................................................ 11,683 13,470
Conversion incentive payments ........................................................... 18,881 22,032
Accrued income taxes .................................................................... 7,643 6,756
Other current liabilities ............................................................... 7,563 7,009
----------------- ---------------
Total current liabilities ............................................................ 96,772 101,157
----------------- ---------------
Non-current liabilities:
Long-term debt, net of current maturities ............................................... 91,179 109,125
Deferred revenue ........................................................................ 192 216
----------------- ---------------
Total non-current liabilities ........................................................ 91,371 109,341
----------------- ---------------
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;
51,637,850 shares and 51,465,646 shares outstanding .................................. 517 515
Common stock warrants; 3,000,000 warrants outstanding ................................... 26,145 26,145
Additional paid-in capital .............................................................. 124,190 120,599
Deferred employee compensation .......................................................... (255) (328)
Notes receivable from employee stockholders ............................................. (331) (478)
Accumulated other comprehensive income (loss)-cumulative translation adjustments ........ (126) 38
Treasury stock, at cost, 66,986 shares and 66,000 shares ................................ (132) (97)
Accumulated deficit ..................................................................... (73,814) (85,396)
----------------- ----------------
Total stockholders' equity ........................................................... 76,194 60,998
----------------- ----------------
Total liabilities and stockholders' equity ........................................... $ 264,337 $ 271,496
================= ================
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,
1999 1998
------------ ------------
Total revenues ............................................ $ 71,087 $ 49,308
Expenses:
Cost of revenues:
Direct costs ....................................... 28,096 22,082
Amortization of client contracts ................... 1,789 1,068
------------ ------------
Total cost of revenues ....................... 29,885 23,150
------------ ------------
Gross margin (exclusive of depreciation) .................. 41,202 26,158
------------ ------------
Operating expenses:
Research and development .............................. 7,620 6,525
Selling and marketing ................................. 3,273 2,397
General and administrative:
General and administrative ......................... 6,282 5,602
Amortization of noncompete agreements and goodwill.. 1,318 1,341
Stock-based employee compensation .................. 73 74
Depreciation .......................................... 2,409 1,842
------------ ------------
Total operating expenses ..................... 20,975 17,781
------------ ------------
Operating income .......................................... 20,227 8,377
------------ ------------
Other income (expense):
Interest expense ................................... (2,224) (2,546)
Interest income .................................... 641 660
Other .............................................. (21) (7)
------------ ------------
Total other .................................. (1,604) (1,893)
------------ ------------
Income before income taxes ................................ 18,623 6,484
Income tax provision .................................. (7,041) --
------------ ------------
Net income ................................................ $ 11,582 $ 6,484
============ ============
Basic net income per common share:
Net income available to common stockholders ............ $ 0.22 $ 0.13
============ ============
Weighted average common shares ......................... 51,565 51,025
============ ============
Diluted net income per common share:
Net income available to common stockholders ............ $ 0.21 $ 0.12
============ ============
Weighted average common shares ......................... 54,216 52,737
============ ============
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,
1999 1998
-------------- -------------
Cash flows from operating activities:
Net income .................................................................................. $ 11,582 $ 6,484
Adjustments to reconcile net income to net cash provided by (used in) operating activities-
Depreciation ............................................................................. 2,409 1,842
Amortization ............................................................................. 3,899 2,846
Deferred income taxes .................................................................... 4,796 (3,699)
Stock-based employee compensation ........................................................ 73 74
Changes in operating assets and liabilities:
Trade accounts and other receivables, net .............................................. 345 (6,540)
Other current and noncurrent assets .................................................... (294) (94)
Accounts payable and accrued liabilities ............................................... (517) (2,561)
-------------- -------------
Net cash provided by (used in) operating activities .................................. 22,293 (1,648)
-------------- -------------
Cash flows from investing activities:
Purchases of property and equipment, net .................................................... (2,317) (3,494)
Additions to software ....................................................................... -- (571)
Conversion and other incentive payments ..................................................... (4,601) --
-------------- -------------
Net cash used in investing activities ................................................ (6,918) (4,065)
-------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock ...................................................... 2,305 1,260
Payments on notes receivable from employee stockholders ..................................... 181 --
Payments on long-term debt .................................................................. (17,250) --
-------------- -------------
Net cash provided by (used in) financing activities .................................. (14,764) 1,260
-------------- -------------
Effect of exchange rate fluctuations on cash .................................................. (169) 104
-------------- -------------
Net increase (decrease) in cash and cash equivalents .......................................... 442 (4,349)
Cash and cash equivalents, beginning of period ................................................ 39,593 20,417
-------------- -------------
Cash and cash equivalents, end of period ...................................................... $ 40,035 $ 16,068
============== =============
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for-
Interest .................................................................................. $ 1,950 $ 2,311
Income taxes .............................................................................. $ 96 $ (70)
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, 1999, 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, 1998, filed with the Securities and
Exchange Commission (the Company's 1998 10-K). The results of operations for the
three months ended March 31, 1999, are not necessarily indicative of the results
for the entire year ending December 31, 1999.
2. STOCK SPLIT
On March 5, 1999, the Company completed a two-for-one stock split, effected as a
stock dividend, for stockholders of record on February 8, 1999. Share and per
share data for all periods presented herein have been adjusted to give effect to
the split.
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. For all periods
presented, dilutive potential common shares consisted entirely of stock options.
For the quarters ended March 31, 1999 and 1998, weighted average outstanding
stock options of 3,200 and 761,128, respectively, have been excluded from the
computation of diluted net income per common share because the exercise prices
of these options were greater than the average market price of the common shares
for the respective quarters.
For the quarters ended March 31, 1999 and 1998, the weighted average dilutive
potential common shares (calculated using the treasury stock method) from Common
Stock Warrants of 2,012,527 and 1,225,386, respectively, are excluded from the
diluted net income per common share calculation as the events necessary to allow
the exercise of the warrants had not been satisfied as of March 31, 1999 or
1998. The Company expects certain of these warrants to become exercisable during
1999. See additional discussion of the Common Stock Warrants in the Company's
1998 10-K.
6
4. COMPREHENSIVE INCOME
The Company's components of comprehensive income was as follows (in thousands):
Three months ended March 31,
----------------------------
1999 1998
------- -------
Net income........................... $11,582 $ 6,484
Foreign currency translation
adjustments...................... (164) 80
------- -------
Comprehensive income................ $11,418 $ 6,564
======= =======
5. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS
Certain March 31, 1998 amounts have been reclassified to conform with the March
31, 1999 presentation.
6. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and for
Hedging Activities" (SFAS 133) was issued. The Statement establishes accounting
and reporting standards requiring every derivative instrument, as defined, to be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. The Company expects to adopt SFAS 133 no later than fiscal year 2000,
and does not expect the adoption of this Statement to have a significant effect
on the Company's consolidated financial statements.
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):
Three months ended March 31,
---------------------------------------------------
1999 1998
------------------------ ------------------------
% of % of
Amount Revenue Amount Revenue
----------- ----------- ----------- -----------
Total revenues ...................................................... $ 71,087 100.0% $ 49,308 100.0%
Expenses:
Cost of revenues:
Direct costs ................................................... 28,096 39.5 22,082 44.8
Amortization of client contracts ............................... 1,789 2.5 1,068 2.1
----------- ----------- ----------- -----------
Total cost of revenues ................................... 29,885 42.0 23,150 46.9
----------- ----------- ----------- -----------
Gross margin (exclusive of depreciation) ......................... 41,202 58.0 26,158 53.1
----------- ----------- ----------- -----------
Operating expenses:
Research and development ....................................... 7,620 10.7 6,525 13.2
Selling and marketing .......................................... 3,273 4.6 2,397 4.9
General and administrative:
General and administrative .................................... 6,282 8.8 5,602 11.4
Amortization of noncompete agreements and goodwill ............ 1,318 1.9 1,341 2.7
Stock-based employee compensation ............................. 73 0.1 74 0.2
Depreciation ................................................... 2,409 3.4 1,842 3.7
----------- ----------- ----------- -----------
Total operating expenses ...................................... 20,975 29.5 17,781 36.1
----------- ----------- ----------- -----------
Operating income .................................................... 20,227 28.5 8,377 17.0
----------- ----------- ----------- -----------
Other income (expense):
Interest expense ............................................... (2,224) (3.1) (2,546) (5.2)
Interest income ................................................ 641 0.8 660 1.3
Other .......................................................... (21) -- (7) --
----------- ----------- ----------- -----------
Total other ................................................... (1,604) (2.3) (1,893) (3.9)
----------- ----------- ----------- -----------
Income before income taxes .......................................... 18,623 26.2 6,484 13.1
Income tax provision ............................................. (7,041) (9.9) -- --
----------- ----------- ----------- -----------
Net income .......................................................... $ 11,582 16.3% $ 6,484 13.1%
=========== =========== =========== ===========
8
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenues. Total revenues for the three months ended March 31, 1999, increased
44.2% to $71.1 million, from $49.3 million for the three months ended March 31,
1998.
Revenues from processing and related services for the three months ended March
31, 1999, increased 48.0% to $59.0 million, from $39.8 million for the three
months ended March 31, 1998. Of the total increase in revenue, approximately 68%
resulted from an increase in the number of customers of the Company's clients
which were serviced by the Company and approximately 32% was due to increased
revenue per customer. Customers serviced as of March 31, 1999 and 1998,
respectively, were 30.5 million and 23.6 million, an increase of 29.4%. 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, 1999
through March 31, 1999, the Company converted and processed approximately 1.0
million additional customers on its systems. Total annualized domestic revenue
per customer account for the first three months of 1999 was $9.10, compared to
$8.13 for the same period in 1998, an increase of 11.9%. Revenue per customer
increased primarily due to a greater percentage of processing revenues in 1999
being generated under the Tele-Communications, Inc. (TCI) processing contract
(the TCI Contract), and to a lesser degree, increased usage of ancillary
services by clients and price increases included in client contracts.
Revenues from software and related product sales and professional consulting
services for the three months ended March 31, 1999, increased 27.9% to $12.1
million, from $9.5 million for the three months ended March 31, 1998. This
increase relates primarily to the continued penetration of sales of software and
services to the Company's existing client base, as well as sales to new clients.
Cost of Revenues. Direct costs as a percentage of related revenues were 39.5%
for the three months ended March 31, 1999, compared to 44.8% for the three
months ended March 31, 1998. The improvement between periods relates primarily
to better overall leveraging of processing costs as a result of the continued
growth of the customer base processed on the Company's system. Amortization of
client contracts for the three months ended March 31, 1999, increased 67.5% to
$1.8 million, from $1.1 million for the three months ended March 31, 1998. The
increase in expense is due primarily to an increase in amortization of the value
assigned to the TCI Contract. The value assigned to the TCI Contract is being
amortized over the life of the contract in proportion to the financial minimums
included in the contract.
Gross Margin. Gross margin for the three months ended March 31, 1999, increased
57.5% to $41.2 million, from $26.2 million for the three months ended March 31,
1998, due primarily to revenue growth. The gross margin percentage increased to
58.0% for the three months ended March 31, 1999, compared to 53.1% for the three
months ended March 31, 1998. The overall increase in the gross margin percentage
is due primarily to the increase in processing and related services revenue per
customer while controlling the cost of delivering such services.
Research and Development Expense. Research and development (R&D) expense for the
three months ended March 31, 1999, increased 16.8% to $7.6 million, from $6.5
million for the three months ended March 31, 1998. As a percentage of total
revenues, R&D expense decreased to 10.7% for the three months ended March 31,
1999, from 13.2% for the three months ended March 31, 1998.
During the three months ended March 31, 1998, the Company capitalized third
party, contracted programming costs of approximately $0.6 million, related
primarily to enhancements to existing products. The Company did not capitalize
any software development costs during the three months ended March 31, 1999. As
a result, total R&D development expenditures (i.e., the total R&D costs
expensed, plus the capitalized development costs) for the three months ended
March 31, 1999 and 1998, were $7.6 million, or 10.7% of total revenues, and $7.1
million, or 14.4% of total revenues, respectively. The overall increase in the
R&D expenditures between periods is due primarily to increased efforts on
several products which are in development and
9
enhancements of the Company's existing products. The increased R&D expenditures
consist primarily of increases in salaries, benefits, and other
programming-related expenses.
Selling and Marketing Expense. Selling and marketing (S&M) expense for the three
months ended March 31, 1999, increased 36.5% to $3.3 million, from $2.4 million
for the three months ended March 31, 1998. As a percentage of total revenues,
S&M expense decreased to 4.6% for the three months ended March 31, 1999, from
4.9% for the three months ended March 31, 1998. The overall decrease in S&M
expenses as a percentage of total revenues is due primarily to increased
revenues, while controlling S&M costs.
General and Administrative Expense. General and administrative (G&A) expense for
the three months ended March 31, 1999, increased 12.1% to $6.3 million, from
$5.6 million for the three months ended March 31, 1998. As a percentage of total
revenues, G&A expense decreased to 8.8% for the three months ended March 31,
1999, from 11.4% for the three months ended March 31, 1998. The increase in G&A
expenses relates primarily to the continued expansion of the Company's
administrative staff and other administrative costs to support the Company's
overall growth. The decrease in G&A expenses as a percentage of total revenues
is due primarily to increased revenues, while controlling G&A costs.
Depreciation Expense. Depreciation expense for the three months ended March 31,
1999, increased 30.8% to $2.4 million, from $1.8 million for the three months
ended March 31, 1998. The increase in expense relates to capital expenditures
made during 1998 and the first three months of 1999 in support of the overall
growth of the Company, consisting principally of computer hardware and related
equipment and statement processing equipment and related facilities.
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 March 31, 1999,
was $20.2 million or 28.5% of total revenues, compared to $8.4 million or 17.0%
of total revenues for the three months ended March 31, 1998. The increase
between years relates to the factors discussed above.
Interest Expense. Interest expense for the three months ended March 31, 1999,
decreased 12.6% to $2.2 million, from $2.5 million for the three months ended
March 31, 1998, with the decrease attributable primarily to scheduled principal
payments on the Company's long-term debt and a decrease in interest rates
between periods.
Income Tax Provision. As of December 31, 1997, the Company had recorded a
valuation allowance against certain deferred tax assets since realization of
future tax benefits was not sufficiently assured as of that date. During the
first quarter of 1998, the Company realized a portion of the deferred tax assets
such that the overall income tax provision for the quarter was zero. During the
fourth quarter of 1998, the Company concluded that it was more likely than not
that it would realize the entire tax benefit from its deferred tax assets and
eliminated the entire valuation allowance as of December 31, 1998.
For the three months ended March 31, 1999, the Company's recorded an income tax
provision of $7.0 million, or an effective income tax rate of approximately 38%,
which represents the Company's estimate of the effective book income tax rate
for 1999.
Adjusted Results of Operations
- ------------------------------
The Company incurred certain one-time or acquisition-related charges
(Acquisition Charges) in connection with the CSG Acquisition in November 1994.
The Acquisition Charges include amortization of acquired software, client
contracts and related intangibles, noncompete agreement, goodwill, and
stock-based compensation and totaled $2.0 million and $2.1 million for the
quarters ended March 31, 1999 and 1998, respectively. The Company's adjusted
results of operations excluding the impact of these items are shown in the
following table. In addition to the exclusion of these expenses from the
calculation, the adjusted results of operations were computed using an effective
income tax rate of 38%, and outstanding shares on a diluted basis. See the
Company's "Management's Discussion and Analysis of Financial Condition and
10
Results of Operations" contained in the Company's 1998 10-K for additional
discussion regarding the Acquisition Charges and the impact of such charges on
operations.
For the three months ended March 31,
------------------------------------
1999 1998
---- ----
(in thousands, except per share amounts)
Adjusted Results of Operations:
Operating income........................... $22,251 $10,428
Operating income margin.................... 31.3% 21.1%
Income before income taxes................. 20,647 8,535
Net income ................................ 12,801 5,292
Earnings per diluted common share.......... .24 .10
Weighted average diluted common shares..... 54,216 52,737
TCI Contract and AT&T Merger
- ----------------------------
During the three months ended March 31, 1999 and 1998, revenues from TCI and
affiliated companies generated under the TCI Contract represented approximately
44.2% and 39.1% of total revenues, respectively. The TCI Contract has a 15-year
term and expires in 2012. The TCI 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 TCI's offerings of wireline video,
all Internet/high-speed data services, residential wireline telephony services,
and print and mail services. The TCI Contract provides 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. To date, the Company believes it has
complied with the terms of the contract. Since execution of the TCI Contract in
September 1997 through March 31, 1999, the Company has successfully converted
approximately 8.6 million TCI cable television customers onto its system.
Approximately 1.7 million additional TCI cable television customers are
currently scheduled to be converted during the remainder of 1999.
AT&T completed its merger with TCI in March 1999. At this time, it is too early
to determine the near- and long-term impact, if any, the merger will have on the
Company's relationship with the combined entity. AT&T has announced its planned
efforts to provide convergent communications services in 10 United States cities
during 1999. The Company is participating in those convergent trials and is
working closely with AT&T to provide customer care and billing services to
customers in those cities. The Company expects to continue performing
successfully under the TCI Contract, and is hopeful that it can continue to sell
products and services to the combined entity that are in excess of the minimum
financial commitments included in the contract.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 1999, the Company's principal sources of liquidity included cash
and cash equivalents of $40.0 million. 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 March
31, 1999, 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, 1999 and December 31, 1998, respectively, the Company had $58.5
million and $60.5 million in net trade accounts receivable, a decrease of $2.0
million. The Company's trade accounts receivable balance includes billings for
several non-revenue items, such as postage, communication lines,
11
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 trade accounts receivable balance for the period. The Company's DBO
calculations for the three months ended March 31, 1999 and 1998 were 60 days and
58 days, respectively.
During the three months ended March 31, 1999, the Company generated $22.3
million of net cash flow from operating activities. Cash generated from these
sources and the proceeds of $2.3 million from the issuance of common stock
through the Company's stock incentive plans were used to (i) fund capital
expenditures of $2.3 million, (ii) pay conversion and other incentive payments
of $4.6 million, and (iii) repay long-term debt of $17.3 million, which includes
$2.3 million of scheduled payments and an optional prepayment of $15.0 million.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for the
three months ended March 31, 1999 was $26.3 million or 36.9% of total revenues,
compared to $12.9 million or 26.1% of total revenues for the three months ended
March 31, 1998. 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.
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.
Effective April 1, 1999, the spread on the LIBOR rate and the prime rate will be
0.50% and 0%, respectively.
The Company is required to make certain conversion incentive payments under the
TCI Contract, with the amounts and the timing of the payments based principally
upon the number of TCI customers converted to, and the total number of TCI
customers processed on, the Company's customer care and billing system. Total
payments as of March 31, 1999 have been approximately $7.1 million. Based on the
conversions performed to date and the future conversions scheduled as of March
31, 1999, the Company expects to pay the remaining $18.9 million to TCI in 1999.
The Company continues to make significant investments in capital equipment,
facilities, and research and development. The Company had no significant capital
commitments as of March 31, 1999. The Company believes that cash generated from
operations, together with the current cash and cash equivalents and the amount
available under the revolving credit facility, will be sufficient to meet its
anticipated cash requirements for operations, income taxes, debt service,
conversion incentive payments and capital expenditures for both its short and
long-term purposes.
Year 2000
- ---------
The Company's business is dependent upon various computer software programs and
operating systems that utilize dates and process data beyond the year 2000. The
Company's actions to address the risks associated with the year 2000 are as
follows:
The Company's State of Readiness. The Company has established a corporate
program to coordinate its year 2000 (Y2K) compliance efforts across all business
functions and geographic areas. The scope of the program includes addressing the
risks associated with the Company's (i) information technology (IT) systems
(including the Company's products and services), (ii) non-IT systems that
include embedded technology, and (iii) significant vendors and their Y2K
readiness. The Company is utilizing the following steps in executing its Y2K
compliance program: (1) awareness, (2) assessment, (3) renovation (including
upgrades and enhancements to the Company's products), (4) validation and
testing, and (5) implementation. The Company has completed the awareness and
assessment steps for all areas.
12
Products and Services. The renovation step has been substantially completed for
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all significant products and services, and the Company now is focusing its
efforts on validation and testing. The Company's most significant renovation
effort involved its core product, Communications Control System (CCS). CCS
utilizes one subroutine for calculating dates, with the various computer
programs within CCS with date dependent calculations accessing this subroutine.
As a result, all date calculations are performed in one location. The renovation
of this subroutine and the related interfaces to the various date dependent
programs has been completed. The Company has completed the testing of the CCS
application using its standard testing methodologies, while adding date
simulation to specifically address the Y2K risk. Such date simulation considered
pre-2000, cross over, and post-2000 time frames, including year 2000 leap year
considerations. The renovated and tested version of CCS has been implemented
into the production environment.
The Company expects to be substantially completed with its testing of third
party interfaces (e.g., addressable devices) to CCS by the end of the second
quarter of 1999. The Company is dependent upon the third parties for such
testing, and expects to be completed with the testing by the end of the third
quarter of 1999. The interfaces are not complex and are considered low risk by
the Company.
For the Company's software products, no significant renovation is believed
necessary, as the products are relatively new and were designed to be Y2K
compliant. The Company is testing these products with similar date simulation
techniques discussed above to ensure they are Y2K compliant. Such testing is
substantially completed, with the remaining testing expected to be done by the
end of the second quarter of 1999.
The Company has developed a process to manage further updates or enhancements to
any product related software code which has been tested and internally certified
as Y2K compliant, and is considering a plan to "freeze" all changes to mission
critical product related software after November 1999. The Company also plans to
retest CCS (through an initial program load of the CCS system) in the fourth
quarter of 1999 to ensure continued Y2K compliance. Several CSG clients are
conducting tests of the Company's products in conjunction with their own
operating environments. Several test phases have been completed (beginning in
December 1998), with additional phases continuing into the third quarter of
1999, including participation by TCI in such testing.
Internal Systems. Renovation and/or testing of the Company's significant
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internal use IT Systems (e.g., payroll systems, accounting systems, etc.) is
substantially complete, with all systems expected to be tested and implemented
by the end of the second quarter of 1999. The Company has a substantial number
of non-IT systems that include embedded technology (e.g., buildings, plant,
equipment and other infrastructure) that are owned and managed by the lessors of
the buildings in which the Company is located. The Company has sent letters to
its lessors requesting certifications of the Y2K compliance of the embedded
systems. The Company has received some of the certifications from lessors and
expects to receive the remaining certifications by the end of the second quarter
of 1999. Letters have also been sent to third parties providing other internal
non-IT systems with embedded technology (e.g., statement insertion machines,
copy machines, etc.). Some of the Y2K certifications and/or upgrades are
complete, with all systems expected to be completed by the end of the second
quarter of 1999.
Significant Vendors. As part of the Company's Y2K compliance program, the
- -------------------
Company has contacted its significant vendors to assess their Y2K readiness. For
substantially all mission critical third party software embedded in or specified
for use in conjunction with the Company's IT systems and products, the Company's
communications with the vendors indicates that the vendors believe they are
fully Y2K compliant. The remaining vendors indicate that they are substantially
Y2K compliant. The Company expects to receive further enhancements from these
vendors as they become available throughout 1999 to bring the products into full
Y2K compliance. Such third party software has been or is being tested in
conjunction with the testing of the IT systems and products discussed above. All
other significant vendors (including the Company's vendor who provides data
processing services for CCS) have indicated they are substantially Y2K
compliant. There can be no assurance that (i) the
13
Company's significant vendors will succeed in their Y2K compliance efforts, or
(ii) the failure of vendors to address Y2K compliance will not have a material
adverse effect on the Company's business or results of operations.
The Costs to Address the Company's Year 2000 Issues. Since inception of its
program in 1995 through March 31, 1999, the Company has incurred and expensed
costs of approximately $3.2 million related to Y2K compliance efforts. The total
estimated costs to complete the Company's Y2K compliance effort are
approximately $0.7 million. The estimated costs to complete, which does not
include any costs which may be incurred by the Company if its significant
vendors fail to timely address Y2K compliance, is based on currently known
circumstances and various assumptions regarding future events. However, there
can be no assurance that these estimates will be achieved and actual results
could differ materially from those anticipated.
The Risks of the Company's Year 2000 Issues. The Company's failure to timely
resolve the Y2K risks could result in system failures, the generation of
erroneous information, and other significant disruptions of business activities,
including among others, access to CCS and the use of related software products,
and timely printing and delivery of clients' customers' statements. Although the
Company believes it will be successful in its Y2K compliance efforts, there can
be no assurance that the Company's systems and products contain all necessary
date code changes. In addition, the Company's operations may be at risk if its
vendors and other third parties (including public and private infrastructure
services, such as electricity, water, gas, transportation, and communications)
fail to adequately address the Y2K issue or if software conversions result in
system incompatibilities with these third parties. To the extent that either the
Company or a third party vendor or service provider on which the Company relies
does not achieve Y2K compliance, the Company's results of operations could be
materially adversely affected. Furthermore, it has been widely reported that a
significant amount of litigation surrounding business interruption will arise
out of Y2K issues. It is uncertain whether, or to what extent, the Company may
be affected by such litigation.
As is the case with many software companies and service providers, if the
Company's current or future clients experience significant business
interruptions due to their failure to achieve Y2K compliance, the Company's
results of operations could be materially adversely affected. There can be no
assurance that the Company's current or future clients will adequately and
successfully address their Y2K risk and not experience any business
interruptions.
The Company's Contingency Plan. The Company is addressing the need for any Y2K
specific contingency plan as part of its overall business continuity planning,
with modifications to the plan where Y2K specific exposures are identified as
the Company continues to execute its Y2K compliance project during 1999. The
Company is establishing a Y2K task force for all mission critical operations of
the Company which will provide dedicated personnel to escalate the resolution of
any Y2K specific matters that may occur. The Company has implemented a
restricted vacation policy for December 1999 and January 2000 to ensure all
mission critical personnel are available if any Y2K specific matters occur.
The (i) inability to timely implement a contingency plan, if deemed necessary,
and (ii) the cost to develop and implement such a plan, may have a material
adverse effect on the Company's results of operations.
Certain Factors That May Affect Future Results of Operations. Except for
statements of existing or historical facts, the foregoing discussion of Y2K
consists of forward-looking statements and assumptions relating to forward-
looking statements, including without limitation the statements relating to
future costs, the timetable for completion of Y2K compliance efforts, potential
problems relating to Y2K, the Company's state of readiness, third party
representations, and the Company's plans and objectives for addressing Y2K
problems. Certain factors could cause actual results to differ materially from
the Company's expectations, including without limitation (i) the failure of
vendors and service providers to timely achieve Y2K compliance, (ii) system
incompatibilities with third parties resulting from
14
software conversions, (iii) the Company's systems and products not containing
all necessary date code changes, (iv) the failure of existing or future clients
to achieve Y2K compliance, (v) potential litigation arising out of Y2K issues,
the risk of which may be greater for information technology based service
providers such as the Company, (vi) the failure of the Company's validation and
testing phase to detect operational problems internal to the Company, in the
Company's products or services or in the Company's interface with service
providers, vendors or clients, whether such failure results from the technical
inadequacy of the Company's validation and testing efforts, the technological
infeasibility of testing certain non-IT systems, the perceived cost-benefit
constraints against conducting all available testing, or the unavailability of
third parties to participate in testing, or (vii) the failure to timely
implement a contingency plan to the extent Y2K compliance is not achieved.
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, 1999. See the Company's 1998 10-K for additional
discussion regarding the Company's market risks.
15
CSG SYSTEMS INTERNATIONAL, INC.
PART II. OTHER INFORMATION
Item 1-5. None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.19H* Fourth and Twenty-Second Amendments and Schedule L to
Restated and Amended CSG Master Subscriber Management
System Agreement between CSG Systems, Inc. and TCI
Cable Management Corporation.
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
None
- ------------------
* 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.
16
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 14, 1999
CSG SYSTEMS INTERNATIONAL, INC.
/s/ Neal C. Hansen
------------------------------------------
Neal C. Hansen
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Greg A. Parker
------------------------------------------
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)
17
CSG SYSTEMS INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.19H* Fourth and Twenty-Second Amendments and Schedule L to Restated
and Amended CSG Master Subscriber Management System Agreement
between CSG Systems, Inc. and TCI Cable Management Corporation.
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.
18