1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-K/A
[X] AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1998
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: 0-28536
BILLING CONCEPTS CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2781950
(State of Incorporation) (I.R.S. Employer
Identification No.)
7411 JOHN SMITH DRIVE, SUITE 200, SAN ANTONIO, TEXAS 78229
(Address of Principal Executive Office) (Zip Code)
(210) 949-7000
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
-----------
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant as of December 11, 1998 was
approximately $460,155,160. There were 34,404,124 shares of the Registrant's
Common Stock outstanding as of December 11, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 1999
Annual Meeting of Stockholders to be held on February 25, 1999, are incorporated
by reference in Part III hereof.
================================================================================
2
The purpose of this amended 10-K is to correct typographical errors that are
present in the version of the report filed via EDGAR. The undersigned registrant
hereby amends Items 7 and 8 of its Report on Form 10-K filed on December 24,
1998 for the year ended September 30, 1998, as follows:
The last sentence of the Research and Development section of Item 7 on page 19
is amended to read: The Company intends to continue its research and
development efforts in the future and anticipates spending approximately $6
million during 1999 for such expenses.
The number of weighted average common shares and common share equivalents
outstanding for the pro forma condensed consolidated statement of income as
reported without special charges for 1998 of Item 7 on page 23 is amended to
read: 34,908.
The first sentence of the Accrued Liabilities section of note 2 of Item 8 on
page 35 is amended to read: Accrued liabilities include sales taxes payable on
behalf of billing customers of $18,866,000 and $15,174,000 at September 30,
1998 and 1997, respectively.
Items 7 and 8 are presented below in amended form.
2
3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company, the Notes thereto and the
other financial information included elsewhere in this Report. For purposes of
the following discussion, references to yearly periods refer to the Company's
fiscal years ended September 30.
GENERAL
On August 2, 1996, U.S. Long Distance Corp. ("USLD") distributed to its
stockholders all of the outstanding shares of common stock of the Company (the
"Distribution") which, prior to the Distribution, was a wholly owned subsidiary
of USLD. Upon the completion of the Distribution, Billing Concepts Corp. ("BCC")
became an independent, publicly held company that owns and operates the billing
clearinghouse and information management services business previously owned by
USLD (see "Pro Forma Results of Operations" below).
RESULTS OF OPERATIONS
The following table presents certain items in the Company's
Consolidated Statements of Income as a percentage of total revenues:
YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1997 1996
------ ------ ------
Operating revenues ............................ 100.0% 100.0% 100.0%
Cost of revenues .............................. 61.5 62.4 64.4
------ ------ ------
Gross profit .................................. 38.5 37.6 35.6
Selling, general and administrative expenses... 12.5 11.0 11.0
Research and development ...................... 1.3 0.6 0.0
Advance funding program income ................ (4.9) (5.9) (6.3)
Advance funding program expense ............... 0.1 0.6 1.3
Depreciation and amortization expense ......... 4.0 3.1 2.0
Special charges ............................... 1.2 17.3 0.0
------ ------ ------
Income from operations ........................ 24.3 10.9 27.6
Other income, net ............................. 2.8 0.5 0.1
------ ------ ------
Income before provision for income taxes ...... 27.0 11.4 27.7
Provision for income taxes .................... (10.9) (8.4) (10.5)
------ ------ ------
Net income .................................... 16.1% 3.0% 17.2%
====== ====== ======
Operating Revenues
The Company's revenues are derived primarily from the provision of
billing clearinghouse and information management services to direct dial long
distance carriers and operator services providers ("Local Exchange Carrier
billing" or "LEC billing"). Revenues are also derived from enhanced billing
services provided to companies that offer 900 services or other non-regulated
telecommunications equipment and services. LEC billing fees charged by the
Company include processing and customer service inquiry fees. Processing fees
are assessed to customers either as a fee charged for each telephone call record
or other transaction processed or as a percentage of the customer's revenue that
is submitted by the Company to local telephone companies for billing and
collection. Processing fees also include any charges assessed to the Company by
local telephone companies for billing and collection services that are passed
through to the customer. Customer service inquiry fees are assessed to customers
either as a fee charged for each record processed by the Company or as a fee
charged for each billing inquiry made by end users.
3
4
The Company also develops, sells and supports convergent billing
systems for telecommunications service providers and provides direct billing
outsourcing services. In addition to license and maintenance fees charged by the
Company for the use of its billing software applications, fees are also charged
on a time and materials basis for software customization and professional
services. Processing fees for direct billing services provided through the
Company's service bureau are assessed to customers based on volume. Billing
systems revenues also include retail sales of computer hardware and third-party
software.
Total revenues for 1998 were $160.8 million compared to $122.8 million
in 1997 and $103.9 million in 1996, representing increases of 30.9% and 18.2%,
respectively. LEC billing services revenues increased 22.5% to $147.5 million in
1998, and increased 15.9% to $120.5 million in 1997 from $103.9 million in 1996.
The remaining increase in revenues from year to year was attributable to billing
systems sales and related services revenues. The LEC billing services revenue
increases are primarily attributable to an increase in the number of telephone
call records processed and billed on behalf of direct dial long distance
customers. Direct dial long distance billing services revenues have exceeded
prior period revenues on a quarterly basis since the inception of this business
in 1993. From 1993 through 1998, revenues derived from operator services
customers have been relatively flat. This lack of operator services growth was
attributable to several factors, including increased regulation and an increased
awareness on the part of the telephone user of competitive long distance
services available at the pay phone. Despite the overall increase in LEC billing
services revenue from 1997, revenue growth during 1998 was negatively impacted
by "slamming" and "cramming" issues. Slamming is defined as the unauthorized and
illegal switching of a customer's telephone service from one carrier to another
carrier while cramming is the practice of a company billing customers for
products and services that they may not have ordered, and may not have received.
During the third quarter of 1998, in response to these issues, certain LECs
established various temporary moratoriums that affected the ability of certain
of our customers to market some of their services. BCC played a very active role
in assisting certain local telephone companies, the Federal Communications
Commission ("FCC") and certain Public Utilities Commissions in providing the
best solution to eliminate these issues from the telecommunications industry,
including taking part in forming an industry coalition, which released a set of
"Standards of Practice" that addresses these issues. The FCC subsequently
published similar standards in its Best Billing Practices document. BCC will
continue to adhere to the Best Billing Practices, and will work with the local
telephone companies to reduce the level of consumer complaints. As a proactive
measure, BCC has taken action against certain customers that include, but is not
limited to, the cessation of billing for certain new or existing products. It is
still unclear what monetary impact these actions will have on the LEC billing
business in the future.
Telephone call record volumes were as follows:
YEAR ENDED SEPTEMBER 30,
----------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
Direct dial long distance services .............................................................. 612.6 510.3 402.8
Operator services ............................................................................... 134.6 133.4 131.8
Enhanced billing services ....................................................................... 11.4 9.6 8.6
Billing management services ..................................................................... 329.1 342.1 308.9
Although billing management records decreased approximately 4% from
1997 to 1998, the impact on revenues was minimal because revenue per record for
billing management customers, who have their own billing and collection
agreements with the local telephone companies, is significantly less than
revenue per record for the Company's other customers.
4
5
Cost of Revenues
Cost of revenues includes billing and collection fees charged to the
Company by local telephone companies and related transmission costs, as well as
all costs associated with the customer service organization, including staffing
expenses and costs associated with telecommunications services. Billing and
collection fees charged by the local telephone companies include fees that are
assessed for each record submitted and for each bill rendered to its end-user
customers. The Company achieves discounted billing costs due to its aggregated
volumes and can pass these discounted costs on to its customers. Cost of
revenues also includes the cost of computer hardware and software sold, and the
salaries and benefits of software development, technical, service bureau and
client service personnel who generate revenue from hourly billings.
Gross profit margin of 38.5% reported for 1998 compares to 37.6%
achieved in 1997 and 35.6% achieved in 1996. The improvement from 1997 to 1998
is due primarily to the addition of sales of billing systems and related
services revenues throughout 1998 that served to improve gross margin due to the
higher margins associated with systems sales. This improvement was offset
partially by higher LEC billing costs. The improvement from 1996 to 1997 is due
primarily to lower customer service and telecommunications services costs, which
were offset partially by higher transmission costs. The addition of higher
margin billing systems and related services revenues in late 1997 also served to
improve gross margin. The lower customer service costs were attributable to
efficiencies resulting from the implementation of an automated voice response
system. The lower telecommunications costs were due to a price decrease from the
Company's vendor as well as savings associated with the voice response system.
The Company's gross profit margin could increase in subsequent periods as a
result of the addition of higher gross margin billing systems sales and related
services revenues although no assurance can be given in this regard.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses are comprised of
all selling, marketing and administrative costs incurred in direct support of
the business operations of the Company. Additionally, a portion of the expense
of certain USLD corporate functions, such as treasury, financial reporting,
investor relations, legal, payroll and management information systems has been
allocated to the Company and is reflected in its historical operating results
for 1996.
SG&A expenses for 1998 were $20.1 million or 12.5% of revenues,
compared to $13.6 million in 1997, and $11.4 million in 1996, both representing
11.0% of revenues. SG&A expenses as a percentage of revenues for 1998 increased
from the prior year primarily due to the systems operations incurring a higher
level of SG&A expenses as a percentage of revenue than the Company as a whole.
As the revenues generated by systems operations have increased as a percentage
of total revenue, the overall SG&A percentage has increased accordingly.
Research and Development
Research and development expenses are comprised of the salaries and
benefits of the employees involved in software development and related expenses.
In 1997, the Company commenced internally funded research and development
activities with respect to efforts to offer "invoice ready" billing services.
During the third quarter of 1997, the Company also acquired a software
development company that was actively involved in ongoing research and
development efforts associated with creating new and enhanced products related
to its convergent billing software platform. Research and development expenses
in 1998 were $2.0 million compared to $688,000 in 1997. The Company intends to
continue its research and development efforts in the future and anticipates
spending approximately $6 million during 1999 for such expenses.
Advance Funding Program Income and Expense
Advance funding program income was $7.9 million in 1998 compared with
$7.3 million in 1997 and $6.6 million in 1996. The year-to-year increases were
primarily the result of financing a higher level of customer receivables under
the Company's advance funding program (see "Advance Funding Program and
Receivable Financing Facility" below). The quarterly average balance of
purchased receivables was $83.0 million, $73.6 million and $60.9 million in
1998, 1997 and 1996, respectively.
5
6
Advance funding program expense was $126,000 in 1998, compared with
$688,000 in 1997 and $1.4 million in 1996. The decreases were primarily
attributable to the Company financing a higher level of customer receivables
with internally generated funds rather than with funds borrowed through the
Company's revolving credit facility. Cost savings were also realized from the
more favorable terms of its new credit facility obtained in December 1996. The
expense recognized during 1998 represents unused credit facility fees and is the
minimum expense that the Company could have incurred during this year.
Depreciation and Amortization
Depreciation and amortization expenses are incurred with respect to
certain assets, including computer hardware, software, office equipment,
furniture, leasehold improvements, costs incurred in securing contracts with
local telephone companies, goodwill and other intangibles. Asset lives range
between three and fifteen years.
Depreciation and amortization expense was $6.5 million in 1998 compared
with $3.8 million in 1997 and $2.1 million in 1996. Depreciation and
amortization expense as a percentage of revenues was 4.0%, 3.1% and 2.0% in
1998, 1997 and 1996, respectively. The increase in the percentage from year to
year is attributable to increased capital expenditures made in order to provide
the infrastructure needed to support the growth of the Company's employee base
and the anticipated expansion of the Company's business. These expenditures
included the purchase of office furniture, computer equipment and software and
leasehold improvements. Investments in leasehold improvements increased in
connection with the Company taking occupancy of a new facility in 1997 that
serves as both a customer service center and the corporate headquarters of the
Company and leasing an additional customer service center in 1998. During 1998
and 1997, the Company recognized $625,000 and $205,000 of amortization expense,
respectively, related to goodwill and other intangibles acquired in connection
with the acquisition of CRM in June 1997.
Income from Operations
Income from operations was $39.0 million, $13.4 million and $28.6
million in 1998, 1997 and 1996, respectively. Income from operations for 1998
reflects special charges of $2.0 million during the fourth quarter of 1998
representing in-process research and development costs acquired in connection
with the acquisition of 22% of the capital stock of PTC. Income from operations
decreased from 1996 to 1997, due to special charges of $21.3 million in the
third quarter of 1997. The $21.3 million charge includes in-process research and
development costs of $13.0 million acquired in connection with the acquisition
of CRM. The remaining $8.3 million represents accumulated costs associated with
the development of a direct billing system for a service bureau operation. The
Company abandoned this development during the third quarter of 1997. Income from
operations, exclusive of special charges, represented 25.5%, 28.2% and 27.6% of
revenues in 1998, 1997 and 1996, respectively. The decrease in income from
operations, exclusive of special charges, as a percentage of revenues from 1997
to 1998 is attributable to higher SG&A, research and development and
depreciation expenses and lower net advance funding income as a percentage of
1998 revenues, offset partly by a higher gross profit margin. The improvement in
income from operations, exclusive of special charges, as a percentage of
revenues from 1996 to 1997 is attributable to a higher gross profit margin and
higher net advance funding income as a percentage of revenues, offset partly by
higher depreciation expenses as a percentage of revenues and research and
development expenses incurred in 1997.
Other Income
Net other income of $4.5 million in 1998 compares to net other income
of $552,000 in 1997 and $152,000 in 1996. The increase in 1998 and 1997 from the
prior year were both primarily due to increased interest income from short-term
investments due to higher cash reserves. Interest expense was also lower in 1998
due to the pay down of long term debt.
Income Taxes
The Company's effective tax rate was 40.3% in 1998, 73.5% in 1997 and
38.0% in 1996 . The Company's effective tax rate is higher than the federal
statutory rate due to the addition of state income taxes and certain deductions
taken for financial reporting purposes that are not deductible for federal
income tax purposes. The increase in the effective rate for 1998 and 1997 is
primarily due to nondeductible in-process research and development costs and
amortization expenses related to the acquisition of PTC and CRM, respectively.
Exclusive of special charges, the Company's effective tax rate would have been
38.5% and 38.0% in 1998 and 1997, respectively.
6
7
Year 2000 Contingency
The operation of the Company's business is highly dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services, third-party
billing clearinghouse services (including the advance funding program), direct
billing services and financial reporting, as well as in various administrative
functions. In providing information management, third-party billing
clearinghouse and direct billing services, the Company processes telephone call
records which are date sensitive. The Company also develops, sells and supports
sophisticated billing systems and software (the "Billing Systems") which must be
able to process date-dependent data correctly. Certain of the Billing Systems
sold by the Company have been warranted to process information related to or
including dates that are prior to, on or after January 1, 2000.
The Company has been evaluating its Programs and Systems to identify
potential Year 2000 readiness problems, as well as manual processes, external
interfaces with customers and services supplied by vendors to coordinate Year
2000 compliance and conversion. The Year 2000 problem refers to the limitations
of the programming code in certain existing software programs to recognize
date-sensitive information for the Year 2000 and beyond. Unless modified prior
to December 31, 1999, such systems may not properly recognize such information
and could generate erroneous data or cause a system to fail to operate properly.
The Company has installed the MBA 4.0 Y2K ready version in its Service Bureau
operation, which is processing 11 clients. BCS is currently beta testing at one
of its largest MBA clients and expects to complete the testing by December 30,
1998. BCS expects to prepare for a general release of MBA 4.0 in the first
quarter of 1999. The LEC systems are still anticipating its modifications and
replacements will be complete by April 1999. It is anticipated that modification
or replacement of the Company's Programs and Systems will be performed in-house
by Company personnel.
The Company believes that, with modifications to existing software and
conversions to new software, the Year 2000 problem will not pose a significant
operational problem for the Company. However, because the Company's business
relies on processing date-sensitive telephone call records supplied by third
parties, it is possible that non-compliant third-party computer systems may not
be able to provide accurate data for processing through the Company's computer
systems. The Company's business, financial condition and results of operations
could be materially adversely affected by the Year 2000 problem if it or
unrelated parties fail to successfully address this issue.
Management of the Company currently anticipates that the total expenses
and capital expenditures associated with its Year 2000 readiness project,
including costs associated with modifying the Programs and Systems and the cost
of purchasing or leasing certain hardware and software, will be less than $3
million. As of December 1998, the Company has spent approximately $1.5 million
on capital expenditures for related hardware and software and incurred and
expensed approximately $300,000 in personnel and other costs related to the Year
2000 readiness process. The Company anticipates incurring less than $1 million
in personnel and other costs, which will be expensed as incurred. The cost of
Year 2000 readiness and the expected completion dates are the best estimates of
Company management and are believed to be reasonably accurate.
In the event the Company's plan to address the Year 2000 problem is not
successfully or timely implemented, the Company may need to devote more
resources to the process and additional costs may be incurred, which could have
a material adverse effect on the Company's financial condition and results of
operations. Problems encountered by the Company's vendors, customers and other
third parties also may have a material adverse effect on the Company's financial
condition and results of operations.
In the event the Company determines, following the Year 2000 date
change, that its Programs and Systems are not Year 2000 ready, the Company will
be unable to process date-sensitive telephone call records and thus be unable to
provide most of its revenue-producing services, which will have a material
adverse effect on the Company's financial condition and results of operations.
The Company will also likely experience considerable delays in compiling
information required for financial reporting and performing various
administrative functions. In addition, in the event the Company's Billing
Systems are not Year 2000 ready, the Company will be required to devote more
monetary and other resources to achieving such readiness, which could have a
material adverse effect on the Company's financial condition and results of
operations.
7
8
The Company is currently developing a contingency plan for
implementation in the event its Programs and Systems are not Year 2000 ready
prior to December 31, 1999. Such contingency plan will be modeled upon the
Company's Disaster Recovery Plan. The Disaster Recovery Plan outlines a strategy
for reduced continued operations following a natural disaster which damages the
Company's operations center in San Antonio, Texas.
The above year 2000 disclosure constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act
(the "Act"), which was signed into law on October 19, 1998. The Act provides
added protection from liability for certain public and private statements
concerning a company's year 2000 readiness.
PRO FORMA RESULTS OF OPERATIONS
The audited Consolidated Statements of Income included in this report
reflect the operations of the Company for the years ended September 30, 1998,
1997 and 1996. Included below is supplemental unaudited consolidated pro forma
financial information that management believes is important to provide an
understanding of the results of operations of the Company. Pro Forma Condensed
Consolidated Statements of Income are presented below on an annual basis for
1998, 1997 and 1996. These Pro Forma Condensed Consolidated Statements of Income
are based on the historical statements of the periods presented, adjusted to
reflect the items discussed in the accompanying notes to the pro forma financial
statements. The Pro Forma Condensed Consolidated Statements of Income for 1996
give effect to the Distribution as if it had occurred at the beginning of the
year.
The unaudited consolidated pro forma financial information is presented
for informational purposes only and should be read in conjunction with the
accompanying notes to the pro forma financial statements and with the Company's
historical financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" set forth herein
and in the Post Effective Amendment No. 2 to the Company's Registration
Statement on Form 10/A dated August 1, 1996. The pro forma financial statements
should not be considered indicative of the operating results that the Company
will achieve in the future because, among other things, these statements are
based on historical rather than prospective information and include certain
assumptions that are subject to change.
The unaudited Pro Forma Condensed Consolidated Statements of Income
reflect, in management's opinion, all adjustments necessary to fairly state the
pro forma results of operations for the periods presented to make the unaudited
pro forma statements not misleading.
8
9
BILLING CONCEPTS CORP. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
AS AS
AS REPORTED AS REPORTED
REPORTED WITHOUT REPORTED WITHOUT
WITH SPECIAL WITH SPECIAL
SPECIAL CHARGES SPECIAL CHARGES
CHARGES (D) CHARGES (B)
-------- -------- ---------- ---------
1998 1998 1997 1997 1996
----- ---- ---- ---- ----
Operating revenues........................................... $ 160,762 $ 160,762 $ 122,836 $ 122,836 $ 103,884
Cost of revenues............................................. 98,894 98,894 76,662 76,662 66,868
----------- ----------- ----------- ---------- ----------
Gross profit................................................. 61,868 61,868 46,174 46,174 37,016
Selling, general and administrative expenses................. 20,111 20,111 13,565 13,565 11,445
Research and development..................................... 2,030 2,030 688 688 0
Advance funding program income............................... (7,919) (7,919) (7,255) (7,255) (6,564)
Advance funding program expense (A).......................... 126 126 688 688 2,760
Depreciation and amortization expense........................ 6,494 6,494 3,797 3,797 2,127
Special charges.............................................. 2,000 0 21,252 0 0
----------- ----------- ----------- ---------- ----------
Income from operations....................................... 39,026 41,026 13,439 34,691 27,248
Other income, net............................................ 4,450 4,450 552 552 152
----------- ----------- ----------- ---------- ----------
Income before provision for income taxes..................... 43,476 45,476 13,991 35,243 27,400
Provision for income taxes (C)............................... (17,529) (17,529) (10,284) (13,381) (10,411)
------------ ------------ ------------ ----------- -----------
Net income................................................... $ 25,947 $ 27,947 $ 3,707 $ 21,862 $ 16,989
=========== =========== =========== ========== ==========
Net income per diluted common share.......................... $ 0.74 $ 0.80 $ 0.11 $ 0.66 $ 0.55
Weighted average common shares and common share equivalents
outstanding (E)............................................ 34,908 34,908 32,518 32,976 30,770
Notes to unaudited pro forma condensed consolidated statements of income:
(A) Reflects an adjustment to increase interest expense for the assumed
borrowings for the cash transfer made to USLD of $11,713 in accordance with
the terms of the Distribution Agreement and cash payments for direct costs
incurred in connection with the Distribution of approximately $9,200.
Interest expense was calculated at a rate of 8.0% per annum.
(B) Excludes special charges of $21,252 representing in-process research and
development costs of $13.0 million acquired in connection with the
acquisition of CRM and $8.3 million of accumulated costs associated with
the development of a direct billing system that was abandoned by the
Company.
(C) Reflects related income tax effect of the adjustments in notes (A) and (B)
(D) Excludes special charges of $2,000 representing in-process research and
development costs acquired in connection with the acquisition of 22% of the
common stock of PTC.
(E) The number of weighted average shares outstanding for 1996 gives effect to
the shares assumed to be issued had the Distribution occurred at the
beginning of each year. The number of weighted average shares outstanding
for 1997 as reported without special charges explained in note (B) gives
effect to the net income that would have been recognized during the third
quarter of 1997 had the special charges not been incurred. Earnings per
share and weighted average common shares and common share equivalents
outstanding for all years presented have been restated to give effect to
the one-for-one common stock dividend that was distributed on January 30,
1998 to stockholders of record on January 20, 1998.
9
10
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $118.3 million at September 30,
1998, from $41.4 million at September 30, 1997. Large fluctuations in daily cash
balances are normal due to the large amount of customer receivables that the
Company collects on behalf of its customers. The Company's working capital
position increased to $58.6 million at September 30, 1998, from $27.6 million at
September 30, 1997, and its current ratio was 1.4:1 and 1.2:1 at September 30,
1998 and 1997, respectively. Net cash provided by operating activities was $37.8
million, $31.1 million and $26.0 million in 1998, 1997 and 1996, respectively,
and reflected the increases in net income from 1996 to 1998, exclusive of
special charges.
In December 1996, the Company obtained a $50.0 million revolving line
of credit facility with certain lenders primarily to draw upon to advance funds
to its billing customers prior to collection of the funds from the local
telephone companies. This credit facility terminates on December 20, 1999.
Borrowings under the credit facility are limited to a portion of the Company's
eligible receivables. Management believes that the capacity under the credit
facility will be sufficient to fund advances to its billing customers for the
foreseeable future. No amounts were borrowed by the Company under its credit
facility to finance the advance funding program at either September 30, 1998 or
1997. At September 30, 1998, the amount available under the Company's credit
facility was $50.0 million.
In addition to the revolving line of credit facility described above,
the Company was obligated as a guarantor of USLD's equipment financing
agreements with certain lenders during the period the debt remained outstanding.
At September 30, 1998, all indebtedness under such agreements had been paid in
full; therefore, the Company is no longer obligated as a guarantor. Under
certain of its credit agreements, the Company is prohibited from paying
dividends on its common stock, is required to comply with certain financial
covenants and is subject to certain limitations on the issuance of additional
secured debt. The Company was in compliance with all required covenants at
September 30, 1998 and 1997.
Capital expenditures amounted to approximately $11.3 million in 1998
and related primarily to the purchase of computer equipment and software. During
1997, the Company financed approximately $4.1 million of equipment through term
debt agreements with two separate lenders. There were no amounts financed in
1998. The Company anticipates capital expenditures before acquisitions, if any,
of approximately $13 million in fiscal 1999, including expenditures for local
telephone company agreements that will enable it to offer "invoice ready"
billing services. The Company believes that it will be able to fund expenditures
with internally generated funds and borrowings, but there can be no assurance
that such funds will be available or expended.
Effective June 1, 1997, the Company acquired CRM, a company that
develops software systems for the direct billing of telecommunications services.
An aggregate of $8.5 million cash and 650,000 shares of the Company's Common
Stock were issued in connection with this purchase transaction. All of the
shares related to the acquisition have been included in the weighted average
shares outstanding for purposes of the earnings per share calculations. During
the third quarter of 1997, the Company expensed $13.0 million of in-process
research and development costs acquired from the acquisition. The Company
granted certain registration rights to and entered into an employment agreement
with the principal of CRM.
In September 1998, the Company acquired 22% of the capital stock of PTC
for $10 million. PTC was a privately held company located in Princeton, New
Jersey specializing in electronic bill publishing over the Internet and advanced
payment solutions. The Company accounts for this investment under the equity
method of accounting. In addition, the Company acquired the right of first
refusal for a period of five years to provide any future equity or debt
financing for PTC.
Effective October 1, 1998, the Company acquired Expansion Systems
Corporation ("ESC"), a privately held company headquartered in Glendale,
California that develops and markets billing and registration systems to
Internet Service Providers ("ISPs") under its flagship products TotalBill and
InstantReg. An aggregate of 170,000 shares of the Company's Common Stock were
issued in connection with this transaction, which will be accounted for as a
pooling of interests.
In December 1998, the Company completed the merger of Communications
Software Consultants, Inc. ("CommSoft") in consideration of 2,492,759 shares of
the Company's common stock. CommSoft was a privately held, international
software development and consulting firm specializing in the telecommunications
industry.
10
11
The Company's operating cash requirements consist principally of
working capital requirements, requirements under its advance funding program,
scheduled payments of principal on its outstanding indebtedness and capital
expenditures. The Company believes that it has the ability to continue to secure
long-term equipment financing and that this ability, combined with cash flows
generated from operations and periodic borrowings under its receivable financing
facility, will be sufficient to fund capital expenditures, advance funding
requirements, working capital needs and debt repayment requirements for the
foreseeable future.
ADVANCE FUNDING PROGRAM AND RECEIVABLE FINANCING FACILITY
Since it generally takes 40 to 90 days to collect receivables from the
local telephone companies, customers can significantly accelerate cash receipts
by utilizing the Company's advance funding program. The Company offers
participation in this program to qualifying customers through its Advance
Payment Agreement. Under the terms of this agreement, the Company purchases the
customer's accounts receivable for an amount equal to the face amount of the
billing records submitted to the local telephone companies by the Company for
billing and collection, less certain deductions. The purchase price is remitted
by the Company to its customers in two payments.
Within five days from receiving a customer's records, an initial
payment is made to the customer based on a percentage of the value of the
customer's call records submitted to the local telephone companies. This
percentage is established by the Advance Payment Agreement and generally ranges
between 50% and 80%. The Company pays the remaining balance of the purchase
price upon collection of funds from the local telephone companies. A portion of
the funds used to make the advance payments may be borrowed under the Company's
revolving line of credit facility. The amount borrowed by the Company under this
credit facility to finance the advance funding program was $0 at September 30,
1998 and 1997.
Service fees charged to customers by the Company are recorded as
Advance Funding Program Income and are computed at a rate above the prime rate
on the amount of advances (initial payments) outstanding to a customer during
the period commencing from the date the initial payment is made until the
Company recoups the full amount of the initial payment from local telephone
companies. The rate charged to the customer by the Company is higher than the
interest rate charged to the Company, in part to cover the administrative
expenses incurred in providing this service. Borrowing costs are computed at a
rate below the prime interest rate and are based on the amount of borrowings
outstanding during the period commencing from the date the funds are borrowed
until the loan is repaid by the Company. Borrowing costs are recorded as Advance
Funding Program Expense. The result of these financing activities is the
generation of a net amount of Advance Funding Program Income that contributes to
the net income of the Company.
As part of the Advance Payment Agreement, the Company contractually
purchases the customer accounts receivable upon which funds are advanced.
Further, the customer may grant a first lien security interest in other customer
accounts and assets and will take other action as may be required to perfect the
Company's first lien security interest in such assets. Under the terms of the
credit facility agreement, the Company is obligated to repay amounts borrowed
whether or not the purchased accounts receivable are actually collected.
SEASONALITY
To some extent, the revenues and telephone call record volumes of most
customers of the Company are affected by seasonality. For example, the Company's
direct dial long distance customers use the Company's services primarily to bill
residential accounts, which typically generate a higher traffic volume around
holidays, particularly Thanksgiving, Christmas and New Year's Day. As a result
of this seasonal variation, direct dial long distance telephone call record
volumes processed by the Company during the Company's first and second fiscal
quarters ending December 31 and March 31, respectively, (which include the
Thanksgiving, Christmas and New Year's Day holidays), historically have been the
highest level of any quarter of the year after adjusting for new business.
Consequently, revenues reported by the Company that are derived from direct dial
long distance telephone call records are similarly affected. The seasonal effect
caused by the Company's direct dial long distance customers has been lessened,
however, as a result of the Company's business from operator services customers.
Typically, the Company's operator services customers experience decreases in
operator services revenues and telephone call record volumes in the fall and
winter months as pay telephone usage declines due to cold and inclement weather
in many parts of the United States. Conversely, due to increased traffic from
pay telephones during the spring and summer months,
11
12
the Company has historically processed its highest volumes of operator services
telephone call records and reported its highest operator services-related
revenues in the third and fourth quarters of the fiscal year. The billing
revenues derived from operator services customers have mitigated the seasonal
effects of the revenues derived from the Company's direct dial long distance
customers.
EFFECT OF INFLATION
Inflation historically has not been a material factor affecting the
Company's business. Prices charged to the Company by local telephone companies
and third-party vendors for billing, collection and transmission services have
not increased significantly during the past year. General operating expenses
such as salaries, employee benefits and occupancy costs are, however, subject to
normal inflationary pressures.
NEW ACCOUNTING STANDARDS
Management of the Company does not anticipate the adoption of any new
accounting standards recently issued by the authoritative bodies will have a
material impact on the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments, which would
require disclosure under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and the related
report of the Company's independent public accountants thereon are included in
this report at the page indicated.
PAGE
----
Report of Independent Public Accountants.................................................................................. 27
Consolidated Balance Sheets at September 30, 1998 and 1997................................................................ 28
Consolidated Statements of Income for the Years Ended September 30, 1998, 1997 and 1996................................... 29
Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1998, 1997 and 1996..................... 30
Consolidated Statements of Cash Flows for the Years Ended September 30, 1998, 1997 and 1996............................... 31
Notes to Consolidated Financial Statements................................................................................ 32
12
13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Billing Concepts Corp.:
We have audited the accompanying consolidated balance sheets of Billing
Concepts Corp. (a Delaware corporation) and subsidiaries as of September 30,
1998 and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Billing Concepts
Corp. and subsidiaries as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
November 12, 1998
13
14
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
SEPTEMBER 30,
-------------
1998 1997
---- ----
Current assets:
Cash and cash equivalents .............................................................................. $ 118,291 $ 41,444
Accounts receivable, net of allowance for doubtful accounts of $268 (1998) and $138 (1997) ............. 33,748 25,919
Purchased receivables .................................................................................. 64,477 70,175
Prepaids and other ..................................................................................... 3,776 3,196
--------- ---------
Total current assets ............................................................................ 220,292 140,734
Property and equipment .................................................................................. 32,314 22,906
Less accumulated depreciation and amortization ......................................................... (10,282) (4,750)
--------- ---------
Net property and equipment ...................................................................... 22,032 18,156
Equipment held under capital leases, net of accumulated amortization of $963 (1998) and $964 (1997)
441 606
Other assets, net of accumulated amortization of $2,503 (1998) and $1,680 (1997) ........................ 8,299 7,516
Investment in equity affiliate .......................................................................... 8,000 0
--------- ---------
Total assets .................................................................................... $ 259,064 $ 167,012
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ................................................................................. $ 17,757 $ 19,223
Accounts payable - billing customers ................................................................... 118,599 75,166
Accrued liabilities .................................................................................... 24,451 17,728
Current portion of long-term debt ...................................................................... 606 606
Current portion of obligations under capital leases .................................................... 251 441
--------- ---------
Total current liabilities ....................................................................... 161,664 113,164
Long-term debt, less current portion .................................................................... 1,668 2,324
Obligations under capital leases, less current portion .................................................. 29 290
Deferred income taxes ................................................................................... 2,575 2,048
Other liabilities ....................................................................................... 797 499
--------- ---------
Total liabilities ............................................................................... 166,733 118,325
Commitments and contingencies (See Notes 4 and 11)
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, no shares issued or outstanding at
September 30, 1998 or 1997 ......................................................................... 0 0
Common stock, $0.01 par value, 75,000,000 shares authorized, 34,150,131 shares issued and outstanding at
September 30, 1998; 60,000,000 shares authorized, 32,395,170 shares issued and outstanding at
September 30, 1997 ................................................................................. 342 324
Additional paid-in capital .............................................................................. 60,039 42,916
Retained earnings ....................................................................................... 32,344 6,397
Deferred compensation ................................................................................... (394) (950)
--------- ---------
Total stockholders' equity ...................................................................... 92,331 48,687
--------- ---------
Total liabilities and stockholders' equity ...................................................... $ 259,064 $ 167,012
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
14
15
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED
------------------
SEPTEMBER 30,
-------------
1998 1997 1996
---- ---- ----
Operating revenues.......................................................................... $ 160,762 $ 122,836 $ 103,884
Cost of revenues............................................................................ 98,894 76,662 66,868
----------- ---------- ----------
Gross profit................................................................................ 61,868 46,174 37,016
Selling, general and administrative expenses................................................ 20,111 13,565 11,445
Research and development.................................................................... 2,030 688 0
Advance funding program income.............................................................. (7,919) (7,255) (6,564)
Advance funding program expense............................................................. 126 688 1,367
Depreciation and amortization expense....................................................... 6,494 3,797 2,127
Special charges (See Note 6)................................................................ 2,000 21,252 0
----------- ---------- ----------
Income from operations...................................................................... 39,026 13,439 28,641
Other income (expense):
Interest income............................................................................ 4,440 989 938
Interest expense........................................................................... (184) (493) (287)
Other, net................................................................................. 194 56 (499)
----------- ---------- ----------
Total other income, net................................................................ 4,450 552 152
----------- ---------- ----------
Income before provision for income taxes.................................................... 43,476 13,991 28,793
Provision for income taxes.................................................................. (17,529) (10,284) (10,941)
----------- ---------- ----------
Net income.................................................................................. $ 25,947 $ 3,707 $ 17,852
=========== ========== ==========
Basic:
Net income per common share ................................................................ $ 0.78 $ 0.12 -
Pro forma net income per common share (Unaudited - See Note 2).............................. - - $ 0.61
Weighted average common shares outstanding ................................................. 33,351 31,032 -
Pro forma weighted average common shares outstanding (Unaudited - See Note 2) .............. - - 29,210
Diluted:
Net income per common share and common share equivalents.................................... $ 0.74 $ 0.11 -
Pro forma net income per common share and common share equivalents (Unaudited - See Note 2).
- - $ 0.58
Weighted average common shares and common share equivalents outstanding .................... 34,908 32,518 -
Pro forma weighted average common shares and common share equivalents outstanding
(Unaudited - See Note 2) ................................................................. - - 30,770
The accompanying notes are an integral part of these consolidated
financial statements.
15
16
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
(IN THOUSANDS)
USLD'S
INVESTMENT
PREFERRED STOCK COMMON STOCK IN AND ADDITIONAL
---------------- ----------------- ADVANCES PAID-IN DEFERRED RETAINED
SHARES AMOUNT SHARES AMOUNT TO BCC CAPITAL COMPENSATION EARNINGS
------ ------ -------- ------- ---------- --------- ------------- ----------
Balances at September 30, 1995....... 10 $ 100 204 $ 2 $ 21,121 $ 0 $ 0 $ 0
Transfers (to) from affiliates...... 0 0 (204) (2) 2,851 (15,448) 0 0
Redemption of preferred stock....... (10) (100) 0 0 (3,900) 0 0 0
Issuance of common stock in
connection with Distribution
(See Note 2).................... 0 0 30,064 302 (35,234) 34,932 0 0
Exercise of stock options........... 0 0 28 0 0 155 0 0
Net income.......................... 0 0 0 0 15,162 0 0 2,690
----- ------ -------- ----- --------- --------- ------ --------
Balances at September 30, 1996....... 0 0 30,092 302 0 19,639 0 2,690
Issuance of common stock............ 0 0 686 6 0 9,831 0 0
Exercise of stock options and
warrants........................ 0 0 1,618 16 0 11,956 0 0
Issuance of stock options........... 0 0 0 0 0 1,490 (1,490) 0
Compensation expense................ 0 0 0 0 0 0 540 0
Net income.......................... 0 0 0 0 0 0 0 3,707
----- ------ -------- ----- --------- --------- ------ --------
Balances at September 30, 1997....... 0 0 32,396 324 0 42,916 (950) 6,397
Issuance of common stock............ 0 0 47 1 0 716 (170) 0
Exercise of stock options and
warrants........................ 0 0 1,707 17 0 16,407 0 0
Compensation expense................ 0 0 0 0 0 0 726 0
Net income.......................... 0 0 0 0 0 0 0 25,947
----- ------ -------- ----- --------- --------- ------ --------
Balances at September 30, 1998....... 0 $ 0 34,150 $ 342 $ 0 $ 60,039 $ (394) $ 32,344
===== ====== ======== ===== ========= ========= ====== ========
The accompanying notes are an integral part of these consolidated
financial statements.
16
17
BILLING CONCEPTS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED
------------------
SEPTEMBER 30,
-------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income................................................................................ $ 25,947 $ 3,707 $ 17,852
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 6,494 3,797 2,127
Deferred compensation................................................................. 726 540 10
(Gain)/Loss on disposition of equipment............................................... (186) 141 376
Special charges....................................................................... 2,000 21,252 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable......................................... (7,829) (7,445) 406
Increase in prepaids and other..................................................... (580) (1,538) (259)
Increase (decrease) in trade accounts payable...................................... (1,466) 6,450 139
Increase in accrued liabilities.................................................... 11,517 3,695 5,403
Increase in deferred income taxes.................................................. 854 0 0
Increase (decrease) in other liabilities........................................... 298 499 (21)
---------- ----------- ---------
Net cash provided by operating activities.................................................. 37,775 31,098 26,033
Cash flows from investing activities:
Purchases of property and equipment....................................................... (11,333) (17,578) (6,679)
Purchase of software development company, net of cash acquired............................ 0 (8,403) 0
Investments in net assets of affiliates................................................... (10,000) 0 0
Collections of (payments for) purchased receivables, net.................................. 5,698 745 (15,692)
Collections of proceeds due (payments made) to billing customers, net..................... 43,433 15,541 23,769
Collections of sales taxes due on behalf of billing customers, net........................ 3,692 2,136 743
Proceeds from sale of equipment........................................................... 538 127 0
Other investing activities................................................................ (334) (1,001) (207)
---------- ----------- ---------
Net cash provided by (used in) investing activities........................................ 31,694 (8,433) 1,934
Cash flows from financing activities:
Payments on revolving line of credit for purchased receivables, net....................... 0 (19,010) (4,020)
Proceeds from issuance of long-term debt.................................................. 0 4,091 1,937
Payments on long-term debt................................................................ (656) (4,184) (688)
Payments on capital leases................................................................ (451) (2,831) (436)
Proceeds from issuance of common stock.................................................... 8,485 6,578 96
Transfers to affiliates................................................................... 0 0 (17,491)
---------- ----------- ---------
Net cash provided by (used in) financing activities........................................ 7,378 (15,356) (20,602)
---------- ----------- ---------
Net increase in cash and cash equivalents.................................................. 76,847 7,309 7,365
Cash and cash equivalents, beginning of year............................................... 41,444 34,135 26,770
---------- ----------- ---------
Cash and cash equivalents, end of year..................................................... $ 118,291 $ 41,444 $ 34,135
========== =========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
17
18
BILLING CONCEPTS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998, 1997 AND 1996
NOTE 1. BUSINESS ACTIVITY
Billing Concepts Corp. ("BCC"), formerly known as Billing Information
Concepts Corp., was incorporated in the State of Delaware in 1996. BCC was
previously a wholly owned subsidiary of U.S. Long Distance Corp. ("USLD") that,
upon its spin-off from USLD, became an independent, publicly held company. BCC
and its subsidiaries (collectively, the "Company") primarily provide billing
clearinghouse and information management services in the United States to the
telecommunications industry. In addition to processing call records, the Company
provides a wide range of back office services including customer service, data
processing, tax filings, accounting services and an advance funding program. The
Company also develops, licenses and supports billing systems for
telecommunications service providers and provides direct billing services.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts
of BCC and its wholly owned subsidiaries. The Company's 22% investment in the
capital stock of Princeton TeleCom Corporation ("PTC") (see Note 5) is accounted
for using the equity method of accounting. All significant intercompany accounts
and transactions have been eliminated in consolidation.
On August 2, 1996 (the "Distribution Date"), USLD distributed all of
the outstanding common stock of BCC, pro rata to the stockholders of USLD (the
"Distribution") with the result being that BCC became an independent, publicly
held company that owns and operates all of the assets of, and is responsible for
all of the liabilities associated with, the billing clearinghouse and
information management services business previously owned by USLD. The
accompanying financial statements include the operations of BCC which, until the
Distribution, were combined with and reported as part of the consolidated
financial statements of USLD.
Certain selling, general and administrative expenses of USLD were
historically accounted for on a consolidated basis with no allocation to
individual subsidiaries. The historical statements of BCC have been adjusted to
include all of the expenses that appropriately and fairly could have been
allocated to BCC except for income taxes. USLD's federal income taxes have
historically been determined on a consolidated basis. For purposes of preparing
the BCC historical consolidated financial statements, income taxes have been
determined on a separate company basis. Deferred taxes have been recorded on
BCC's consolidated financial statements, as appropriate. Tax assets and
liabilities are reflected in a manner consistent with the Tax Sharing Agreement
between USLD and BCC.
Certain intercompany transactions that had previously been eliminated
in consolidation are properly reflected in the historical consolidated financial
statements of BCC at amounts that are believed by management to reflect an
arm's-length relationship. Certain prior period amounts have been reclassified
for comparative purposes.
Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
18
19
Revenue Recognition Policies
The Company recognizes revenue from its billing services when records
that are to be billed and collected by the Company are processed. Revenue from
the sale of billing systems, including the licensing of software rights, is
recognized at the time the product is delivered to the customer, provided that
the Company has no significant related obligations or collection uncertainties
remaining. If there are significant obligations related to the installation or
development of the system delivered, revenue is recognized in the period that
the Company fulfills its obligations. Services revenue related to the Company's
billing systems is recognized in the period that the services are provided.
Billing Services
The Company provides billing services to operator services providers
and direct dial long distance companies through billing agreements with the
local telephone companies, which maintain the critical database of end-user
names and addresses of the billed parties. Bills are generated by the local
telephone companies and the collected funds are remitted to the Company, which
in turn remits these funds, net of fees, to its billing customers. The Company
records a trade accounts receivable and operating revenue for fees charged for
its billing services. When the customer's receivables are collected by the
Company from the local telephone companies, the Company's trade receivables are
reduced by the amount corresponding to the Company's processing fees and the
remaining funds are recorded as an accounts payable to billing customers.
The Company offers participation in an advance funding program to
qualifying customers through its Advance Payment Agreement. Under the terms of
this agreement, the Company purchases the customer's accounts receivable for an
amount equal to the face amount of the billing records submitted to the local
telephone companies by the Company for billing and collection less:
o all local telephone company charges, rejects, unbillables and
bad debt deductions;
o all credits and adjustments granted to end users;
o all of the Company's processing fees and sales taxes, if
appropriate;
o all financing service charges assessed by the Company; and
o any and all losses, costs or expenses incurred by the Company
in processing or collecting the customer accounts from all
previously billed records.
The purchase price is remitted by the Company to its customers in two
payments. Within five days from receiving a customer's records, an initial
payment is made to the customer based on a percentage of the face amount of the
customer's call records submitted by the Company to the local telephone
companies. The Company pays the remaining balance of the purchase price to the
customer upon collection of funds from the local telephone companies. The
purchase date is the date the initial payment is made. In connection with its
purchase of billing records, the Company may draw on its revolving credit
facility.
19
20
Any accounts receivable purchased by the Company are recorded as
purchased receivables in an amount equal to the face amount of the billing
records submitted to the local telephone companies by the Company for billing
and collection. Concurrently, an equal amount is recorded as accounts payable to
billing customers. The amount of the initial payment made to the customer
reduces accounts payable to billing customers. The balance, reported as accounts
payable to billing customers ($118,599,000 and $75,166,000 at September 30, 1998
and 1997, respectively), consists of:
o an amount equal to the face value of all purchased
receivables, reduced for any amounts paid as initial payments
under Advance Payment Agreements',
o an amount equal to collections from local telephone companies
that have not yet been remitted to customers, and
o an amount accrued for the estimated liability associated with
future end-user refunds and local telephone company
adjustments related to customers who are no longer serviced by
the Company.
The purchased receivables balance is relieved at the time the customer
receivables are collected from the local telephone companies. Any differences
between the amount initially recorded as a purchased receivable and the amount
ultimately collected from the local telephone companies are recorded as a
reduction of both the purchased receivable and accounts payable to billing
customers in an equal amount. The funds are remitted to the customer after the
Company deducts the amount funded, the financing service charges earned under
the Advance Payment Agreement, local telephone company billing fees due the
Company and any end-user customer service refunds.
The Company has some risk with regard to these deductions to the extent
that they exceed the amount collected from the local telephone companies.
Generally, the Company will collect these amounts from future funds received
from the local telephone companies. However, in certain cases, such as if the
Company is no longer providing services to the customer, there may not be
adequate funds from which to collect these amounts. The Company does have the
right of offset against all funds held for the account of such customers and may
hold a first lien security interest in such billing customers' accounts,
generally including those not acquired by the Company. The Company has an
accrued liability included in the balance sheet caption entitled "Accounts
payable - billing customers" for the estimated amount that such deductions
exceed funds withheld from such customers.
The following receivables purchased and financed by the Company were
outstanding at:
SEPTEMBER 30,
-----------------
1998 1997
---- ----
(IN THOUSANDS)
Purchased receivables................................... $64,477 $70,175
Software Services
The Company also develops, sells and supports convergent billing
systems for telecommunications service providers and provides direct billing
outsourcing. In addition to license and maintenance fees charged by the Company
for the use of its billing software applications, fees are also charged on a
time and materials basis for software customization and professional services.
Processing fees for direct billing services provided through the Company's
service bureau are assessed to customers based on volume. Billing systems
revenues also include retail sales of computer hardware and third-party
software.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are computed on a straight-line basis over the estimated useful
lives of the related assets, which range from three to ten years. Upon
disposition, the cost and related accumulated depreciation and amortization are
removed from the accounts and the resulting gain or loss is reflected in other
income (expense) for that period. Expenditures for maintenance and repairs are
charged to expense as incurred, and major improvements are capitalized.
20
21
Other Assets
Other assets include costs incurred to acquire billing agreements with
local telephone companies for billing and collection services and other
agreements. These costs are being amortized over five to seven years. Other
assets also include financing costs related to the issuance of debt, which have
been deferred and are amortized over the life of the respective financing
agreement, and goodwill and other intangibles related to the acquisition of a
software development company (see Note 5).
In addition, long-term deposits have been included in other assets.
Accrued Liabilities
Accrued liabilities include sales taxes payable on behalf of billing
customers of $18,866,000 and $15,174,000 at September 30, 1998 and 1997,
respectively.
The Company self-insures its medical coverage for employees and
dependents up to $40,000 per covered individual and an aggregate annual maximum
of $1 million. The Company accrues for known claims and an estimate of claims
incurred but not reported up to the maximum anticipated cost to the Company.
During 1998, the Company recognized approximately $420,000 in self-insurance
expense. The Company's insurer will pay cumulative claims above the attachment
limit up to $960,000 lifetime per covered individual. The Company does not
believe that claims reported and claims incurred but not reported will exceed
the amounts to be covered by the insurer.
Common Stock Dividend
On January 9, 1998, the Company announced that its Board of Directors
declared a one-for-one common stock dividend. The dividend was distributed on
January 30, 1998 to stockholders of record on January 20, 1998. No additional
proceeds were received on the dividend date and all costs associated with the
share dividend were capitalized as a reduction of additional paid-in capital.
All share and per share information in the accompanying consolidated financial
statements has been adjusted to give retroactive effect to the stock dividend.
Fair Value of Financial Instruments
The estimated fair values of the Company's cash and cash equivalents
and all other financial instruments have been determined using appropriate
valuation methodologies and approximate their related carrying values.
Income Taxes
Deferred tax assets and liabilities are recorded based on enacted
income tax rates that are expected to be in effect in the period in which the
deferred tax asset or liability is expected to be settled or realized. A change
in the tax laws or rates results in adjustments to the deferred tax assets or
liabilities. The effects of such adjustments are required to be included in
income in the period in which the tax laws or rates are changed.
BCC and USLD entered into a Tax Sharing Agreement that defines the
parties' respective rights and obligations with respect to deficiencies and
refunds of federal, state and other income or franchise taxes relating to BCC's
business for tax years prior to the Distribution and with respect to certain tax
attributes of BCC after the Distribution. In general, with respect to periods
ending on or before the last day of the year in which the Distribution occurred,
USLD is responsible for (i) filing both consolidated federal tax returns for the
USLD affiliated group and combined or consolidated state tax returns for any
group that includes a member of the USLD affiliated group, including in each
case BCC and its subsidiaries for the relevant periods of time that such
companies were members of the applicable group, and (ii) paying the taxes
related to such returns (including any subsequent adjustments resulting from the
redetermination of such tax liabilities by the applicable taxing authorities).
BCC will reimburse USLD for a portion of such taxes and the cost of preparation
of the associated tax returns related to the BCC affiliated group. BCC is
responsible for filing returns and paying taxes related to the BCC affiliated
group for subsequent periods. BCC and USLD have agreed to cooperate with each
other and to share information in preparing such tax returns and in dealing with
other tax matters.
21
22
Net Income Per Common Share
Earnings per share for all periods have been restated to reflect the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," which established standards for computing and presenting
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. SFAS No. 128 requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. Basic EPS were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted EPS differs from basic EPS due to the assumed conversions of potentially
dilutive options and warrants that were outstanding during the period. The
effects of potentially dilutive securities are excluded in periods in which a
loss is reported because their inclusion would be antidilutive. The per share
and weighted average common shares outstanding data for the year ended September
30, 1996 is unaudited and presented on a pro forma basis as BCC had no publicly
held common shares outstanding prior to its spin-off from USLD on August 2,
1996. The number of weighted average common shares outstanding used in the
calculation of the pro forma earnings per share gives effect to the shares
assumed to be issued had the spin-off occurred at the beginning of each period
presented. The following is a reconciliation of the numerators and the
denominators of the basic and diluted per share computations for net income:
FOR THE YEAR ENDED SEPTEMBER 30, 1998
---------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ------------- ---------
BASIC EPS
Net income available to common stockholders $25,947,000 33,351,000 $ 0.78
=======
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants 65,000
Stock options 1,492,000
-------------
DILUTED EPS
Net income available to common stockholders
including assumed conversions $ 25,947,000 34,908,000 $ 0.74
============ ============= =======
FOR THE YEAR ENDED SEPTEMBER 30, 1997
---------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
---------- ------------- ---------
BASIC EPS
Net income available to common stockholders $ 3,707,000 31,032,000 $ 0.12
=======
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants 190,000
Stock options 1,296,000
-------------
DILUTED EPS
Net income available to common stockholders
including assumed conversions $ 3,707,000 32,518,000 $ 0.11
============ ============= =======
22
23
FOR THE YEAR ENDED SEPTEMBER 30, 1996
-----------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
(PRO FORMA, UNAUDITED)
BASIC EPS
Net income available to common stockholders $17,852,000 29,210,000 $ 0.61
===========
EFFECT OF POTENTIALLY DILUTIVE SECURITIES
Warrants 381,000
Stock options 1,179,000
-----------
DILUTED EPS
Net income available to common stockholders
including assumed conversions $17,852,000 30,770,000 $ 0.58
=========== =========== ===========
Certain options to purchase 5,829,260 shares of common stock at prices
ranging from $13 to $29 per share were outstanding for a portion of 1998. They
were not included in the computation of the diluted EPS because the options'
exercise price was greater than the average market price of the common shares.
New Accounting Standards
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," which provides guidance on when revenue should be recognized and
in what amounts for licensing, selling, leasing or otherwise marketing computer
software. SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997 and is to be applied prospectively. In March
1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of a Provision
of SOP 97-2." SOP 98-4 defers for one year the application of certain provisions
of SOP 97-2. Management of the Company does not anticipate that the adoption of
SOP 97-2 and SOP 98-4 will have a material impact on the Company's financial
position or results of operations.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for reporting information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 supersedes SFAS No. 14,"
Financial Reporting for Segments of a Business Enterprise." Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. SFAS No. 131 need not be applied to interim
financial statements in the initial year of its application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application.
23
24
Statements of Cash Flows
Cash payments and non-cash activities during the periods indicated were
as follows:
YEAR ENDED SEPTEMBER 30,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Cash payments for interest ................................................ $ 310 $ 1,375 $ 1,563
Cash payments for income taxes ............................................ 9,141 8,913 8,366
Noncash investing and financing activities:
Common stock issued in connection with the Distribution .................. 0 0 35,234
Net assets transferred from USLD in connection with the Distribution ..... 0 0 892
Capital lease obligations incurred ....................................... 0 0 2,432
Tax benefit recognized in connection with stock option exercises ......... 8,484 5,765 59
Assets acquired in connection with acquisition ........................... 0 20,512 0
Liabilities assumed in connection with acquisition ....................... 0 2,596 0
Common stock issued in connection with acquisition ....................... 0 9,466 0
For purposes of determining cash flows, the Company considers all
temporary cash investments purchased with an original maturity of three months
or less to be cash equivalents.
NOTE 3. DEBT
Long-term debt is comprised of the following:
SEPTEMBER 30,
-------------------
1998 1997
------- -------
(IN THOUSANDS)
Fixed interest rate term notes .............. $ 2,274 $ 2,930
Less - Current portion ...................... (606) (606)
------- -------
Long-term debt, less current portion ........ $ 1,668 $ 2,324
======= =======
The Company has various fixed rate term notes with rates ranging from
7.62% to 7.73%, due in varying amounts through June 2002. The proceeds from the
issuance of these notes were used to acquire certain computer equipment and
office furniture. The loans are secured by the assets acquired.
In December 1996, the Company obtained a $50.0 million revolving line
of credit facility with certain lenders primarily to draw upon to advance funds
to its billing customers prior to collection of the funds from the local
telephone companies. This credit facility terminates on December 20, 1999.
Borrowings under the credit facility are limited to a portion of the Company's
eligible receivables. Management believes that the capacity under the credit
facility will be sufficient to fund advances to its billing customers for the
foreseeable future. No amounts were borrowed by the Company under its credit
facility to finance the advance funding program at either September 30, 1998 or
1997. At September 30, 1998, the amount available under the Company's credit
facility was $50.0 million. Additionally, at September 30, 1997, the Company had
a $1.2 million letter of credit outstanding.
Under the most restrictive terms of the Company's credit agreements,
the Company is prohibited from paying dividends on its common stock, is required
to comply with certain financial covenants and is subject to certain limitations
on the issuance of additional secured debt. The Company was in compliance with
all such covenants at September 30, 1998.
24
25
Scheduled maturities of debt as of September 30, 1998, are as follows:
(IN THOUSANDS)
--------------
Year Ending September 30,
1999.............................................................. $ 606
2000.............................................................. 606
2001.............................................................. 606
2002.............................................................. 456
--------
$ 2,274
========
NOTE 4. LEASES AND CHARTERS
The Company leases equipment and office space under operating leases
and leases a jet airplane under a charter agreement with a company associated
with an officer/director of the Company (see Note 12). Rental expense for the
years ended September 30, 1998, 1997 and 1996, was $2,456,000, $1,630,000 and
$726,000, respectively. Future minimum lease payments under non-cancelable
operating leases and this charter as of September 30, 1998 are as follows:
(IN THOUSANDS)
--------------
Year Ending September 30,
1999.............................................................. $ 3,213
2000.............................................................. 3,189
2001.............................................................. 3,131
2002.............................................................. 3,120
2003.............................................................. 2,378
Thereafter........................................................ 0
--------
Total minimum lease payments.................................. $ 15,031
========
The Company also leases various computer equipment under capital lease
arrangements. Future minimum lease payments under these capital leases, together
with the present value of the net minimum lease payments as of September 30,
1998, are as follows:
(IN THOUSANDS)
--------------
Total minimum lease payments...................................... $ 298
Less: Amount representing interest................................ (18)
--------
Present value of net minimum lease payments....................... $ 280
========
Scheduled maturities of the present value of the net minimum lease
payments as of September 30, 1998 are as follows:
(IN THOUSANDS)
--------------
Year ending September 30,
1999.......................................................... $ 251
2000.......................................................... 29
--------
Total present value of net minimum lease payments................. $ 280
========
25
26
NOTE 5. ACQUISITIONS
In September 1998, the Company acquired 22% of the capital stock of PTC
for $10 million. PTC was a privately held company located in Princeton, New
Jersey specializing in electronic bill publishing over the Internet and advanced
payment solutions. The Company accounts for this investment under the equity
method of accounting. In addition, the Company acquired the right of first
refusal for a period of five years to provide any future equity or debt
financing for PTC.
Effective June 1, 1997, the Company acquired Computer Resources
Management, Inc. ("CRM"), a company that develops software systems for the
direct billing of telecommunications services. This acquisition has been
accounted for as a purchase. Accordingly, the results of operations for CRM have
been included in the Company's consolidated financial statements, and the shares
related to the acquisition have been included in the weighted average shares
outstanding for purposes of calculating net income per common share since the
date of acquisition. The following unaudited pro forma information gives effect
to the acquisition of CRM as if it had occurred at the beginning of the periods
presented. The unaudited pro forma information is based on the historical
information for the periods presented and includes adjustments to reflect the
special charge resulting from expensing acquired in-process research and
development costs (see Note 6) and the effect on depreciation and amortization
expense of recording the fair value of assets acquired. The number of weighted
average shares outstanding used in the calculation of the pro forma per share
data gives effect to the shares assumed to be issued had the acquisition
occurred at the beginning of each period presented.
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Operating revenues................................................... $127,579 $109,153
Net income........................................................... $ 4,203 $ 4,860
Net income per common share - basic.................................. $ 0.13 $ 0.16
Net income per common share - diluted................................ $ 0.13 $ 0.15
The pro forma financial information should not be considered indicative
of the operating results that would have occurred had the acquisition actually
taken place at the beginning of the periods specified or that the Company will
achieve in the future because, among other things, this information is based on
historical rather than prospective information and includes certain assumptions
which are subject to change. The unaudited pro forma financial information
reflects, in management's opinion, all adjustments necessary to fairly state the
pro forma operating results for the periods presented to make the unaudited pro
forma financial information not misleading.
An aggregate of $8.5 million cash and 650,000 shares of the Company's
common stock were issued in connection with this purchase transaction. The
excess of the purchase price over the fair value of net tangible assets acquired
was determined through an independent appraisal and amounted to approximately
$17.5 million, of which approximately $1.2 million was recorded as goodwill and
is being amortized on a straight-line basis over fifteen years. In addition,
$13.0 million was recorded as in-process research and development expenses (see
Note 6). The remaining balance was recorded as the purchase price for a customer
list and other intangibles, which are being amortized on a straight-line basis
over periods ranging from six to twelve years.
In December 1998, the Company completed the merger of Communications
Software Consultants, Inc. ("CommSoft") in consideration of 2,492,759 shares of
the Company's common stock. CommSoft was a privately held, international
software development and consulting firm specializing in the telecommunications
industry (see Note 14).
26
27
NOTE 6. SPECIAL CHARGES
During the fourth quarter of fiscal 1998, the Company recognized
special charges in the amount of $2.0 million. The $2.0 million charge
represented the in-process research and development costs acquired in connection
with the acquisition of 22% of the capital stock of PTC (see Note 5).
During the third quarter of fiscal 1997, the Company recognized special
charges in the amount of $21.3 million. The $21.3 million charge included
in-process research and development costs of $13.0 million acquired in
connection with the acquisition of CRM (see Note 5). At the date of acquisition,
the technological feasibility of the acquired technology had not yet been
established, and the technology had no future alternative uses. The remaining
$8.3 million charge represented accumulated costs associated with the
development of a direct billing system for a service bureau operation. This
development was abandoned by the Company.
NOTE 7. SHARE CAPITAL
On July 10, 1996, the Company, upon authorization by its Board of
Directors, adopted a Shareholder Rights Plan ("Rights Plan") and declared a
dividend of one preferred share purchase right on each share of its outstanding
common stock. The rights will become exercisable if a person or group acquires
15% or more of the Company's common stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's common stock. These rights, which expire on July 10, 2006,
entitle stockholders to buy one ten-thousandth of a share of a new series of
participating preferred shares at a purchase price of $130 per one
ten-thousandth of a preferred share. The Rights Plan was designed to ensure that
stockholders receive fair and equal treatment in the event of any proposed
takeover of the Company.
On August 2, 1996, USLD distributed 30,064,002 shares of the Company's
common stock to the existing stockholders of USLD in order to effect the
spin-off of BCC from USLD. Prior to August 2, 1996, BCC operated as a wholly
owned subsidiary of USLD and, consequently, had no publicly owned common shares.
No dividends were paid on the Company's common stock during fiscal 1998, 1997 or
1996.
NOTE 8. STOCK OPTIONS AND STOCK PURCHASE WARRANTS
Prior to the Distribution, the Company adopted the BCC 1996 Employee
Comprehensive Stock Plan ("Comprehensive Plan") and the BCC 1996 Non-Employee
Director Plan ("Director Plan") under which officers and employees, and
non-employee directors, respectively, of the Company and its affiliates are
eligible to receive stock option grants. Employees of the Company also are
eligible to receive restricted stock grants under the Comprehensive Plan. The
Company has reserved 10,500,000 and 800,000 shares of its common stock for
issuance pursuant to the Comprehensive Plan and Director Plan, respectively.
Under each plan, options vest and expire pursuant to individual award
agreements; however, the expiration date of unexercised options may not exceed
ten years from the date of grant under the Comprehensive Plan and five and seven
years for automatic and discretionary grants, respectively, under the Director
Plan. Immediately prior to the Distribution, the Company granted, under the
Comprehensive Plan and Director Plan, respectively, options to purchase BCC
common stock to each holder of an outstanding option to purchase shares of USLD
common stock under the USLD Employee Stock Option Plan and the USLD Non-Employee
Director Plan, respectively. The BCC options are exercisable for BCC common
stock on the basis of one share of BCC common stock for every one share of USLD
common stock subject to the outstanding USLD options. BCC options to purchase a
total of 3,143,008 shares of BCC common stock were granted in connection with
the adjustment to the USLD options. In connection with the grant of the BCC
options, the exercise price of the USLD options was adjusted to preserve the
economic value of the USLD options existing immediately prior to the
Distribution after giving effect to the grant of the BCC options. The BCC
options will have vesting schedules mirroring the vesting schedules of the
related USLD options. Each BCC option granted in connection with the
Distribution will terminate in accordance with the original USLD option grant.
27
28
Option activity for the years ended September 30, 1998, 1997 and 1996
is summarized as follows:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
----------- --------------
Outstanding, September 30, 1995 ........ 0 --
Granted .............................. 4,678,008 $ 5.26
Canceled ............................. (28,664) $ 3.89
Exercised ............................ (27,416) $ 3.50
----------
Outstanding, September 30, 1996 ........ 4,621,928 $ 5.26
Granted .............................. 2,580,200 $ 15.81
Canceled ............................. (179,048) $ 7.03
Exercised ............................ (1,443,192) $ 3.98
----------
Outstanding, September 30, 1997 ........ 5,579,888 $ 10.43
Granted .............................. 1,974,662 $ 10.92
Canceled ............................. (225,000) $ 17.60
Exercised ............................ (1,505,890) $ 4.96
----------
Outstanding, September 30, 1998 ........ 5,823,660 $ 11.73
==========
At September 30, 1998, 1997 and 1996, stock options to purchase an
aggregate of 2,027,508, 2,033,594 and 2,031,772 shares were exercisable and had
weighted average exercise prices of $10.46, $6.02 and $3.57 per share,
respectively.
Stock options outstanding and exercisable at September 30, 1998, were
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------- --------------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED WEIGHTED
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------ ----------- ------------ -------------- ----------- --------------
$3.15 - $6.95 464,364 1.4 $ 3.98 412,710 $ 3.94
$8.06 - $9.81 2,681,130 5.7 $ 8.21 863,712 $ 8.12
$12.38 - $16.84 2,358,666 5.6 $ 15.91 732,752 $ 16.72
$17.31 - $21.50 197,000 5.6 $ 19.46 18,334 $ 17.33
$22.19 - $25.38 74,000 6.2 $ 23.10 0 --
$26.44 - $29.00 48,500 5.8 $ 28.17 0 --
----------- -----------
5,823,660 5.3 $ 11.73 2,027,508 $ 10.46
=========== ===========
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," but has elected to apply Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock option plans as allowed under SFAS
No. 123. Accordingly, the Company has not recognized compensation expense for
stock options granted where the exercise price is equal to the market price of
the underlying stock at the date of the grant. During fiscal 1998, 1997 and
1996, the Company recognized $726,000, $540,000 and $10,000, respectively, of
compensation expense for options granted below the market price of the
underlying stock on such measurement date. In addition, in accordance with the
provisions of APB Opinion No. 25, the Company has not recognized compensation
expense for employee stock purchases under the Billing Concepts Corp. Employee
Stock Purchase Plan ("ESPP").
28
29
Had compensation expense for the Company's stock options granted and
ESPP purchases in 1998, 1997 and 1996 been determined based on the fair value at
the grant dates consistent with the methodology of SFAS No. 123, pro forma net
income and net income per common share would have been as follows (in thousands,
except per share amounts):
Year ended September 30,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
Pro forma net income ........................ $ 22,888 $ 2,230 $ 15,511
Pro forma net income per common share:
Basic ................................ $ 0.69 $ 0.07 $ 0.53
Diluted .............................. $ 0.66 $ 0.07 $ 0.50
The fair value for these options was estimated at the respective grant
dates using the Black-Scholes option pricing model with the following
weighted-average assumptions:
Year ended September 30,
--------------------------------------
1998 1997 1996
--------- ---------- ----------
Expected volatility ............... 25% 24% 25%
Expected dividend yield ........... 0% 0% 0%
Expected life ..................... 2.5 years 2.4 years 2 years
Risk-free interest rate ........... 5.21% 6.05% 6.03%
The weighted average fair value and weighted average exercise price,
respectively, of options granted where the exercise price was equal to the
market price of the underlying stock at the grant date were $2.33 and $10.40 for
the year ended September 30, 1998, $3.55 and $16.46 for the year ended September
30, 1997, and $5.07 and $5.23 for the year ended September 30, 1996. The
weighted average fair value and weighted average exercise price of options
granted during the year ended September 30, 1997 where the exercise price was
below the market price of the underlying stock at the grant date were $4.48 and
$13.00, respectively. For purposes of the pro forma disclosures, the estimated
fair value of options is amortized to expense over the options' vesting periods.
Warrants to purchase 450,000 shares of common stock at an exercise
price of $4.63 per share were granted during fiscal 1996 immediately prior to
the Distribution to each holder of a warrant to purchase shares of USLD common
stock and had a weighted average fair value of $6.01. The fair value for these
warrants was estimated at the grant date using the Black-Scholes option pricing
model with an expected volatility of 25%, an expected dividend yield of 0%, an
expected life of 2 years and a risk-free interest rate of 6.09% as the
weighted-average assumptions. Warrants to purchase 201,252 and 175,354 shares of
common stock were exercised in fiscal 1998 and 1997, respectively. There were no
warrants exercised in fiscal 1996.
29
30
NOTE 9. INCOME TAXES
The provision for income taxes is comprised of the following:
YEAR ENDED SEPTEMBER 30,
---------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Federal:
Current ................. $ 15,197 $ 9,386 $ 10,049
Deferred ................ 907 (146) (113)
-------- -------- --------
$ 16,104 $ 9,240 $ 9,936
======== ======== ========
State:
Current ................. $ 1,425 $ 1,044 $ 1,005
Total:
Current ................. $ 16,622 $ 10,430 $ 11,054
Deferred ................ 907 (146) (113)
-------- -------- --------
$ 17,529 $ 10,284 $ 10,941
======== ======== ========
The provision for income taxes for fiscal 1998, 1997 and 1996 differs
from the amount computed by applying the statutory federal income tax rate of
35% to income before provision for income taxes. The reasons for these
differences were as follows:
YEAR ENDED SEPTEMBER 30,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
Computed income tax provision at statutory rate ....... $15,217 $ 4,897 $10,078
Increases in taxes resulting from:
Nondeductible research and development expenses ...... 700 4,536 0
State income taxes, net of federal benefit ........... 926 679 653
Other, net ........................................... 686 172 210
------- ------- -------
Provision for income taxes ............................ $17,529 $10,284 $10,941
======= ======= =======
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows:
SEPTEMBER 30,
-------------------
1998 1997
------- -------
(IN THOUSANDS)
Deferred tax assets:
Expense provisions ...................................... $ 123 $ 12
Deferred tax liabilities:
Acquisition of nondeductible intangibles ................ (1,680) (2,009)
Bad debt tax write-off provisions ....................... (1,018)
Tax depreciation and amortization in excess of book ..... 0 (51)
------- -------
Total deferred tax liabilities ............................ (2,698) (2,060)
------- -------
Net deferred tax liability ................................ ($2,575) ($2,048)
======= =======
30
31
The Company was notified by the Internal Revenue Service ("IRS") that a
fiscal 1992 transaction between a wholly owned foreign subsidiary of USLD (Mega
Plus Dialing, Inc.) and the Company is proposed to be treated differently by the
IRS than originally characterized by the Company. The IRS district office issued
a report that proposed an assessment of taxes, interest and penalties. The
Company filed a written protest, and the assessment was appealed to the
appellate division of the IRS. The appellate division of the IRS agreed with the
Company's original treatment of the transaction.
NOTE 10. BENEFIT PLANS
The Company did not have any benefit plans in effect prior to its
spin-off from USLD; however, certain employees and directors of the Company were
eligible to participate in certain similar compensation and benefit plans
provided by USLD.
The Benefit Plans and Employment Matters Allocation Agreement
("Benefits Agreement") entered into by the Company and USLD (see Note 12)
provides for the allocation of certain responsibilities with respect to employee
compensation benefit and labor matters. The allocation of responsibility and
adjustments made pursuant to the Benefits Agreement was substantially consistent
with the existing benefits provided to USLD employees under USLD's various
compensation plans. Among other things, the Benefits Agreement provides that,
effective as of the Distribution Date, the Company will, or will cause one or
more of its subsidiaries to, assume or retain, as the case may be, all
liabilities of USLD, to the extent unpaid as of the Distribution Date, under
employee benefit plans, policies, arrangements, contracts and agreements with
respect to employees who, on or after the Distribution Date, were employees of
the Company or its subsidiaries. The Benefits Agreement also provides that,
effective as of the Distribution Date, USLD will, or will cause one or more of
its subsidiaries to, assume or retain, as the case may be, all liabilities of
USLD, to the extent unpaid as of the Distribution Date, under employee benefit
plans, policies, arrangements, contracts and agreements, with respect to
employees who, on or after the Distribution Date, were employees of USLD or its
subsidiaries.
In addition, the Company assumed, with respect to employees who, on or
after the Distribution Date, were employees of the Company or any of its
subsidiaries, all responsibility for liabilities and obligations as of the
Distribution Date for medical and dental plan coverage and for vacation and
welfare plans. USLD assumed, with respect to the employees who, on or after the
Distribution Date, were employees of USLD or any of its subsidiaries, all
responsibilities for all liabilities and obligations as of the Distribution Date
for medical and dental plan coverage and for vacation and welfare plans.
Participation in the Billing Concepts Corp. 401(k) Retirement Plan
("Retirement Plan") is offered to eligible employees of the Company. Generally,
all employees of the Company who are 21 years of age or older and who have
completed six months of service during which they worked at least 500 hours were
eligible for participation in the Retirement Plan. The Retirement Plan is a
defined contribution plan which provides that participants generally may make
voluntary salary deferral contributions, on a pretax basis, of between 1% and
15% of their compensation in the form of voluntary payroll deductions up to a
maximum amount as indexed for cost-of-living adjustments. The Company makes
matching contributions as a percentage determined annually of the first 6% of a
participant's compensation contributed as salary deferral. The Company may make
additional discretionary contributions. No discretionary contributions were made
in fiscal 1998, 1997 or 1996. During fiscal 1998, 1997 and 1996, the Company's
matching contributions totaled approximately $193,000, $67,000 and $35,000,
respectively.
Participation in the Billing Concepts Corp. Executive Compensation
Deferral Plan ("Executive Plan") is offered to selected employees occupying
management positions as determined by BCC's board of directors from time to
time. The Executive Plan is a defined contribution plan which provides that
participants may make voluntary salary deferral contributions, on a pretax
basis, of between 1% and 100% of their eligible compensation. Under the
Executive Plan, the Company makes matching contributions equal to the lesser of
100% of a participant's contributions or an amount based on a formula
established by the plan. During fiscal 1998, 1997 and 1996, the Company
contributed $150,000, $47,000 and $22,000, respectively, to the Executive Plan.
Additionally, the Billing Concepts Corp. Executive Qualified Disability
Plan ("Disability Plan") is provided to certain employees occupying management
positions. The Disability Plan provides long-term disability benefits through
disability insurance coverage purchased by the Company and through Company
funded payments. Benefits under the Disability Plan are provided directly by the
Company based on definitions contained in the applicable insurance policies.
31
32
The ESPP, which was established under the requirements of Section 423
of the Internal Revenue Code of 1986, as amended, is offered to eligible
employees of the Company. The Company has reserved 2,000,000 shares of its
common stock for issuance pursuant to the ESPP. The ESPP enables employees who
have completed at least six months of continuous service with the Company to
purchase shares of BCC's common stock at a 15% discount through voluntary
payroll deductions. The purchase price is the lesser of 85% of the closing price
of the common stock on the opening date of each participation period or 85% of
the closing price of the common stock on the ending date of each participation
period. The Company issued 14,659 and 27,561 shares of its common stock in
January and July 1998 pursuant to the ESPP at purchase prices of $15.99 and
$11.32, respectively. The Company issued 19,504 and 15,704 shares of its common
stock in February and August 1997 pursuant to the ESPP at purchase prices of
$9.03 and $12.43, respectively.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course of business. The Company believes it
is unlikely that the final outcome of any of the claims or proceedings to which
the Company is a party will have a material adverse effect on the Company's
financial position or results of operations; however, due to the inherent
uncertainty of litigation, there can be no assurance that the resolution of any
particular claim or proceeding would not have a material adverse effect on the
Company's results of operations for the fiscal period in which such resolution
occurred.
The Company is obligated to pay certain local telephone companies a
total of approximately $5.7 million, $4.2 million, $4.1 million, $4.1 million,
$4.0 million, and $7.1 million during fiscal 1999, 2000, 2001, 2002, 2003 and
thereafter, respectively, for minimum usage charges under billing and collection
agreements that, unless automatically renewed, expire at varying dates through
the end of fiscal 2005. The billing and collection agreements do not provide for
any penalties other than payment of the obligation should the usage levels not
be met. The Company has met all such volume commitments in the past and
anticipates exceeding the minimum usage volumes with all of these vendors.
NOTE 12. RELATED PARTIES
The Company and USLD shared a common individual on their respective
boards of directors through June 2, 1997. Therefore, USLD was considered a
related party for purposes of financial disclosure through this date. The
Company provided billing and information management services for USLD and
purchased telecommunications services from USLD. Transactions under the
agreements for these services have been reflected in the accompanying
consolidated financial statements at market prices. Related party transactions
between the Company and USLD are summarized as follows:
YEAR ENDED SEPTEMBER 30,
--------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
Sales to USLD ........... $ 0 $ 3,166 $ 5,347
Purchases from USLD ..... 0 1,705 3,332
From time to time, the Company has made advances to or was owed amounts
from certain officers of the Company. The highest aggregate amount outstanding
of advances to officers during the years ended September 30, 1998, and 1997 was
$250,000 and $1.7 million, respectively. The Company had a $250,000 note
receivable bearing interest at 7.50% from an officer of the Company at September
30, 1998. The Company also had a $50,000 note bearing interest at 7.50% payable
to an officer of the Company at September 30, 1997. This amount was paid in full
during the year ended September 30, 1998.
The Company charters a jet airplane from a company associated with an
officer/director of the Company. Under the terms of the charter agreement, the
Company is obligated to pay annual minimum fees of $500,000 over the five years
ending March 31, 2003 for such charter services. Such amounts have been included
in the future minimum operating lease and charter payments in Note 4. During the
year ended September 30, 1998, the Company paid approximately $278,000 in fees
related to this agreement.
32
33
For purposes of governing certain ongoing relationships between the
Company and USLD after the Distribution and to provide for an orderly
transition, the Company and USLD entered into certain agreements. Such
agreements include: (i) the Distribution Agreement, providing for, among other
things, the Distribution and the division between the Company and USLD of
certain assets and liabilities and material indemnification provisions; (ii) the
Benefit Plans and Employment Matters Allocation Agreement, providing for certain
allocations of responsibilities with respect to benefit plans, employee
compensation and labor and employment matters; (iii) the Tax Sharing Agreement,
pursuant to which the Company and USLD agreed to allocate tax liabilities that
relate to periods prior to and after the Distribution Date; (iv) the
Transitional Services and Sublease Agreement, pursuant to which USLD will
provide certain services on a temporary basis and sublease certain office space
to the Company and the Company will provide certain services to USLD on a
temporary basis; (v) the Zero Plus - Zero Minus Billing and Information
Management Services Agreement and the One Plus Billing and Information
Management Services Agreement, pursuant to which the Company will provide
billing clearinghouse and information management services to USLD for an initial
period of three years; and (vi) the Telecommunications Agreement, pursuant to
which USLD will provide long distance telecommunications services to the Company
for an initial period of three years. It is the intention of USLD and the
Company that the Transitional Services and Sublease Agreement, the Zero Plus
Zero Minus Billing and Information Management Services Agreement, the One Plus
Billing and Information Management Services Agreement, and the
Telecommunications Agreement reflect terms and conditions similar to those that
would have been arrived at by independent parties bargaining at arm's length;
however, there can be no assurances that such agreements are on terms at least
as favorable as could have been obtained from unaffiliated third parties.
NOTE 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands, except per share amounts
QUARTER ENDED
-------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1997 1997 1997 1996
-------- -------- -------- --------
Operating revenues ...................... $ 41,094 $ 40,406 $ 41,014 $ 38,248
Income from operations .................. 7,520 9,763 11,260 10,483
Net income .............................. 4,825 6,901 7,368 6,853
Net income per common share - basic ..... $ 0.14 $ 0.20 $ 0.22 $ 0.21
Net income per common share - diluted ... $ 0.14 $ 0.20 $ 0.21 $ 0.20
QUARTER ENDED
-------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1997 1997 1997 1996
-------- -------- -------- --------
Operating revenues ............................... $ 35,742 $ 31,894 $ 27,382 $ 27,818
Income from operations ........................... 9,836 (12,453) 8,195 7,861
Net income ....................................... 6,261 (12,622) 5,157 4,911
Net income (loss) per common share - basic ....... $ 0.19 $ (0.41) $ 0.17 $ 0.16
Net income (loss) per common share - diluted ..... $ 0.18 $ (0.41) $ 0.16 $ 0.15
Share data has been restated to give effect to the one-for-one common stock
dividend that was distributed on January 30, 1998 to stockholders of record on
January 20, 1998 (see Note 2).
33
34
NOTE 14. SUBSEQUENT EVENTS (UNAUDITED)
Effective October 1, 1998, the Company acquired Expansion Systems
Corporation ("ESC"), a privately held company headquartered in Glendale,
California that develops and markets billing and registration systems to
Internet Service Providers ("ISP") under its flagship products TotalBill and
InstantReg. An aggregate of 170,000 shares of the Company's common stock were
issued in connection with this transaction, which will be accounted for as a
pooling of interests.
In December 1998, the Company completed the merger of Communications
Software Consultants, Inc. ("CommSoft") in consideration of 2,492,759 shares of
the Company's common stock. CommSoft was a privately held, international
software development and consulting firm specializing in the telecommunications
industry.
The following unaudited pro forma information summarizes the combined
operating results of the Company and CommSoft as if the merger had occurred at
the beginning of the periods presented. The impact of ESC on prior periods was
not material, and the Company does not intend to restate prior periods for the
ESC acquisition. The unaudited pro forma information is based on the historical
information of CommSoft for the periods presented. The number of average
weighted shares outstanding used in the calculation of the pro forma per share
data gives effect to the shares assumed to be issued had the CommSoft merger
occurred at the beginning of each period presented:
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Operating revenues .......................... $ 177,378 $ 132,672 $ 109,763
Net income .................................. $ 27,879 $ 4,236 $ 18,073
Net income per common share - basic ......... $ 0.78 $ 0.13 $ 0.57
Net income per common share - diluted ....... $ 0.74 $ 0.12 $ 0.54
The unaudited pro forma financial information reflects, in management's
opinion, all adjustments necessary to fairly state the pro forma operating
results for the periods presented to make the unaudited pro forma financial
information not misleading.
34
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
BILLING CONCEPTS CORP.
By: /s/ PARRIS H. HOLMES, JR.
-------------------------
Parris H. Holmes, Jr.
Chairman of the Board and
Chief Executive Officer
Date: March 4, 1999
35